<PAGE>
As filed with the Securities and Exchange Commission on April 30, 1999
Registration Nos. 002-94996;
811-4185
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 34 [X]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 35 [X]
THE HUDSON RIVER TRUST
(Exact Name of Registrant as Specified in Declaration of Trust)
1345 Avenue of the Americas
New York, New York 10105
(Address of Principal Executive Offices, including zip code)
John D. Carifa, President
1345 Avenue of the Americas
New York, New York 10105
(Name and Address of Agent for Service)
925-254-6464
(Registrant's Telephone Number, including Area Code)
Please Send Copies of all Communications to:
--------------------------------------------
Edmund P. Bergan, Jr. J.B. Kittredge, Esq.
Alliance Capital Management L.P. Ropes & Gray
1345 Avenue of the Americas One International Place
New York, New York 10105 Boston, MA 02110-2624
Approximate Date of Proposed Public Offering: Continuous.
It is proposed that this filing will become effective (check appropriate box):
[X] Immediately upon filing purusant to [ ] On (date) pursuant to
paragraph (b) paragraph (b)
[ ] 60 days after filing pursuant to [ ] On (May 1, 1999) pursuant to
paragraph (a)(1) paragraph (a)(1)
[ ] 75 days after filing pursuant to (a)(2) [ ] On (date) pursuant to paragraph
(a)(2) of Rule 485.
If appropriate, check the following box:
[ ] This post-effecitve amendment designates a
new effective date for a previously filed
post-effective amendment.
================================================================================
<PAGE>
The Hudson River Trust
PROSPECTUS DATED MAY 1, 1999
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1
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<TABLE>
<S> <C>
THE ASSET ALLOCATION SERIES
- ----------------------------------------------------------------------------
Alliance Conservative Investors Portfolio
Alliance Balanced Portfolio
Alliance Growth Investors Portfolio
THE EQUITY SERIES THE FIXED INCOME SERIES
- ---------------------------------------- ---------------------------------
Alliance Growth and Income Portfolio Alliance Money Market Portfolio
Alliance Equity Index Portfolio Alliance Intermediate Government
Alliance Common Stock Portfolio Securities Portfolio
Alliance Global Portfolio Alliance Quality Bond Portfolio
Alliance International Portfolio Alliance High Yield Portfolio
Alliance Aggressive Stock Portfolio
Alliance Small Cap Growth Portfolio
</TABLE>
This Prospectus describes the Portfolios that are available as underlying
investments through your variable contract. For information about your variable
contract, including information about insurance-related expenses, see the
prospectus for your variable contract, which accompanies this Prospectus. This
Prospectus relates to the Class IA shares of each Portfolio. Another Prospectus
that relates to the Class IB shares of each Portfolio has been filed with the
Securities and Exchange Commission.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIME.
V.1
<PAGE>
Contents of this prospectus
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3
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<TABLE>
<S> <C>
1
- --
1 RISK/RETURN SUMMARY 4
- ------------------------------------ ------
2 DESCRIPTION OF THE PORTFOLIOS 22
- ------------------------------------ -------
The Asset Allocation Series 22
The Equity Series 25
The Fixed Income Series 30
- ------------------------------------ -------
3 INVESTMENT TECHNIQUES 38
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4 MANAGEMENT OF THE TRUST 45
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5 DESCRIPTION OF THE TRUST'S SHARES 49
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6 DIVIDENDS, DISTRIBUTIONS AND TAXES 50
- ------------------------------------ -------
7 FINANCIAL HIGHLIGHTS 51
- ------------------------------------ -------
8 APPENDIX A-DESCRIPTION OF BOND
RATINGS A-1
- ------------------------------------ -------
9 APPENDIX B-PERFORMANCE INFORMATION B-1
- ------------------------------------ -------
</TABLE>
<PAGE>
1
Risk/Return Summary
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4
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The following is a summary of certain key information about the Hudson River
Trust Portfolios. You will find additional information about each Portfolio,
including a detailed description of the risks of an investment in each
Portfolio, after this Summary.
This Summary identifies each Portfolio's investment objective, principal
investment strategies and principal risks. The summary of each Portfolio's
principal investment strategies is accompanied by a short discussion of some
of the Portfolio's principal risks. The principal risks of each Portfolio are
identified and more fully discussed beginning on page 18.
You can find more detailed descriptions of the Portfolios, including the risks
associated with investing in the Portfolios, further back in this Prospectus.
Please be sure to read this additional information BEFORE you invest. Each of
the Portfolios (except for the Alliance Money Market Portfolio) may at times
use certain types of investment derivatives such as options, futures, forwards
and swaps. The use of these techniques involves special risks that are
discussed in this Prospectus. This Risk/Return Summary includes a table for
each Portfolio showing its average annual returns and a bar chart showing its
annual returns. The table and bar chart provide an indication of the
historical risk of an investment in each Portfolio by showing:
o how the Portfolio's average annual returns for one, five, and 10 years (or
over the life of the Portfolio if the Portfolio is less than 10 years old)
compare to those of a broad based securities market index (you will find
more information on each referenced index in Appendix B); and
o changes in the Portfolio's performance from year to year over 10 years (or
over the life of the Portfolio if the Portfolio is less than 10 years old).
A Portfolio's past performance, of course, does not necessarily indicate how
it will perform in the future.
Other important things for you to note:
o You may lose money by investing in the Portfolios.
o An investment in the Portfolios is not a deposit in a bank and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any
other government agency.
<PAGE>
THE ASSET ALLOCATION SERIES
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5
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ALLIANCE CONSERVATIVE INVESTORS PORTFOLIO
OBJECTIVE:
This Portfolio seeks to achieve a high total return without, in the opinion of
Alliance Capital Management L.P., the Portfolio's investment adviser
("Alliance"), undue risk to principal.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS:
The Portfolio invests varying portions of its assets in debt and equity
securities. Investment grade debt securities generally represent between 50%
and 90% of the Portfolio's holdings, with equity securities comprising the
remainder of the Portfolio's assets. The Portfolio may invest in foreign
securities and may also make use of various other investment strategies,
including securities lending. The Portfolio may use derivatives.
Among the principal risks of investing in the Portfolio are market risk,
management risk, credit risk, derivatives risk and leveraging risk. The
Portfolio is subject to credit risk through its investments in debt securities
and to foreign investment risk and currency risk through its investments in
foreign securities.
YEARLY PERFORMANCE (%)
6.3 19.8 5.6 10.8 -4.1 20.4 5.2 13.3 13.3
90 91 92 93 94 95 96 97 98
Calendar year End
During the periods shown above, the highest quarterly return was 7.65% for the
quarter ended 12/31/98, and the lowest was -3.21% for the quarter ended
3/31/94. For the quarter ended March 31, 1999, the Portfolio's return was
1.88%.
The information below shows how the Portfolio's performance compares with the
returns of an index of funds with similar investment objectives, the returns
of a blend of fixed income and equity securities indices and the returns of a
broad based equity securities market index.
PERFORMANCE TABLE
<TABLE>
<CAPTION>
Average Annual
Total Returns (for
periods ending Since Inception
December 31, Past One Past Five (October 2,
1998) Year Years 1989)
<S> <C> <C> <C>
Class IA Shares 13.88 9.40 9.99
Lipper Flexible 14.20 14.31 12.55
Portfolio Average
70% Lehman 15.59 13.37 12.08
Treasury/30% S&P
500
S&P 500 28.58 24.06 17.62
</TABLE>
<PAGE>
THE ASSET ALLOCATION SERIES (CONTINUED)
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6
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ALLIANCE BALANCED PORTFOLIO
OBJECTIVE:
This Portfolio seeks to achieve a high return through both appreciation of
capital and current income.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS:
The Portfolio invests varying portions of its assets in debt and equity
securities. The Portfolio's debt securities may have equity features such as
conversion or exchange rights, stock warrants or participations based on
revenues, rates or profits. There will be times when the Portfolio places
significantly greater emphasis on equity securities or debt securities, but
over time the Portfolio's holdings are expected, on average, to be equally
divided between debt securities and equity securities. The Portfolio may
invest in foreign securities and may also make use of various other investment
strategies, including securities lending. The Portfolio may use derivatives.
Among the principal risks of investing in the Portfolio are market risk,
management risk, credit risk, derivatives risk, liquidity risk and leveraging
risk. The Portfolio is subject to foreign investment risk and currency risk
through its investments in foreign securities.
YEARLY PERFORMANCE (%)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
25.8 0.3 41.3 -2.8 12.3 -8.0 19.8 11.7 15.1 18.1
89 90 91 92 93 94 95 96 97 98
Calendear Year End
</TABLE>
During the periods shown above, the highest quarterly return was 15.13% for
the quarter ended 12/31/91, and the lowest -8.29% was for the quarter ended
9/30/90. For the quarter ended March 31, 1999, the Portfolio's return was
2.86%.
The information below shows how the Portfolio's performance compares with the
returns of an index of funds with similar investment objectives, the returns
of a blend of fixed income and equity securities indices and the returns of a
broad based equity securities market index.
PERFORMANCE TABLE
<TABLE>
<CAPTION>
Average Annual
Total Returns (for
periods ending
December 31, Past One Past Five Past Ten
1998) Year Years Years
<S> <C> <C> <C>
Class IA Shares 18.11 10.82 12.51
Lipper Balanced 13.48 13.84 12.97
Mutual Funds
Average
50% S&P 500/50% 19.02 16.88 15.21
Lehman Gov't Corp.
S&P 500 28.58 24.06 19.21
</TABLE>
<PAGE>
THE ASSET ALLOCATION SERIES (CONTINUED)
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7
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ALLIANCE GROWTH INVESTORS PORTFOLIO
OBJECTIVE:
This Portfolio seeks to achieve the highest total return consistent with
Alliance's determination of reasonable risk.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS:
The Portfolio invests varying portions of its assets in equity and debt
securities. Over time, the Portfolio's holdings, on average, are expected to
be allocated 70% to equity securities and 30% to debt securities. The
Portfolio's equity securities may include foreign stocks as well as preferred
stocks and convertible securities and may include securities of intermediate
and small-sized companies. The Portfolio's debt securities may include foreign
debt securities as well as lower quality, higher yielding debt securities
commonly known as "junk bonds." The Portfolio may also make use of various
other investment strategies, including securities lending. The Portfolio may
use derivatives.
Among the principal risks of investing in the Portfolio are market and
interest rate risk, management risk, credit risk, leveraging risk, derivatives
risk, liquidity risk, smaller company risk, foreign investment risk and
currency risk. The Portfolio is subject to heightened credit risk through its
investments in lower quality debt securities.
YEARLY PERFORMANCE (%)
During the periods shown above, the highest quarterly return was 18.16% for
the quarter ended 12/31/98, and the lowest was -10.60% for the quarter ended
9/30/90. For the quarter ended March 31, 1999, the Portfolio's return was
4.78%.
The information below shows how the Portfolio's performance compares with the
returns of an index of funds with similar investment objectives, the returns
of a blend of fixed income and equity securities indices and the returns of
broad based equity securities market index.
PERFORMANCE TABLE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
10.7 48.8 4.9 15.3 -3.2 26.4 12.6 16.9 19.1
90 91 92 93 94 95 96 97 98
Calendear Year End
</TABLE>
<TABLE>
<CAPTION>
Average Annual
Total Returns (for Since
periods ending Inception
December 31, Past One Past Five (October 2,
1998) Year Years 1989)
<S> <C> <C> <C>
Class IA Shares 19.13 13.92 16.09
Lipper Flexible 14.20 14.31 12.55
Portfolio Average
70% S&P 500/30% 22.85 19.96 15.55
Lehman Gov't Corp.
S&P 500 28.58 24.06 17.62
</TABLE>
---------------------------------------------- The Hudson River Trust
<PAGE>
THE EQUITY SERIES
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8
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ALLIANCE GROWTH AND INCOME PORTFOLIO
OBJECTIVE:
This Portfolio seeks 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.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS:
The Portfolio invests primarily in stocks and securities convertible into
stocks, and may invest up to 30% of its total assets in high yield debt
securities that are convertible into stocks. The Portfolio may invest in
foreign securities and may also make use of various other investment
strategies. The Portfolio may use derivatives.
Among the principal risks of investing in the Portfolio are market risk,
management risk, leveraging risk, derivatives risk, smaller company risk,
foreign investment risk and currency risk. The Portfolio is subject to
heightened credit risk through its investments in high yield debt securities.
YEARLY PERFORMANCE (%)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- -0.6 24.1 20.1 26.9 20.9
94 95 96 97 98
Calendear Year End
</TABLE>
During the periods shown above, the highest quarterly return was 26.28% for
the quarter ended 12/31/98, and the lowest was -15.03% for the quarter ended
9/30/98. For the quarter ended March 31, 1999, the Portfolio's return was
2.84%.
The information below shows how the Portfolio's performance compares with the
returns of an index of funds with similar investment objectives, the returns
of a blend of convertible and equity securities indices and the returns of a
broad based equity securities market index.
Performance Table
<TABLE>
<CAPTION>
Average Annual
Total Returns (for Since
periods ending Inception
December 31, Past One Past Five (October 1,
1998) Year Years 1993)
<S> <C> <C> <C>
Class IA Shares 20.86 17.84 16.86
Lipper Growth and 15.61 18.35 17.89
Income Funds
Average
75% S&P 20.10 21.07 20.48
500/25%Value Line
Convertible
S&P 500 28.58 24.06 23.32
</TABLE>
<PAGE>
THE EQUITY SERIES (CONTINUED)
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9
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ALLIANCE EQUITY INDEX PORTFOLIO
OBJECTIVE:
This Portfolio seeks a total return before expenses that approximates the total
return performance of the Standard & Poor's (S&P) 500 Composite Stock Price
Index, including reinvestment of dividends, at a risk level consistent with
that of the Index.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS:
Through the use of proprietary models, the Portfolio attempts to track the
Index by investing in many of the Index's largest capitalization securities
while trying to maintain industry diversification by investing in some smaller
and medium-sized capitalization companies as well. The Portfolio may also make
use of various other investment strategies, including securities lending. The
Portfolio may use derivatives.
Among the principal risks of investing in the Portfolio are market risk,
credit risk, derivatives risk, leveraging risk and management risk. The
Portfolio is subject to smaller company risk through its investments in
smaller capitalization companies.
YEARLY PERFORMANCE (%)
[<TABLE>
<CAPTION>
<S> <C> <C> <C>
36.5 22.4 32.6 28.1
95 96 97 98
Calendear Year End
</TABLE>
During the periods shown above, the highest quarterly return was 21.13% for
the quarter ended 12/31/98, and the lowest was -9.97% for the quarter ended
9/30/98. For the quarter ended March 31, 1999, the Portfolio's return was
4.91%.
The information below shows how the Portfolio's performance compares with the
returns of an index of funds with similar investment objectives and the
returns of a broad based equity securities market index.
PERFORMANCE TABLE
<TABLE>
<CAPTION>
Average Annual
Total Returns (for Since
periods ending Inception
December 31, Past One (March 1,
1998) Year 1994)
<S> <C> <C>
Class IA Shares 28.07 24.31
Lipper S&P 500 28.05 24.31
Index Funds
Average
S&P 500 28.58 24.79
</TABLE>
---------------------------------------------- The Hudson River Trust
<PAGE>
THE EQUITY SERIES (CONTINUED)
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10
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ALLIANCE COMMON STOCK PORTFOLIO
OBJECTIVE:
This Portfolio seeks to achieve long-term growth of its capital and increase
income.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS:
The Portfolio invests primarily in stock and other equity securities (such as
preferred stocks or convertible debt). The Portfolio may also make use of
various other investment strategies, including investment in foreign
securities, securities lending and investments in debt securities (including
high yield securities). The Portfolio may use derivatives.
Among the principal risks of investing in the Portfolio are market risk,
credit risk, foreign investment risk, currency risk, leveraging risk,
derivatives risk, smaller company risk and management risk. The Portfolio is
subject to foreign investment risk and currency risk through its investments
in foreign securities.
YEARLY PERFORMANCE (%)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
25.6 -8.1 37.9 3.2 24.8 -2.1 32.5 24.3 29.4 29.4
89 90 91 92 93 94 95 96 97 98
Calendear Year End
</TABLE>
During the periods shown above, the highest quarterly return was 28.42% for
the quarter ended 12/31/98, and the lowest was -20.22% for the quarter ended
9/30/90. For the quarter ended March 31, 1999, the Portfolio's return was
4.40%.
The information below shows how the Portfolio's performance compares with the
returns of an index of funds with similar investment objectives and the
returns of a broad based equity securities market index.
PERFORMANCE TABLE
<TABLE>
<CAPTION>
Average Annual
Total Returns (for
periods ending
December 31, Past One Past Five Past Ten
1998) Year Years Years
<S> <C> <C> <C>
Class IA Shares 29.39 21.95 18.65
Lipper Growth 22.86 18.63 16.72
Equity Mutual Funds
Average
S&P 500 28.58 24.06 19.21
</TABLE>
<PAGE>
THE EQUITY SERIES (CONTINUED)
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11
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ALLIANCE GLOBAL PORTFOLIO
OBJECTIVE:
This Portfolio seeks long-term growth of capital.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS:
The Portfolio invests primarily in a diversified mix of equity securities of
U.S. and established foreign companies. The Portfolio may also make use of
various other investment strategies, including the purchase and sale of shares
of other mutual funds investing in foreign securities, investments in debt
securities and securities lending. The Portfolio may use derivatives.
Among the principal risks of investing in the Portfolio are foreign investment
risk, currency risk, market risk, credit risk, leveraging risk, derivatives
risk, liquidity risk and management risk.
YEARLY PERFORMANCE (%)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
26.7 -6.1 30.5 -0.5 32.1 5.2 18.8 14.6 11.7 21.8
89 90 91 92 93 94 95 96 97 98
Calendear Year End
</TABLE>
During the periods shown above, the highest quarterly return was 26.59% for
the quarter ended 12/31/98, and the lowest was -16.99% for the quarter ended
9/30/98. For the quarter ended March 31, 1999, the Portfolio's return was
6.54%.
The information below shows how the Portfolio's performance compares with the
returns of an index of funds with similar investment objectives and the
returns of a broad based equity securities market index.
PERFORMANCE TABLE
<TABLE>
<CAPTION>
Average Annual
Total Returns (for
periods ending
December 31, Past One Past Five Past Ten
1998) Year Years Years
<S> <C> <C> <C>
Class IA Shares 21.80 14.28 14.81
Lipper Global 14.34 11.98 11.21
Mutual Funds
Average
MSCI World 24.34 15.68 10.66
</TABLE>
---------------------------------------------- The Hudson River Trust
<PAGE>
THE EQUITY SERIES (CONTINUED)
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12
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ALLIANCE INTERNATIONAL PORTFOLIO
OBJECTIVE:
This Portfolio seeks 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.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS:
The Portfolio may invest anywhere in the world (including developing countries
or "emerging markets"), although it will not generally invest in the United
States. The Portfolio may purchase securities of developing countries, which
include, among others, Mexico, Brazil, Hong Kong, India, Poland, Turkey and
South Africa. The Portfolio may also make use of various other investment
strategies, including the purchase and sale of shares of other mutual funds
investing in foreign securities, investments in debt securities and securities
lending. The Portfolio may use derivatives.
Among the principal risks of investing in the Portfolio are foreign investment
risk, currency risk, market risk, credit risk, leveraging risk, derivatives
risk, liquidity risk and management risk.
YEARLY PERFORMANCE (%)
<TABLE>
<CAPTION>
<S> <C> <C>
9.8 -2.98 10.6
96 97 98
Calendear Year End
</TABLE>
During the periods shown above, the highest quarterly return was 16.55% for
the quarter ended 12/31/98, and the lowest was -15.68% for the quarter ended
9/30/98. For the quarter ended March 31, 1999, the Portfolio's return was
3.05%.
The information below shows how the Portfolio's performance compares with the
returns of an index of funds with similar investment objectives and the
returns of a broad based equity securities market index.
PERFORMANCE TABLE
<TABLE>
<CAPTION>
Average Annual
Total Returns (for Since
periods ending Inception
December 31, Past One (April 3,
1998) Year 1995)
<S> <C> <C>
Class IA Shares 10.57 7.49
Lipper International 13.02 10.74
Mutual Funds
Average
MSCI EAFE 20.00 9.68
</TABLE>
The Equity Series
<PAGE>
THE EQUITY SERIES (CONTINUED)
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13
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ALLIANCE AGGRESSIVE STOCK PORTFOLIO
OBJECTIVE:
This Portfolio seeks to achieve long-term growth of capital.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS:
The Portfolio invests primarily in stocks and other equity securities of small
and medium-sized companies. The Portfolio may also invest in securities of
companies in cyclical industries, companies whose securities are temporarily
undervalued, companies in special situations and less widely known companies.
The Portfolio may invest in foreign securities and may also make use of
various other investment strategies, including investments in debt securities
and securities lending. The Portfolio may use derivatives.
Among the principal risks of investing in the Portfolio are smaller company
risk, market risk, credit risk, leveraging risk, derivatives risk, liquidity
risk and management risk. The Portfolio is subject to foreign investment risk
and currency risk through its investments in foreign securities.
YEARLY PERFORMANCE (%)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
43.5 8.2 86.9 -3.2 16.8 -3.8 31.6 22.2 10.9 0.3
89 90 91 92 93 94 95 96 97 98
Calendear Year End
</TABLE>
During the periods shown above, the highest quarterly return was 40.10% for
the quarter ended 3/31/91, and the lowest was -27.19% for the quarter ended
9/30/98. For the quarter ended March 31, 1999, the Portfolio's return was
-1.62%.
The information below shows how the Portfolio's performance compares with the
returns of an index of funds with similar investment objectives, the returns
of a blend of two securities indices and the returns of a broad based equity
securities market index.
PERFORMANCE TABLE
<TABLE>
<CAPTION>
Average Annual
Total Returns (for
periods ending
December 31, Past One Past Five Past Ten
1998) Year Years Years
<S> <C> <C> <C>
Class IA Shares 0.29 11.47 18.90
Lipper Mid-Cap 12.16 14.87 15.44
Growth Funds
Average
50% S&P 400 8.28 15.56 16.49
Mid-Cap/50%
Russell 2000
S&P 400 Mid-Cap 19.11 18.84 19.29
</TABLE>
---------------------------------------------- The Hudson River Trust
<PAGE>
THE EQUITY SERIES (CONTINUED)
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14
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ALLIANCE SMALL CAP GROWTH PORTFOLIO
OBJECTIVE:
This Portfolio seeks to achieve long-term growth of capital.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS:
The Portfolio invests primarily in stocks and other equity securities of
smaller companies. The Portfolio may at times invest in companies in cyclical
industries, companies whose securities are temporarily undervalued, companies
in special situations and less widely known companies. The Portfolio may
invest in foreign securities and may also make use of various other investment
strategies, including securities lending and investments in debt securities.
The Portfolio may use derivatives.
Among the principal risks of investing in the Portfolio are smaller company
risk, market risk, credit risk, leveraging risk, derivatives risk, liquidity
risk and management risk. The Portfolio is subject to foreign investment risk
and currency risk through its investments in foreign securities.
YEARLY PERFORMANCE (%)
- -4.3
98
Calendear Year End
During the periods shown above, the highest quarterly return was 22.98% for
the quarter ended 12/31/98, and the lowest was -28.07% for the quarter ended
9/30/98. For the quarter ended March 31, 1999, the Portfolio's return was
-9.96%.
The information below shows how the Portfolio's performance compares with the
returns of an index of funds with similar investment objectives and the
returns of a broad based equity securities market index.
PERFORMANCE TABLE
<TABLE>
<CAPTION>
Average Annual
Total Returns (for Since
periods ending Inception
December 31, Past One (May 1,
1998) Year 1997)
<S> <C> <C>
Class IA Shares (4.28) 12.27
Lipper Small (0.33) 16.72
Company Growth
Funds Average
Russell 2000 1.23 16.58
Growth
</TABLE>
<PAGE>
THE FIXED INCOME SERIES
- ----------
15
- --------------------------------------------------------------------------------
ALLIANCE MONEY MARKET PORTFOLIO
OBJECTIVE:
This Portfolio seeks to obtain a high level of current income, preserve its
assets and maintain liquidity.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS:
The Portfolio invests in high quality U.S. dollar denominated money market
instruments. Its investments are limited to those which, in the opinion of
Alliance, present minimal credit risk. The Portfolio will maintain a
dollar-weighted average portfolio maturity of 90 days or less. The Portfolio
may make use of various other investment strategies, including investments in
U.S. dollar denominated foreign money market instruments and securities
lending.
Among the principal risks of investing in the Portfolio are money market risk,
market risk, credit risk, leveraging risk and management risk. The Portfolio
is subject to foreign investment risk through its investments in foreign money
market instruments and is subject to credit risk through its involvement with
securities lending.
An investment in the Portfolio is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency. Although the
Portfolio seeks to preserve the value of your investment, it is possible to
lose money by investing in the Portfolio.
YEARLY PERFORMANCE (%)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
9.2 8.2 6.2 3.6 3.0 4.0 5.7 5.3 5.4 5.3
89 90 91 92 93 94 95 96 97 98
Calendear Year End
</TABLE>
During the periods shown above, the highest quarterly return was 2.37% for the
quarter ended 6/30/89, and the lowest was 0.69% for the quarter ended
12/31/92. For the quarter ended March 31, 1999, the Portfolio's return was
1.15%. The Portfolio's 7-day yield for the quarter ended December 31, 1998 was
4.69%.
The information below shows how the Portfolio's performance compares with the
returns of an index of funds with similar investment objectives and the
returns on three- month U.S. Treasury bills.
PERFORMANCE TABLE
<TABLE>
<CAPTION>
Average Annual
Total Returns (for
periods ending
December 31, Past One Past Five Past Ten
1998) Year Years Years
<S> <C> <C> <C>
Class IA Shares 5.34 5.17 5.58
Lipper Money 4.84 4.77 5.20
Market Mutual
Funds Average
3 Month Treasury 5.05 5.11 5.44
Bill
</TABLE>
<PAGE>
THE FIXED INCOME SERIES (CONTINUED)
- ----------
16
- --------------------------------------------------------------------------------
ALLIANCE INTERMEDIATE GOVERNMENT SECURITIES PORTFOLIO
OBJECTIVE:
This Portfolio seeks 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 its
agencies or instrumentalities.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS:
The Portfolio invests primarily in U.S. Government securities, which for these
purposes include repurchase agreements and forward commitments related to U.S.
Government securities. The Portfolio may also purchase debt securities of
non-government issuers that own mortgages. The Portfolio's investments will
generally have a final maturity of not more than ten years or a duration
(Alliance's measure of a debt instrument's sensitivity to interest rates) not
exceeding that of a 10-year Treasury note. The Portfolio may also make use of
various other investment strategies, including short sales, the purchase or
sale of securities on a when-issued, delayed delivery or forward commitment
basis, and repurchase agreements. The Portfolio uses derivatives.
Among the principal risks of investing in the Portfolio are market risk,
credit risk, leveraging risk, derivatives risk and management risk.
YEARLY PERFORMANCE (%)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
5.5 10.6 -4.4 13.3 3.8 7.3 7.7
92 93 94 95 96 97 98
Calendear Year End
</TABLE>
During the periods shown above, the highest quarterly return was 5.31% for the
quarter ended 9/30/91, and the lowest was -2.97% for the quarter ended
3/31/94. For the quarter ended March 31, 1999, the Portfolio's return was
-0.26%.
The information below shows how the Portfolio's performance compares with the
returns of an index of funds with similar investment objectives and the
returns of a broad based securities market index.
PERFORMANCE TABLE
<TABLE>
<CAPTION>
Average Annual
Total Returns (for Since
periods ending Inception
December 31, Past One Past Five (April 1,
1998) Year Years 1991)
<S> <C> <C> <C>
Class IA Shares 7.74 5.39 7.10
Lipper Intermediate 7.68 5.91 7.25
Government Funds
Average
Lehman 8.49 6.45 7.60
Intermediate
Government Bond
</TABLE>
<PAGE>
THE FIXED INCOME SERIES (CONTINUED)
- ----------
17
- --------------------------------------------------------------------------------
ALLIANCE QUALITY BOND PORTFOLIO
OBJECTIVE:
This Portfolio seeks to achieve high current income consistent with
preservation of capital by investing primarily in investment grade fixed income
securities.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS:
In addition to investment grade debt securities (securities rated at least BBB
by S&P or determined by Alliance to be of comparable quality), the Portfolio
may at times invest in convertible debt securities, preferred stock and
dividend-paying common stocks. The Portfolio may invest in foreign securities
and also make use of various other investment strategies, including zero
coupon securities, securities lending, the purchase or sale of securities on a
when-issued, delayed delivery or forward commitment basis and repurchase
agreements. The Portfolio may use derivatives.
Among the principal risks of investing in the Portfolio are market risk,
management risk, leveraging risk, derivatives risk and credit risk. The
Portfolio is subject to foreign investment risk and currency risk through its
investments in foreign securities.
YEARLY PERFORMANCE (%)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- -5.1 17.0 5.4 9.1 8.7
94 95 96 97 98
Calendear Year End
</TABLE>
During the periods shown above, the highest quarterly return was 6.19% for the
quarter ended 6/30/95, and the lowest was -4.03% for the quarter ended
3/31/94. For the quarter ended March 31, 1999, the Portfolio's return was
-0.80%.
The information below shows how the Portfolio's performance compares with the
returns of an index of funds with similar investment objectives and the
returns of a broad based securities market index.
PERFORMANCE TABLE
<TABLE>
<CAPTION>
Average Annual
Total Returns (for Since
periods ending Inception
December 31, Past One Past Five (October 1,
1998) Year Years 1993)
<S> <C> <C> <C>
Class IA Shares 8.69 6.78 6.34
Lipper Corporate 7.47 6.54 6.21
Debt Funds A Rated
Average
Lehman Aggregate 8.69 7.27 6.92
Bond
</TABLE>
---------------------------------------------- The Hudson River Trust
<PAGE>
THE FIXED INCOME SERIES (CONTINUED)
- ----------
18
- --------------------------------------------------------------------------------
ALLIANCE HIGH YIELD PORTFOLIO
OBJECTIVE:
This Portfolio seeks to achieve a high return by maximizing current income and,
to the extent consistent with that objective, capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS:
The Portfolio invests primarily in high yield debt securities (so-called "junk
bonds"). The Portfolio may also make use of various other investment
strategies, including investments in common stocks and other equity securities
and securities lending. The Portfolio may use derivatives.
Among the principal risks of investing in the Portfolio are credit risk,
market and interest rate risk, leveraging risk, derivatives risk, liquidity
risk, currency risk, foreign investment risk, smaller company risk and
management risk. Credit risk is particularly high for the Portfolio because of
its extensive investment in high yield debt securities.
YEARLY PERFORMANCE (%)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
5.1 -1.1 24.5 12.3 23.2 -2.8 19.9 22.9 18.5 -5.2
89 90 91 92 93 94 95 96 97 98
Calendear Year End
</TABLE>
During the periods shown above, the highest quarterly return was 7.96% for the
quarter ended 6/30/97, and the lowest was -10.97% for the quarter ended
9/30/98. For the period ended March 31, 1999, the Portfolio's return was
-0.77%.
The information below shows how the Portfolio's performance compares with the
returns of an index of funds with similar investment objectives and the return
of a broad based securities market index.
PERFORMANCE TABLE
<TABLE>
<CAPTION>
Average Annual
Total Returns (for
periods ending
December 31, Past One Past Five Past Ten
1998) Year Years Years
<S> <C> <C> <C>
Class IA Shares (5.15) 9.99 11.17
Lipper High Current (0.44) 7.37 9.34
Yield Bond Funds
Average
ML Master 3.66 9.01 11.08
</TABLE>
<PAGE>
SUMMARY OF PRINCIPAL RISKS
- ----------
19
- --------------------------------------------------------------------------------
The value of your investment in a Portfolio changes with the values of the
Portfolio's investments. Many factors can affect those values. This summary
describes the principal risks that may affect a particular Portfolio's
investments as a whole. The chart at the end of this section displays similar
information. Any Portfolio could be subject to additional principal risks
because the types of investments made by the Portfolios can change over time.
Investments mentioned in this summary and described in greater detail under
"Description of the Portfolios" or "Investment Techniques" appear in BOLD
TYPE. Those sections also include more information about the Portfolios, their
investments and the related risks.
o MARKET AND INTEREST RATE RISK. Each of the Portfolios is subject to market
risk, which is the general risk of unfavorable changes in the market value
of a Portfolio's securities. The Portfolios that invest in common stock,
preferred stock, convertible securities and other equity securities are
exposed to the risks of changes in the value of those securities based on
market fluctuations and business variables. These include the risks of
broader market declines as well as more company-specific risks, such as
poor management performance, inappropriate financial leverage, industry
problems and reduced demand for a particular company's products.
Interest rate risk is the risk that interest rates will rise causing a
portfolio's investments to decline in value. Portfolios that invest in debt
securities such as bonds, notes and ASSET-BACKED SECURITIES are subject to
this type of market risk. Debt securities are obligations of an issuer to
make fixed payments of principal and/or interest on future dates. If the
interest rate paid by an issuer on a particular debt security is high
relative to market interest rates, that security is attractive to investors
and valuable. Accordingly, if market interest rates rise, your investment
in a Portfolio that holds debt securities is likely to become less valuable
because its debt securities are likely to drop in value.
Even the Alliance Intermediate Government Securities Portfolio is
subject to interest rate risk despite the fact that it generally invests a
substantial portion of its assets in the highest quality debt securities,
such as U.S. Government Securities. Interest rate risk is generally
greater, however, for Portfolios, such as the Alliance Growth Investors
Portfolio and the Alliance High Yield Portfolio, that invest in lower rated
securities or comparable unrated securities.
All the Portfolios, except the Alliance Equity Index Portfolio, may
invest in MORTGAGE-BACKED SECURITIES. Market risk generally is greater for
Portfolios that may invest to a material extent in MORTGAGE-RELATED or
other asset-backed securities that may be prepaid. These securities bear
greater market risk because they have variable maturities that tend to
lengthen when that is least desirable-when interest rates are rising.
Increased market risk is also likely for Portfolios that invest to a
material extent in debt securities paying no interest, such as ZERO COUPON,
principal-only and interest-only securities, or paying non-cash interest in
the form of other debt securities (pay-in-kind securities).
o CREDIT RISK. Credit risk is the risk that the issuer or the guarantor of a
debt security or the counterparty to a Portfolio's transaction will be
unable or unwilling to make timely principal and/or interest payments, or
otherwise to honor its obligations. Each of the Portfolios may be subject
to credit risk to the extent that it invests in debt securities or engages
in transactions, such as SECURITIES LOANS, which involve a promise by a
third party to honor an obligation to the Portfolio. Varying degrees of
credit risk, often reflected in credit ratings, apply to different third
parties and related transactions.
Credit risk is particularly significant for Portfolios, such as the
Alliance Growth Investors Portfolio and the Alliance High Yield Portfolio,
that invest a material portion of their assets in LOWER-RATED SECURITIES.
These debt securities and similar unrated securities (commonly known as
"junk bonds") have speculative elements or are
<PAGE>
SUMMARY OF PRINCIPAL RISKS (CONTINUED)
- ----------
20
- --------------------------------------------------------------------------------
predominantly speculative credit risks. Even debt securities that are
"investment grade" may have some speculative characteristics. Portfolios
such as the Alliance Growth Investors Portfolio and the Alliance High Yield
Portfolio may also be subject to greater credit risk because they may
invest in debt securities issued in connection with corporate
restructurings by highly leveraged issuers or in debt securities not
current in the payment of interest or principal, or in default. Portfolios
such as the Alliance Global Portfolio and the Alliance International
Portfolio that may invest in FOREIGN SECURITIES are also subject to
increased credit risk because of the difficulties of requiring foreign
entities, including issuers of sovereign debt, to honor their contractual
commitments, and because a number of foreign governments and other issuers
are already in default.
o CURRENCY RISK. Portfolios such as the Alliance Global Portfolio and the
Alliance International Portfolio that invest in securities denominated in,
and/or receiving revenues in, FOREIGN CURRENCIES will be subject to
currency risk. This is the risk that those currencies will decline in
value relative to the U.S. Dollar, or, in the case of hedging positions,
that the U.S. Dollar will decline in value relative to the currency
hedged. In either event, the dollar value of such investments would be
adversely affected.
o FOREIGN INVESTMENT RISK. Portfolios with foreign investments, such as the
Alliance Global Portfolio and the Alliance International Portfolio, may
experience more rapid and extreme changes in value than Portfolios with
investments solely in securities of U.S. companies. This is because the
securities markets of many foreign countries are relatively small, with a
limited number of companies representing a small number of industries.
Additionally, FOREIGN SECURITIES issuers are usually not subject to the
same degree of regulation as U.S. issuers. Reporting, accounting and
auditing standards of foreign countries differ, in some cases
significantly, from U.S. standards. Also, nationalization, expropriation or
confiscatory taxation, currency blockage, political changes or diplomatic
developments could adversely affect a Portfolio's investments in a foreign
country. In the event of nationalization, expropriation or other
confiscation, a Portfolio could lose its entire investment.
o LEVERAGING RISK. When a Portfolio is borrowing money or otherwise
leveraging its portfolio, the value of an investment in that Portfolio will
be more volatile and all other risks will tend to be compounded. All of the
Portfolios may take on leveraging risk by investing collateral from
SECURITIES LOANS and by borrowing money to meet redemption requests.
o DERIVATIVES RISK. All the Portfolios, except the Alliance Money Market
Portfolio, may use DERIVATIVES, which are financial contracts whose value
depends on, or is derived from, the value of an underlying asset,
reference rate or index. Alliance will sometimes use DERIVATIVES as part
of a strategy designed to reduce other risks and sometimes will use
DERIVATIVES for leverage, which increases opportunities for gain but also
involves greater risk. In addition to other risks such as the credit risk
of the counterparty, DERIVATIVES involve the risk of mispricing or
improper valuation and the risk that changes in the value of a derivative
may not correlate perfectly with relevant assets, rates and indices.
o LIQUIDITY RISK. Liquidity risk exists when particular investments are
difficult to purchase or sell, possibly preventing a Portfolio from
selling out of these illiquid securities at an advantageous price.
Portfolios such as the Alliance Global Portfolio, the Alliance
International Portfolio, the Alliance Growth Investors Portfolio, the
Alliance Aggressive Stock Portfolio, the Alliance Small Cap Growth
Portfolio and the Alliance High Yield Portfolio are subject to liquidity
risk because foreign investments and securities involving substantial
market and/or credit risk tend to be harder to sell. In addition,
liquidity risk for the Alliance High Yield Portfolio tends to increase to
the extent
<PAGE>
SUMMARY OF PRINCIPAL RISKS (CONTINUED)
- -----
21
- --------------------------------------------------------------------------------
that it invests in loan PARTICIPATIONS AND ASSIGNMENTS, whose sale may be
restricted by law or by contract.
o SMALLER COMPANY RISK. Market risk and liquidity risk are particularly
pronounced for Portfolios, such as the Alliance Aggressive Stock Portfolio
and the Alliance Small Cap Growth Portfolio, that invest a significant
percentage of their assets in the stocks of companies with relatively small
market capitalizations. These companies may have limited product lines,
markets or financial resources or may depend on a few key employees.
o MONEY MARKET RISK. While money market funds are designed to be relatively
low risk investments, they are not entirely free of risk. Despite the
short maturities and high credit quality of the Alliance Money Market
Portfolio's investments, increases in interest rates and deteriorations in
the credit quality of the instruments the Portfolio has purchased may
reduce the Portfolio's net asset value. In addition, the Portfolio is
still subject to the risk that the value of an investment may be eroded
over time by inflation.
o MANAGEMENT RISK. Each Portfolio is subject to management risk because it is
an actively managed investment portfolio. Alliance will apply its
investment techniques and risk analyses in making investment decisions for
the Portfolios, but there can be no guarantee that they will produce the
desired results. In some cases, certain investments may be unavailable or
Alliance may choose not to use them under market conditions when, in
retrospect, their use would have been beneficial to the Portfolios.
PRINCIPAL RISKS BY PORTFOLIO
The following chart summarizes the principal risks of each Portfolio. Risks not
marked for a particular Portfolio may, however, still apply to some extent to
that Portfolio at various times.
<TABLE>
<CAPTION>
Market
and
Interest Foreign
Alliance Rate Credit Currency Investment
Portfolio Risk Risk Risk Risk
<S> <C> <C> <C> <C>
Conservative Investors X X X X
Balanced X X X X
Growth Investors X X X X
Growth and Income X X X X
Equity Index X X
Common Stock X X X X
Global X X X X
International X X X X
Aggressive Stock X X X X
Small Cap Growth X X X X
Money Market X X X
Intermediate X X
Government Securities
Quality Bond X X X X
High Yield X X X X
<CAPTION>
Smaller Money
Alliance Leveraging Derivatives Liquidity Company Market Management
Portfolio Risk Risk Risk Risk Risk Risk
<S> <C> <C> <C> <C> <C> <C>
Conservative Investors X X X
Balanced X X X X
Growth Investors X X X X X
Growth and Income X X X X
Equity Index X X X X
Common Stock X X X X
Global X X X X
International X X X X
Aggressive Stock X X X X X
Small Cap Growth X X X X X
Money Market X X X
Intermediate X X X
Government Securities
Quality Bond X X X
High Yield X X X X X
</TABLE>
---------------------- The Hudson River Trust
<PAGE>
2
Description of the Portfolios
- ----------
22
- --------------------------------------------------------------------------------
This section of the Prospectus provides a more complete description of the
principal investment objectives, strategies, and risks of the Portfolios. Of
course, there can be no assurance that any portfolio will achieve its
investment objective.
Please note that:
o Additional discussion of the Portfolios' investments, including the risks
of the investments, can be found in the discussion under "Investment
Techniques" following this section.
o The description of the principal risks for a Portfolio may include risks
described in the "Summary of Risks" above. Additional information about the
risks of investing in a Portfolio can be found in the discussion below
under "Investment Techniques."
o Additional descriptions of each Portfolio's strategies, investments and
risks can be found in the Portfolios' Statement of Additional Information,
or SAI.
o Except as noted, (i) the Portfolios' investment objectives are
"fundamental" and cannot be changed without shareholder vote, and (ii) the
Portfolios' investment policies are not fundamental and thus can be changed
without a shareholder vote.
THE ASSET ALLOCATION SERIES
The Alliance Conservative Investors Portfolio, the Alliance Balanced 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.
The "balanced investor" is somewhat less aggressive than the growth investor
and has a medium- to long-term investment horizon. This investor is sensitive
to risk, but is willing to take on some risk in seeking high total return.
Consequently, the asset mix for the Alliance Balanced Portfolio attempts to
capture a sizable portion of the market's upside while diversifying risk among
asset classes.
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.
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
<PAGE>
- ----------
23
- --------------------------------------------------------------------------------
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.
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, 1998, the duration of a 10-year Treasury bond was
considered by Alliance to be 4.68 years.
---------------------------------------------- The Hudson River Trust
<PAGE>
- ----------
24
- --------------------------------------------------------------------------------
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 BALANCED PORTFOLIO-INVESTMENT POLICIES
The Alliance Balanced Portfolio attempts to achieve its objective by investing
varying portions of its assets in publicly-traded equity and debt securities
and money market instruments. The Alliance Balanced Portfolio attempts to
achieve long-term growth of capital by investing in common stock and other
equity-type instruments. It will try to achieve a competitive level of current
income and capital appreciation through investments in publicly traded debt
securities and a high level of current income through investments in money
market instruments.
The portion of the Alliance Balanced Portfolio's assets invested in each type
of security will vary in accordance with economic conditions, the general
level of common stock prices, interest rates and other relevant
considerations, including the risks associated with each investment medium.
Although the Alliance Balanced Portfolio will seek to reduce the risks
associated with any one investment medium by utilizing a variety of
investments, performance will depend upon Alliance's ability to assess
accurately and react to changing market conditions.
The Alliance Balanced Portfolio will at all times hold at least 25% of its
assets in fixed income securities (including, for these purposes, that portion
of the value of securities convertible into common stock which is attributable
to the fixed income characteristics of those securities, as well as money
market instruments). The Portfolio's equity securities will always comprise at
least 25%, but never more than 75%, of the Portfolio's total assets.
Consequently, the Portfolio will have "Core Holdings" of at least 25% fixed
income securities and 25% equity securities. Over time, holdings by the
Portfolio are currently expected to average approximately 50% in fixed income
securities and approximately 50% in equity securities. Actual asset mixes will
be adjusted in response to economic and credit market cycles.
The equity securities invested in by the Alliance Balanced Portfolio will
consist of the types of securities in which the Alliance Common Stock
Portfolio may invest. The money market securities will consist of the types of
securities and credit quality in which the Alliance Money Market Portfolio may
invest. The debt securities will consist principally of bonds, notes,
debentures and equipment trust certificates. The Portfolio may also buy debt
securities with equity features such as conversion or exchange rights or
warrants for the acquisition of stock or participations based on revenues,
rates or profits. These debt securities will principally be investment grade
securities rated at least Baa by Moody's or BBB by S&P, or will be issued or
guaranteed by the U.S. Government, its agencies or instrumentalities. If such
Baa or BBB debt securities held by the Portfolio fall below those ratings, the
Portfolio will not be obligated to dispose of them and may continue to hold
them if Alliance considers them appropriate investments under the
circumstances. In addition, the Alliance Balanced Portfolio may at times hold
some of its assets in cash. The Portfolio may invest up to 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 Balanced Portfolio may write covered call and
put options and may purchase call and put options on all the types of
securities in which it may invest, as well as securities indexes and foreign
currencies. The Alliance Balanced Portfolio may also purchase and sell stock
index, interest rate and foreign currency futures contracts and options
thereon. See "Investment Techniques-Options," "Investment
<PAGE>
- ----------
25
- --------------------------------------------------------------------------------
Techniques-Futures" and "Investment Techniques-Risk Factors in Options and
Futures," below.
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, 1998, approximately 22.3% of the Portfolio
was invested in fixed income securities. 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
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
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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 EQUITY INDEX PORTFOLIO-INVESTMENT POLICIES
The Alliance Equity Index Portfolio's investment objective is to seek a total
return before expenses that approximates the total return of the S&P 500
Composite Stock Price Index (the "Index"), including reinvestment of
dividends, at a risk level consistent with that of the Index. The Index is a
widely publicized index that tracks 500 companies traded on the New York and
American Stock Exchanges and in the over-the-counter market. It is weighted by
market value so that each company's stock influences the Index in proportion
to its market importance. While most issuers are among the 500 largest U.S.
companies in terms of aggregate market value, some other stocks are included
by S&P for purposes of diversification. The value of the Index may change over
time due to a variety of factors, including economic factors and events
affecting issuers included in the Index.
In managing the Alliance Equity Index Portfolio, the Trust's investment
adviser will not utilize customary economic, financial or market analyses or
other traditional investment techniques. Rather, the investment adviser will
use proprietary modeling techniques to construct a portfolio that it believes
will, in the aggregate, approximate the performance results of the Index. The
investment adviser will first select from the largest capitalization
securities in the Index on a capitalization-weighted basis. Generally, the
largest capitalization securities reasonably track the Index because the Index
is significantly influenced by a small number of securities. However,
selecting securities on the basis of their capitalization alone would distort
the Alliance Equity Index Portfolio's industry diversification, and therefore
economic events could potentially have a dramatically different impact on the
performance of the Alliance Equity Index Portfolio from that of the Index.
Recognizing this fact, the modeling techniques also consider industry
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diversification when selecting investments for the Alliance Equity Index
Portfolio. The investment adviser also seeks to diversify the Alliance Equity
Index Portfolio's assets with respect to market capitalization. As a result,
the Alliance Equity Index Portfolio will include securities of smaller and
medium-sized capitalization companies in the Index.
Although the modeling techniques are intended to produce a portfolio whose
performance approximates that of the Index (before expenses), there can be no
assurance that these techniques will reduce "tracking error" (i.e., the
difference between the Alliance Equity Index Portfolio's investment results
(before expenses) and the Index's). Tracking error may arise as a result of
brokerage costs, fees and operating expenses and a lack of correlation between
the Alliance Equity Index Portfolio's investments and the Index.
Cash may be accumulated in the Alliance Equity Index Portfolio until it
reaches approximately 1% of the value of the Alliance Equity Index Portfolio
at which time such cash will be invested in common stocks as described above.
Accumulation of cash increases tracking error. The Alliance Equity Index
Portfolio will, however, remain substantially fully invested in common stocks
even when common stock prices are generally falling. Also, adverse performance
of a stock will ordinarily not result in its elimination from the Alliance
Equity Index Portfolio.
In order to reduce brokerage costs, maintain liquidity to meet shareholder
redemptions or minimize tracking error when the Alliance Equity Index
Portfolio holds cash, the Alliance Equity Index Portfolio may from time to
time buy and hold futures contracts on the Index and options on such futures
contracts. See "Investment Techniques-Futures" and "Investment Techniques-Risk
Factors in Options and Futures," below. The contract value of futures
contracts purchased by the Alliance Equity Index Portfolio plus the contract
value of futures contracts underlying call options purchased by the Alliance
Equity Index Portfolio will not exceed 20% of the Alliance Equity Index
Portfolio's total assets.
The Alliance Equity Index Portfolio may seek to increase income by lending
securities with a value of up to 50% of its total assets to brokers-dealers.
See "Investment Techniques-Securities Lending," below.
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 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
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December 31, 1998, 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
U.S. 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 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
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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
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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.
ALLIANCE SMALL CAP GROWTH PORTFOLIO-INVESTMENT
POLICIES
The Alliance Small Cap Growth Portfolio pursues 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
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instruments. The instruments in which the Portfolio invests include: (1)
marketable obligations of, or guaranteed by, the U.S. Government, its agencies
or instrumentalities (collectively, the "U.S. Government"); (2) certificates
of deposit, bankers' acceptances, bank notes, time deposits and interest
bearing savings deposits issued or guaranteed by (a) domestic banks (including
their foreign branches) or savings and loan associations having total assets
of more than $1 billion and which are members of the Federal Deposit Insurance
Corporation ("FDIC") in the case of banks, or insured by the FDIC, in the case
of savings and loan associations or (b) foreign banks (either by their foreign
or U.S. branches) having total assets of at least $5 billion and having an
issue of either commercial paper rated at least A-1 by S&P or Prime-1 by
Moody's or long term debt rated at least AA by S&P or Aa by Moody's; (3)
commercial paper (rated at least A-1 by S&P or Prime-1 by Moody's or, if not
rated, issued by domestic or foreign companies having outstanding debt
securities rated at least AA by S&P or Aa by Moody's) and participation
interests in loans extended by banks to such companies; (4) mortgage-backed
securities and asset-backed securities; (5) corporate debt obligations with
remaining maturities of less than one year, rated at least AA by S&P or Aa by
Moody's, as well as corporate debt obligations rated at least A by S&P or
Moody's, provided the corporation also has outstanding an issue of commercial
paper rated at least A-1 by S&P or Prime-1 by Moody's; (6) floating rate or
master demand notes; and (7) repurchase agreements covering securities issued
or guaranteed by the U.S. Government (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
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interest is paid on Treasury Bills; instead, they are issued at a discount
and repaid at full face value when they mature. They are backed by the
full faith and credit of the U.S. Government.
o U.S. Treasury Notes-Direct obligations of the U.S. Treasury issued in
maturities which vary between one and ten years, with interest payable
every six months. They are backed by the full faith and credit of the U.S.
Government.
o U.S. Treasury Bonds-These direct obligations of the U.S. Treasury are
issued in maturities more than ten years from the date of issue, with
interest payable every six months. They are backed by the full faith and
credit of the U.S. Government.
o "Ginnie Maes"-Ginnie Maes are debt securities issued by a mortgage banker
or other mortgagee and represent an interest in a pool of mortgages insured
by the Federal Housing Administration or the Farmer's Home Administration
or guaranteed by the Veteran's Administration. The Government National
Mortgage Association ("GNMA") guarantees the timely payment of principal
and interest. Ginnie Maes, although not direct obligations of the U.S.
Government, are guaranteed by the U.S. Treasury.
o "Fannie Maes"-The Federal National Mortgage Association ("FNMA") is a
government-sponsored corporation owned entirely by private stockholders
that purchases residential mortgages from a list of approved
seller/servicers. Pass-through securities issued by FNMA are guaranteed as
to timely payment of principal and interest by FNMA and supported by
FNMA's right to borrow from the U.S. Treasury, at the discretion of the
U.S. Treasury. Fannie Maes are not backed by the full faith and credit of
the U.S. Government.
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
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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, 1998, the duration of a 10-year
Treasury bond was considered by Alliance to be 4.68 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.
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 CMOs only if they are 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.
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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 QUALITY BOND PORTFOLIO-INVESTMENT POLICIES
The Alliance Quality Bond Portfolio expects to invest in readily marketable
securities with relatively attractive yields, but which do not, in the opinion
of Alliance, involve undue risk of loss of capital. The Alliance Quality Bond
Portfolio will follow a policy of investing at least 65% of its total assets
in securities which are rated at the time of purchase at least Baa by Moody's
or BBB by S&P, or in unrated fixed income securities determined by Alliance to
be of comparable quality. In the event that the credit rating of a security
held by the Alliance Quality Bond Portfolio falls below investment grade (or,
in the case of unrated securities, Alliance determines that the quality of
such security has deteriorated below investment grade), the Alliance Quality
Bond Portfolio will not be obligated to dispose of such security and may
continue to hold the obligation if, in the opinion of Alliance, such
investment is appropriate in the circumstances. The Alliance Quality Bond
Portfolio will also seek to maintain an average aggregate quality rating of
its portfolio securities of at least A (Moody's and S&P). For more information
concerning the bond ratings assigned by Moody's and S&P, see Appendix A.
The Alliance Quality Bond Portfolio has complete flexibility as to the types
of securities in which it will invest and the relative proportions thereof,
and the Alliance Quality Bond Portfolio plans to vary the proportions of its
holdings of long- and short-term fixed income securities (including debt
securities, convertible debt securities and U.S. Government obligations) and
preferred stocks in order to reflect Alliance's assessment of prospective
cyclical changes even if such action may adversely affect current income.
The Alliance Quality Bond Portfolio may invest in foreign securities. The
Alliance Quality Bond Portfolio will not invest more than 20% of its total
assets in securities denominated in currencies other than the U.S. dollar. See
"Investment Techniques-Foreign Securities and Currencies," below. The Alliance
Quality Bond Portfolio may enter into foreign currency futures contracts (and
related options), forward
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foreign currency exchange contracts and options on foreign currencies for
hedging purposes. See "Investment Techniques-Forward Foreign Currency Exchange
Contracts," below.
For temporary defensive purposes, the Alliance Quality Bond Portfolio may
invest in certain money market instruments. See "Investment Techniques-Certain
Money Market Instruments," below.
The Alliance Quality Bond Portfolio may purchase put and call options and
write covered put and call options on securities it may purchase. The Alliance
Quality Bond Portfolio also intends to write covered call options for
cross-hedging purposes. A call option is for cross-hedging purposes if it is
designed to provide a hedge against a decline in value of another security
which the Portfolio owns or has the right to acquire. See "Investment
Techniques-Options," below.
INTEREST RATE TRANSACTIONS. The Alliance Quality Bond Portfolio may seek to
protect the value of its investments from interest rate fluctuations by
entering into various hedging transactions, such as interest rate swaps and
the purchase or sale of interest rate caps and floors. The Portfolio expects
to enter into these transactions primarily to preserve a return or spread on a
particular investment or portion of its portfolio. The Alliance Quality Bond
Portfolio may also enter into these transactions to protect against an
increase in the price of securities the Portfolio anticipates purchasing at a
later date. The Alliance Quality Bond Portfolio intends to use these
transactions as a hedge and not as a speculative investment. Interest rate
swaps involve the exchange by the Alliance Quality Bond Portfolio with another
party of their respective commitments to pay or receive interest, e.g., an
exchange of floating rate payments for fixed rate payments. The purchase of an
interest rate cap entitles the purchaser, to the extent that a specified index
exceeds a predetermined interest rate, to receive payments on a notional
principal amount from the party selling such interest rate cap. The purchase
of an interest rate floor entitles the purchaser, to the extent that a
specified index falls below a predetermined interest rate, to receive payments
of interest on a notional principal amount from the party selling such
interest rate floor.
The Alliance Quality Bond Portfolio may enter into interest rate swaps, caps
and floors on either an asset-based or liability-based basis depending on
whether it is hedging its assets or its liabilities, and will only enter into
such swaps, caps and floors on a net basis, i.e., the two payment streams are
netted out, with the Alliance Quality Bond Portfolio receiving or paying, as
the case may be, only the net amount of the two payments. The net amount of
the excess, if any, of the Alliance Quality Bond Portfolio's obligations over
its entitlements with respect to each interest rate swap, cap or floor will be
accrued on a daily basis and an amount of cash or liquid securities having an
aggregate net asset value at least equal to the accrued excess will be
maintained in a segregated account by the custodian. The Alliance Quality Bond
Portfolio will not enter into any interest rate swap, cap or floor transaction
unless the unsecured senior debt or the claims-paying ability of the other
party thereto is rated in the highest rating category of at least one NRSRO at
the time of entering into such transaction. If there is a default by the other
party to such a transaction, the Alliance Quality Bond Portfolio will have
contractual remedies pursuant to the agreements related to the transaction.
Caps and floors are relatively recent innovations which may be illiquid.
ZERO COUPON SECURITIES. To the extent consistent with its investment
objective, the Alliance Quality Bond Portfolio may invest in "zero coupon"
securities, which are debt securities that have been stripped of their
unmatured interest coupons, and receipts or certificates representing
interests in such stripped debt obligations and coupons. A zero coupon
security pays no interest to its holder during its life. Accordingly, such
securities usually trade at a deep discount from their face or par value and
will be subject to greater fluctuations in market value in response to
changing interest rates than debt obligations of comparable maturities that
make current distributions of interest. The
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Alliance Quality Bond Portfolio may also invest in "pay-in-kind" debentures
(i.e., debt obligations the interest on which may be paid in the form of
additional obligations of the same type rather than cash) which have
characteristics similar to zero coupon securities.
The Alliance Quality Bond Portfolio may invest in collateralized mortgage
obligations or CMOs. See "Investment Techniques-Mortgage-Backed and
Asset-Backed Securities," below. The Portfolio may purchase and sell interest
rate futures contracts and options thereon and may make loans of securities
with a value of up to 50% of its total assets. See "Investment
Techniques-Futures," "Investment Techniques-Risk Factors in Options and
Futures" and "Investment Techniques-Securities Lending," below.
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.
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, 1998, 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: 5.3% in securities
rated AAA or its equivalent, 2.3% of securities rated BBB or its equivalent,
8.2% in securities rated BB or its equivalent, 79.1% in securities rated B or
its equivalent and 5.1% in securities rated CCC or its equivalent. Of these
securities, 94% were rated by an NRSRO and 6% were unrated. All of the unrated
securities were considered by the investment adviser to be of comparable
quality to the Portfolio's investments rated by an NRSRO.
The Portfolio may also invest in fixed income securities which are providing
high current yields because of risks other than credit, such as prepayment
risks, in the case of mortgage-backed securities, or currency risks, in the
case of non-U.S. dollar denominated foreign securities. 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
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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.
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Investment Techniques
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The Portfolios have the flexibility to invest, within limits, in a variety of
instruments designed to enhance their investment capabilities. All of the
Portfolios, other than the Alliance Equity Index Portfolio, may make
investments in repurchase agreements, and all of the Portfolios may purchase
or sell securities on a when-issued, delayed delivery or forward commitment
basis. The Portfolios, other than the Alliance Money Market and the Alliance
Equity Index Portfolios, may write (i.e., sell) covered put and call options
and buy put and call options on securities and securities indexes. The
Portfolios, other than the Alliance Money Market, Alliance Equity Index 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 Balanced, 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, Alliance Quality Bond, Alliance
Growth and Income and Alliance Equity Index 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.
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, other than the Alliance
Equity Index Portfolio, 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.
DERIVATIVES
o Futures
The Alliance High Yield, Alliance Global, Alliance International, Alliance
Conservative Investors, Alliance Growth Investors, Alliance Intermediate
Government Securities, Alliance Balanced and Alliance Quality Bond Portfolios
may each purchase and sell futures contracts and related options on debt
securities and on indexes of debt securities to hedge against anticipated
changes in interest rates that might otherwise have an adverse effect on the
value of their assets or assets they intend to acquire. In addition, each
Portfolio listed above (except the Alliance Intermediate Government Securities
and Alliance Quality Bond Portfolios) 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). In the case of the Alliance Equity Index Portfolio,
futures contracts and related options on the S&P 500 Index may be purchased in
order to reduce brokerage costs, maintain liquidity to meet
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shareholder redemptions or minimize tracking error. As described below under
"Foreign Securities and Currencies," the Alliance High Yield, Alliance Global,
Alliance International, Alliance Conservative Investors, Alliance Growth
Investors, Alliance Balanced, Alliance Common Stock, Alliance Aggressive
Stock, Alliance Small Cap Growth, Alliance Quality Bond 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
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. In addition, the contract value of futures contracts
purchased by the Alliance Equity Index Portfolio plus the contract value of
futures contracts underlying call options purchased by the Alliance Equity
Index Portfolio will not exceed 20% of the Alliance Equity Index Portfolio's
total assets. When a Portfolio purchases or sells a futures contract or writes
a put or call option on a futures contract, the Portfolio will segregate with
its custodian 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.
o Options
The Portfolios, other than the Alliance Money Market and Alliance Equity Index
Portfolios, may write (sell) covered put and call options and buy put and call
options, including options relating to individual securities and securities
indexes. The Portfolios, other than the Alliance Money Market, Alliance
Intermediate Government Securities and Alliance Equity Index Portfolios, may
also write covered put and call options and buy put and call options on
foreign currencies.
A call option is a contract that gives to the holder the right to buy a
specified amount of the underlying security at a fixed or determinable price
(called the exercise or strike price) upon exercise of the option. A put
option is a contract that gives the holder the right to sell a specified
amount of the underlying security at a fixed or determinable price upon
exercise of the option. In the case of index options, exercises are settled
through the payment of cash rather than the delivery of property. A call
option on a security will be considered covered, for example, if the Portfolio
holds the security upon which the option is written. The Portfolios may write
call options on securities or securities indexes for the purpose of increasing
their return or to provide a partial hedge against a decline in the value of
their portfolio securities or both. The Portfolios may write put options on
securities or securities indexes in order to earn additional income or (in the
case of put options written on individual securities) to purchase the
underlying security at a price below the current market price. If a Portfolio
writes an option which expires unexercised or is closed out by the Portfolio
at a profit, it will retain all or part of the premium received for the
option, which will increase its gross income. If the option is exercised, the
Portfolio will be required to sell or purchase the underlying security at a
disadvantageous price, or, in the case of index options, deliver an amount of
cash, which loss may only be partially offset by the amount of premium
received. Each of the Portfolios noted above may also purchase put or call
options on securities and securities indexes in order to hedge against changes
in interest rates or stock prices which may adversely affect the prices of
securities that the Portfolio wants to purchase at a later date, to hedge its
existing investments against a decline in value, or to attempt to reduce the
risk of missing a market or
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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, such options are subject to the risk that the
counterparty may fail to meet its obligations to the Fund, and 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, Alliance Intermediate Government Securities and
Alliance Equity Index Portfolios, may purchase put and call options and write
covered put and call options on foreign currencies for the purpose of
protecting against declines in the dollar value of portfolio securities and
against increases in the dollar cost of securities to be acquired. Such
investment strategies will be used as a hedge and not for speculation. As in
the case of other types of options, however, the writing of an option on
foreign currency will constitute only a partial hedge, up to the amount of the
premium received, and the Portfolio could be required to purchase or sell
foreign currencies at disadvantageous exchange rates, thereby incurring
losses. The purchase of an option on foreign currency may constitute an
effective hedge against fluctuations in exchange rates although, in the event
of rate movements adverse to the Portfolio's position, it may forfeit the
entire amount of the premium plus related transaction costs. Options on
foreign currencies may be traded on the national securities exchanges or in
the over-the-counter market. As described above, options traded in the
over-the-counter market may not be as actively traded as those on an exchange,
so it may be more difficult to value such options. In addition, such options
are subject to the risk that the counterparty may fail to meet its obligations
to the Fund, and it may be difficult to enter into closing transactions with
respect to options traded over-the-counter.
o 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
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the investment adviser's ability to predict correctly the direction of
securities prices, interest rates and other economic factors.
FIXED INCOME SECURITIES
Fixed income securities include preferred and preference stocks and all types
of debt obligations of both domestic and foreign issuers (such as bonds,
debentures, notes, equipment lease certificates, equipment trust certificates,
conditional sales contracts, commercial paper, mortgage-backed securities and
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities). Corporate debt securities may bear fixed, contingent or
variable rates of interest and may involve equity features, such as conversion
or exchange rights or warrants for the acquisition of stock of the same or a
different issuer or participation based on revenues, sales or profits or the
purchase of common stock in a unit transaction (where corporate debt
securities and common stock are offered as a unit).
FOREIGN SECURITIES AND CURRENCIES
All of the Portfolios, except the Alliance Intermediate Government Securities
and Alliance Equity Index Portfolios, may invest in foreign securities. For
these purposes, "foreign securities" are securities of foreign issuers that
are not traded in U.S. markets. Each of the Portfolios, except the Alliance
Intermediate Government Securities Portfolio, may invest in American
depositary receipts and securities of foreign issuers that are traded in U.S.
markets. These securities may involve certain of the risks described below for
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.
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
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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 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 Portfolio 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.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
All the Portfolios, except the Alliance Money Market, Alliance Intermediate
Government Securities and Alliance Equity Index Portfolios, may enter into
contracts for the purchase or sale of a specific currency at a future date at
a price set at the time of the contract.
Generally, such forward contracts will be for a period of less than three
months. The Portfolios will enter into forward contracts for hedging purposes
only. These transactions will include forward purchases or sales of foreign
currencies for the purpose of protecting the 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.
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.
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.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
The Portfolios, other than the Alliance Equity Index Portfolio, may invest in
mortgage-backed securities, which are mortgage loans made by banks, savings
and loan institutions and other lenders that are assembled into pools, that
are (i) issued by an agency of the U.S. Government (such as GNMA) whose
securities are guaranteed by the U.S. Treasury, (ii) issued by an
instrumentality of the U.S. Government (such as FNMA) whose securities are
supported by the instrumentality's right to borrow from the U.S. Treasury, at
the discretion of the U.S. Treasury, though not backed by the full faith and
credit of the U.S. Government itself, or (iii) collateralized by U.S. Treasury
obligations or U.S. Government agency securities. Interests in such pools are
described in this prospectus as mortgage-backed securities. The Portfolios,
other than the Equity Index Portfolio, may invest in (i) mortgage-backed
securities,
<PAGE>
- ----------
43
- --------------------------------------------------------------------------------
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."
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.
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."
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
---------------------------------------------- The Hudson River Trust
<PAGE>
- ----------
44
- --------------------------------------------------------------------------------
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.
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.
<PAGE>
4
Management of the Trust
- -----
45
- --------------------------------------------------------------------------------
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 Balanced 0.450% 0.400% 0.350% 0.325% 0.300 %
- ---------------------------------------------- ----- ----- ----- ----- ------
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 Quality Bond 0.525% 0.500% 0.475% 0.455% 0.445 %
- ---------------------------------------------- ----- ----- ----- ----- ------
Alliance Intermediate Government Securities 0.500% 0.475% 0.450% 0.430% 0.420 %
- ---------------------------------------------- ----- ----- ----- ----- ------
Alliance Equity Index 0.325% 0.300% 0.275% 0.255% 0.245 %
- ---------------------------------------------- ----- ----- ----- ----- ------
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.
<PAGE>
- ----------
46
- --------------------------------------------------------------------------------
For 1998, the Portfolios paid the following advisory fees (as a percentage of
each Portfolio's average daily net assets):
<TABLE>
<S> <C>
Alliance International 0.90%
- ------------------------------------------------------- ----
Alliance Global 0.64%
- ------------------------------------------------------- ----
Alliance Aggressive Stock 0.54%
- ------------------------------------------------------- ----
Alliance Common Stock 0.36%
- ------------------------------------------------------- ----
Alliance Growth and Income 0.55%
- ------------------------------------------------------- ----
Alliance Small Cap Growth 0.90%
- ------------------------------------------------------- ----
Alliance Growth Investors 0.51%
- ------------------------------------------------------- ----
Alliance Balanced 0.41%
- ------------------------------------------------------- ----
Alliance Conservative Investors 0.48%
- ------------------------------------------------------- ----
Alliance High Yield 0.60%
- ------------------------------------------------------- ----
Alliance Quality Bond 0.53%
- ------------------------------------------------------- ----
Alliance Intermediate Government Securities 0.50%
- ------------------------------------------------------- ----
Alliance Equity Index 0.31%
- ------------------------------------------------------- ----
Alliance Money Market 0.35%
- ------------------------------------------------------- ----
</TABLE>
THE PORTFOLIO MANAGERS
THE ASSET ALLOCATION SERIES
ALLIANCE CONSERVATIVE INVESTORS, ALLIANCE BALANCED AND ALLIANCE GROWTH
INVESTORS PORTFOLIOS
Robert G. Heisterberg has been the person principally responsible for the
Alliance Conservative Investors, Alliance Balanced 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.
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 1996 and Mr. Kuck since the Portfolio's inception. Mr.
Rissman, a Senior 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 EQUITY INDEX PORTFOLIO
Judith A. DeVivo has been the person principally responsible for the Alliance
Equity Index Portfolio's investment program since its inception. Ms. DeVivo, a
Vice President of Alliance, has been associated with Alliance since 1970.
---------------------------------
* 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.
<PAGE>
- ----------
47
- --------------------------------------------------------------------------------
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
Sandra L. Yeager has been the person principally responsible for the Alliance
Global Portfolio's investment program since 1998. Ms. Yeager has also been the
person principally responsible for the Alliance International Portfolio's
investment program since January 1999. Ms. Yeager, a Senior Vice President of
Alliance Capital Management L.P. ("Alliance"), has been associated with
Alliance since 1990.
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 Senior Vice President of
Alliance, has been associated with Alliance since 1988.*
ALLIANCE SMALL CAP GROWTH PORTFOLIO
Mark J. Cunneen has been the person principally responsible for the Alliance
Small Cap Growth Portfolio's investment program since January 1999. Mr.
Cunneen, a Senior Vice President of Alliance, has been associated with
Alliance since January 1999. Prior to joining Alliance, Mr. Cunneen had been
associated with INVESCO since May 1998, and before that with Chancellor LGT
Asset Management, Inc. ("Chancellor") since 1992. Mr. Cunneen had been the
head of Chancellor's Small Cap Equity Group since 1997.
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 Senior
Vice President of Alliance, has been associated with Alliance since 1990.*
ALLIANCE INTERMEDIATE GOVERNMENT SECURITIES PORTFOLIO
Jeffrey S. Phlegar has been the person principally responsible for the
Alliance Intermediate Government Securities Portfolio's investment program
since January 1999. Mr. Phlegar, a Senior Vice President of Alliance, has been
associated with Alliance since 1998.
ALLIANCE QUALITY BOND PORTFOLIO
Matthew Bloom has been the person principally responsible for the Alliance
Quality Bond Portfolio's investment program since 1995. Mr. Bloom, a Senior
Vice President of Alliance, has been associated with Alliance since 1989.
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 Senior Vice
President of Alliance, has been associated with Alliance since 1987.*
---------------------------------
* Prior to July 22, 1993, with Equitable Capital Management Corporation
("Equitable Capital"). On that date Alliance acquired the business and
substantially all of the assets of Equitable Capital and became the
investment adviser to the Trust.
---------------------------------------------- The Hudson River Trust
<PAGE>
- ----------
48
- --------------------------------------------------------------------------------
YEAR 2000
Many computer software systems in use today cannot properly process
date-related information relating to periods from and after January 1, 2000.
Should any of the computer systems employed by the Trust's major service
providers fail to process this type of information properly, that could have a
negative impact on the Trust's operations and services that are provided to
the Trust's shareholders. Alliance has advised the Trust that it is reviewing
all of its computer systems with the goal of modifying or replacing such
systems prior to January 1, 2000, to the extent necessary to foreclose any
such negative impact. In addition, Alliance has been advised by the Trust's
custodian that it is also in the process of reviewing its systems with the
same goal. As of the date of this prospectus, the Trust and Alliance have no
reason to believe that these goals will not be achieved. Similarly, the values
of certain of the portfolio securities held by the Trust may be adversely
affected by the inability of the securities' issuers or of third parties to
process this type of information properly.
<PAGE>
5
Description of the Trust's Shares
- ----------
49
- --------------------------------------------------------------------------------
PURCHASE AND REDEMPTION
EQ Financial Consultants, Inc., formerly Equico Securities, Inc. ("EQ
Financial"), a wholly-owned subsidiary of Equitable, is the principal
underwriter of the Class IA shares of the Trust. EQ Financial's address is
1755 Broadway, New York, New York 10019. The Trust will offer and sell its
shares without a sales charge, at each Portfolio's net asset value per share.
The price at which a purchase is effected is based on the next calculation of
net asset value after an order is placed by an insurance company investing in
the Trust. Net asset value per share is calculated for purchases and
redemption of shares of each Portfolio by dividing the value of total
Portfolio assets, less liabilities (including Trust expenses, which are
accrued daily), by the total number of shares of that Portfolio outstanding.
The net asset value per share of each Portfolio is determined each business
day at 4:00 p.m. Eastern time. Values are not calculated on national business
holidays.
All shares may be redeemed in accordance with the Trust's Agreement and
Declaration of Trust and By-Laws. Shares will be redeemed at their net asset
value. Sales and redemptions of shares of the same class by the same
shareholder on the same day will be netted. All redemption requests will be
processed and payment with respect thereto will be made within seven days
after tenders.
The Trust may also suspend redemption, if permitted by the Investment Company
Act, for any period during which the New York Stock Exchange is closed or
during which trading is restricted by the SEC or the SEC declares that an
emergency exists. Redemption may also be suspended during other periods
permitted by the SEC for the protection of the Trust's shareholders.
HOW ASSETS ARE VALUED
Values are determined according to accepted accounting practices and all laws
and regulations that apply. The assets of each Portfolio are generally valued
at the close of regular trading on the New York Stock Exchange 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. Because foreign markets may be open at
different times than the New York Stock Exchange, the value of a
Portfolio's shares may change on days when shareholders are not able to
buy or sell them. If events materially affecting the values of the
Portfolio's foreign investments occur between the close of foreign markets
and the close of regular trading on the New York Stock Exchange, these
investments may be valued at their fair value.
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.
<PAGE>
6
Dividends, Distributions and Taxes
- ----------
50
- --------------------------------------------------------------------------------
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 order for investors to receive the favorable tax treatment generally
available to holders of variable annuity and variable life contracts, the
separate accounts underlying such contracts, as well as the Portfolios in
which such accounts invest, must meet certain diversification requirements.
Each Portfolio intends to comply with these requirements. If a Portfolio does
not meet such requirements, income allocable to the variable annuity and
variable life contracts (other than "pension plan contracts"), including
accumulated investment earnings, would be immediately taxable to the holders
of such contracts.
A more complete discussion of this and other issues appears in the SAI.
For more information regarding the tax implications for owners of variable
contracts investing in the Trust, refer to the prospectuses for those
products.
<PAGE>
7
Financial Highlights
- -----
51
- --------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the
Portfolio's financial performance for the past 5 years (or, if shorter, the
period of the Portfolio's operations). Certain information reflects financial
results for a single Portfolio share. The total returns in the table represent
the rate that an investor would have earned (or lost) on an investment in the
Portfolio (assuming reinvestment of all dividends and distributions). This
information has been audited by PricewaterhouseCoopers LLP, whose report,
along with the Trust's financial statements, is included in the SAI.
Additional unaudited performance information is contained in the Trust's
Annual Report, which is available upon request.
FINANCIAL HIGHLIGHTS
PER SHARE INCOME AND CAPITAL CHANGES
(FOR A CLASS IA SHARE OUTSTANDING THROUGHOUT EACH PERIOD)(A)
ASSET ALLOCATION SERIES
ALLIANCE CONSERVATIVE INVESTORS PORTFOLIO:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year (b) ....................... $ 11.89 $ 11.29 $ 11.52 $ 10.15 $ 11.12
------- ------- ------- ------- -------
Income from investment operations:
Net investment income ....................................... 0.49 0.49 0.50 0.60 0.55
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions ............................................... 1.12 0.97 0.07 1.43 ( 1.00)
------- ------- ------- ------- -------
Total from investment operations ............................ 1.61 1.46 0.57 2.03 ( 0.45)
------- ------- ------- ------- -------
Less distributions:
Dividends from net investment income ........................ ( 0.48) ( 0.49) ( 0.51) ( 0.59) ( 0.52)
Distributions from realized gains ........................... ( 0.70) ( 0.37) ( 0.27) ( 0.07) -
Distributions in excess of realized gains ................... - - ( 0.02) - -
-------- -------- -------- -------- -------
Total dividends and distributions ........................... ( 1.18) ( 0.86) ( 0.80) ( 0.66) ( 0.52)
-------- -------- -------- -------- -------
Net asset value, end of year ................................. $ 12.32 $ 11.89 $ 11.29 $ 11.52 $ 10.15
-------- -------- -------- -------- -------
Total return (c) ............................................. 13.88% 13.25% 5.21% 20.40% ( 4.10)%
-------- -------- -------- -------- -------
Ratios/Supplemental Data:
Net assets, end of year (000's) .............................. $355,441 $307,847 $282,402 $252,101 $173,691
Ratio of expenses to average net assets ...................... 0.53% 0.57% 0.61% 0.59% 0.59%
Ratio of net investment income to average net assets ......... 3.99% 4.17% 4.48% 5.48% 5.22%
Portfolio turnover rate ...................................... 103% 206% 181% 287% 228%
</TABLE>
Footnotes appear on page 65.
<PAGE>
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52
- --------------------------------------------------------------------------------
ALLIANCE BALANCED PORTFOLIO:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Net asset value, beginning of year (b) ....................... $ 17.58 $ 16.64
--------- ---------
Income from investment operations:
Net investment income ....................................... 0.56 0.58
Net realized and unrealized gain (loss) on investments
and foreign currency transactions .......................... 2.54 1.86
--------- ---------
Total from investment operations ............................ 3.10 2.44
--------- ---------
Less distributions:
Dividends from net investment income ........................ ( 0.50) ( 0.59)
Dividends in excess of net investment income ................ - -
Distributions from realized gains ........................... ( 1.67) ( 0.91)
Distributions in excess of realized gains ................... - -
Tax return of capital distributions ......................... - -
---------- ----------
Total dividends and distributions ........................... ( 2.17) ( 1.50)
---------- ----------
Net asset value, end of year ................................. $ 18.51 $ 17.58
---------- ----------
Total return (c) ............................................. 18.11% 15.06%
---------- ----------
Ratios/Supplemental Data:
Net assets, end of year (000's) .............................. $1,936,429 $1,724,089
Ratio of expenses to average net assets ...................... 0.45% 0.45%
Ratio of net investment income to average net assets ......... 3.00% 3.30%
Portfolio turnover rate ...................................... 95% 146%
<CAPTION>
Year Ended December 31,
---------------------------------------------
1996 1995 1994
-------------- -------------- ---------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year (b) ....................... $ 16.76 $ 14.87 $ 16.67
--------- --------- ---------
Income from investment operations:
Net investment income ....................................... 0.53 0.54 0.45
Net realized and unrealized gain (loss) on investments
and foreign currency transactions .......................... 1.31 2.36 ( 1.78)
--------- --------- ---------
Total from investment operations ............................ 1.84 2.90 ( 1.33)
--------- --------- ---------
Less distributions:
Dividends from net investment income ........................ ( 0.53) ( 0.54) ( 0.44)
Dividends in excess of net investment income ................ - - ( 0.03)
Distributions from realized gains ........................... ( 1.40) ( 0.47) -
Distributions in excess of realized gains ................... ( 0.03) - -
Tax return of capital distributions ......................... - - ( 0.00)
---------- ---------- ---------
Total dividends and distributions ........................... ( 1.96) ( 1.01) ( 0.47)
---------- ---------- ---------
Net asset value, end of year ................................. $ 16.64 $ 16.76 $ 14.87
---------- ---------- ---------
Total return (c) ............................................. 11.68% 19.75% ( 8.02)%
---------- ---------- ---------
Ratios/Supplemental Data:
Net assets, end of year (000's) .............................. $1,637,856 $1,523,142 $1,329,820
Ratio of expenses to average net assets ...................... 0.41% 0.40% 0.39%
Ratio of net investment income to average net assets ......... 3.15% 3.33% 2.87%
Portfolio turnover rate ...................................... 177% 186% 115%
</TABLE>
Footnotes appear on page 65.
<PAGE>
- -----
53
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ALLIANCE GROWTH INVESTORS PORTFOLIO:
<TABLE>
<CAPTION>
Year Ended December
31,
-----------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Net asset value, beginning of year (b) ....................... $ 18.55 $ 17.20
--------- ---------
Income from investment operations:
Net investment income ....................................... 0.41 0.41
Net realized and unrealized gain (loss) on investments and
foreign currency transactions .............................. 3.03 2.43
--------- ---------
Total from investment operations ............................ 3.44 2.84
--------- ---------
Less distributions:
Dividends from net investment income ........................ ( 0.41) ( 0.46)
Dividends in excess of net investment income ................ - -
Distributions from realized gains ........................... ( 1.71) ( 1.03)
Distributions in excess of realized gains ................... - -
---------- ----------
Total dividends and distributions ........................... ( 2.12) ( 1.49)
---------- ----------
Net asset value, end of year ................................. $ 19.87 $ 18.55
---------- ----------
Total return (c) ............................................. 19.13% 16.87%
---------- ----------
Ratios/Supplemental Data:
Net asset, end of year (000's) ............................... $1,963,074 $1,630,389
Ratio of expenses to average net assets ...................... 0.55% 0.57%
Ratio of net investment income to average net assets ......... 2.10% 2.18%
Portfolio turnover rate ...................................... 102% 121%
<CAPTION>
Year Ended December 31,
-----------------------------------------
1996 1995 1994
-------------- ------------ -------------
<S> <C> <C> <C>
Net asset value, beginning of year (b) ....................... $ 17.68 $ 14.66 $ 15.61
--------- ------- -------
Income from investment operations:
Net investment income ....................................... 0.40 0.57 0.50
Net realized and unrealized gain (loss) on investments and
foreign currency transactions .............................. 1.66 3.24 ( 0.98)
--------- ------- -------
Total from investment operations ............................ 2.06 3.81 ( 0.48)
--------- ------- -------
Less distributions:
Dividends from net investment income ........................ ( 0.40) ( 0.54) ( 0.46)
Dividends in excess of net investment income ................ ( 0.03) ( 0.01) ( 0.01)
Distributions from realized gains ........................... ( 2.10) ( 0.24) -
Distributions in excess of realized gains ................... ( 0.01) - -
---------- -------- -------
Total dividends and distributions ........................... ( 2.54) ( 0.79) ( 0.47)
---------- -------- -------
Net asset value, end of year ................................. $ 17.20 $ 17.68 $ 14.66
---------- -------- -------
Total return (c) ............................................. 12.61% 26.37% ( 3.15)%
---------- -------- -------
Ratios/Supplemental Data:
Net asset, end of year (000's) ............................... $1,301,643 $896,134 $492,478
Ratio of expenses to average net assets ...................... 0.57% 0.56% 0.59%
Ratio of net investment income to average net assets ......... 2.31% 3.43% 3.32%
Portfolio turnover rate ...................................... 190% 107% 131%
</TABLE>
Footnotes appear on page 65.
---------------------- The Hudson River Trust
<PAGE>
- -----
54
- --------------------------------------------------------------------------------
EQUITY SERIES
ALLIANCE GROWTH AND INCOME PORTFOLIO:
<TABLE>
<CAPTION>
Year Ended December
31,
-------------------------
1998 1997
------------ ------------
<S> <C> <C>
Net asset value, beginning of year (b) .......................... $ 15.38 $ 13.01
------- -------
Income from investment operations:
Net investment income .......................................... 0.06 0.15
Net realized and unrealized gain (loss) on investments ......... 3.08 3.30
------- -------
Total from investment operations ............................... 3.14 3.45
------- -------
Less distributions:
Dividends from net investment income ........................... ( 0.05) ( 0.15)
Distributions from realized gains .............................. ( 1.48) ( 0.93)
-------- --------
Total dividends and distributions .............................. ( 1.53) ( 1.08)
-------- --------
Net asset value, end of year .................................... $ 16.99 $ 15.38
-------- --------
Total return (c) ................................................ 20.86% 26.90%
-------- --------
Ratios/Supplemental Data:
Net assets, end of year (000's) ................................. $877,744 $555,059
Ratio of expenses to average net assets ......................... 0.58% 0.58%
Ratio of net investment income to average net assets ............ 0.38% 0.99%
Portfolio turnover rate ......................................... 74% 79%
<CAPTION>
Year Ended December 31,
------------------------------------
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Net asset value, beginning of year (b) .......................... $ 11.70 $ 9.70 $ 9.95
------- ------- -------
Income from investment operations:
Net investment income .......................................... 0.24 0.33 0.31
Net realized and unrealized gain (loss) on investments ......... 2.05 1.97 ( 0.36)
------- ------- -------
Total from investment operations ............................... 2.29 2.30 ( 0.05)
------- ------- -------
Less distributions:
Dividends from net investment income ........................... ( 0.23) ( 0.30) ( 0.20)
Distributions from realized gains .............................. ( 0.75) - -
-------- ------- -------
Total dividends and distributions .............................. ( 0.98) ( 0.30) ( 0.20)
-------- ------- -------
Net asset value, end of year .................................... $ 13.01 $ 11.70 $ 9.70
-------- ------- -------
Total return (c) ................................................ 20.09% 24.07% ( 0.58)%
-------- ------- -------
Ratios/Supplemental Data:
Net assets, end of year (000's) ................................. $232,080 $98,053 $31,522
Ratio of expenses to average net assets ......................... 0.58% 0.60% 0.78%
Ratio of net investment income to average net assets ............ 1.94% 3.11% 3.13%
Portfolio turnover rate ......................................... 88% 65% 52%
</TABLE>
Footnotes appear on page 65.
<PAGE>
- -----
55
- --------------------------------------------------------------------------------
ALLIANCE EQUITY INDEX PORTFOLIO:
<TABLE>
<CAPTION>
Year Ended
December 31,
-----------------------------------------------------
1998 1997 1996 1995
-------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period (b) ..................... $ 19.74 $ 15.16 $ 13.13 $ 9.87
--------- ------- ------- -------
Income from investment operations:
Net investment income ....................................... 0.27 0.26 0.27 0.26
Net realized and unrealized gain (loss) on investments and
foreign currency transactions .............................. 5.25 4.64 2.65 3.32
--------- ------- ------- -------
Total from investment operations ............................ 5.52 4.90 2.92 3.58
--------- ------- ------- -------
Less distributions:
Dividends from net investment income ........................ ( 0.25) ( 0.25) ( 0.25) ( 0.22)
Distributions from realized gains ........................... ( 0.01) ( 0.07) ( 0.64) ( 0.09)
Distributions in excess of realized gains ................... - - - ( 0.01)
---------- -------- -------- --------
Total dividends and distributions ........................... ( 0.26) ( 0.32) ( 0.89) ( 0.32)
---------- -------- -------- --------
Net asset value, end of period ............................... $ 25.00 $ 19.74 $ 15.16 $ 13.13
---------- -------- -------- --------
Total return (c) ............................................. 28.07% 32.58% 22.39% 36.48%
---------- -------- -------- --------
Ratios/Supplemental Data:
Net assets, end of period (000's) ............................ $1,689,913 $943,631 $386,249 $165,785
Ratio of expenses to average net assets ...................... 0.34% 0.37% 0.39% 0.48%
Ratio of net investment income to average net assets ......... 1.23% 1.46% 1.91% 2.16%
Portfolio turnover rate ...................................... 6% 3% 15% 9%
<CAPTION>
March 1, 1994
to
December 31, 1994
------------------
<S> <C>
Net asset value, beginning of period (b) ..................... $ 10.00
---------
Income from investment operations:
Net investment income ....................................... 0.20
Net realized and unrealized gain (loss) on investments and
foreign currency transactions .............................. ( 0.09)
---------
Total from investment operations ............................ 0.11
---------
Less distributions:
Dividends from net investment income ........................ ( 0.20)
Distributions from realized gains ........................... ( 0.03)
Distributions in excess of realized gains ................... ( 0.01)
---------
Total dividends and distributions ........................... ( 0.24)
---------
Net asset value, end of period ............................... $ 9.87
---------
Total return (c) ............................................. 1.08%
---------
Ratios/Supplemental Data:
Net assets, end of period (000's) ............................ $36,748
Ratio of expenses to average net assets ...................... 0.49%(d)
Ratio of net investment income to average net assets ......... 2.42%(d)
Portfolio turnover rate ...................................... 7%
</TABLE>
---------------------- The Hudson River Trust
<PAGE>
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56
- --------------------------------------------------------------------------------
ALLIANCE COMMON STOCK PORTFOLIO:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1998 1997
--------------- --------------
<S> <C> <C>
Net asset value, beginning of year (b) ....................... $ 21.61 $ 18.23
---------- ---------
Income from investment operations:
Net investment income ....................................... 0.18 0.14
Net realized and unrealized gain (loss) on investments
and foreign currency transactions .......................... 5.99 5.12
---------- ---------
Total from investment operations ............................ 6.17 5.26
---------- ---------
Less distributions:
Dividends from net investment income ........................ ( 0.15) ( 0.11)
Dividends in excess of net investment income ................ - -
Distributions from realized gains ........................... ( 3.28) ( 1.77)
Distributions in excess of realized gains ................... - -
Tax return of capital distributions ......................... - -
----------- ----------
Total dividends and distributions ........................... ( 3.43) ( 1.88)
----------- ----------
Net asset value, end of year ................................. $ 24.35 $ 21.61
----------- ----------
Total return (c) ............................................. 29.39% 29.40%
----------- ----------
Ratios/Supplemental Data:
Net assets, end of year (000's) .............................. $12,061,977 $9,331,994
Ratio of expenses to average net assets ...................... 0.39% 0.39%
Ratio of net investment income to average net assets ......... 0.75% 0.69%
Portfolio turnover rate ...................................... 46% 52%
<CAPTION>
Year Ended December 31,
---------------------------------------------
1996 1995 1994
-------------- -------------- ---------------
<S> <C> <C> <C>
Net asset value, beginning of year (b) ....................... $ 16.48 $ 13.36 $ 14.65
--------- --------- ---------
Income from investment operations:
Net investment income ....................................... 0.15 0.20 0.20
Net realized and unrealized gain (loss) on investments
and foreign currency transactions .......................... 3.73 4.12 ( 0.51)
--------- --------- ---------
Total from investment operations ............................ 3.88 4.32 ( 0.31)
--------- --------- ---------
Less distributions:
Dividends from net investment income ........................ ( 0.15) ( 0.20) ( 0.19)
Dividends in excess of net investment income ................ - ( 0.02) ( 0.01)
Distributions from realized gains ........................... ( 1.76) ( 0.95) ( 0.77)
Distributions in excess of realized gains ................... ( 0.22) ( 0.03) -
Tax return of capital distributions ......................... - - ( 0.01)
---------- ---------- ---------
Total dividends and distributions ........................... ( 2.13) ( 1.20) ( 0.98)
---------- ---------- ---------
Net asset value, end of year ................................. $ 18.23 $ 16.48 $ 13.36
---------- ---------- ---------
Total return (c) ............................................. 24.28% 32.45% ( 2.14)%
---------- ---------- ---------
Ratios/Supplemental Data:
Net assets, end of year (000's) .............................. $6,625,390 $4,879,677 $3,466,245
Ratio of expenses to average net assets ...................... 0.38% 0.38% 0.38%
Ratio of net investment income to average net assets ......... 0.85% 1.27% 1.40%
Portfolio turnover rate ...................................... 55% 61% 52%
</TABLE>
Footnotes appear on page 65.
<PAGE>
- -----
57
- --------------------------------------------------------------------------------
ALLIANCE GLOBAL PORTFOLIO:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Net asset value, beginning of year (b) ....................... $ 17.29 $ 16.92
--------- ---------
Income from investment operations:
Net investment income ....................................... 0.14 0.17
Net realized and unrealized gain on investments and foreign
currency transactions ...................................... 3.56 1.75
--------- ---------
Total from investment operations ............................ 3.70 1.92
--------- ---------
Less distributions:
Dividends from net investment income ........................ ( 0.22) ( 0.36)
Dividends in excess of net investment income ................ - -
Distributions from realized gains ........................... ( 1.31) ( 1.19)
Distributions in excess of realized gains ................... - -
Tax return of capital distributions ......................... - -
---------- ----------
Total dividends and distributions ........................... ( 1.53) ( 1.55)
---------- ----------
Net asset value, end of year ................................. $ 19.46 $ 17.29
---------- ----------
Total return (c) ............................................. 21.80% 11.66%
---------- ----------
Ratios/Supplemental Data:
Net assets, end of year (000's) .............................. $1,360,220 $1,203,867
Ratio of expenses to average net assets ...................... 0.71% 0.69%
Ratio of net investment income to average net assets ......... 0.72% 0.97%
Portfolio turnover rate ...................................... 105% 57%
<CAPTION>
Year Ended December 31,
-------------------------------------
1996 1995 1994
------------ ------------ -----------
<S> <C> <C> <C>
Net asset value, beginning of year (b) ....................... $ 15.74 $ 13.87 $ 13.62
------- ------- --------
Income from investment operations:
Net investment income ....................................... 0.21 0.26 0.20
Net realized and unrealized gain on investments and foreign
currency transactions ...................................... 2.05 2.32 0.52
------- ------- --------
Total from investment operations ............................ 2.26 2.58 0.72
------- ------- --------
Less distributions:
Dividends from net investment income ........................ ( 0.21) ( 0.25) ( 0.17)
Dividends in excess of net investment income ................ ( 0.08) - -
Distributions from realized gains ........................... ( 0.79) ( 0.42) ( 0.28)
Distributions in excess of realized gains ................... - ( 0.03) ( 0.00)
Tax return of capital distributions ......................... ( 0.00) ( 0.01) ( 0.02)
-------- -------- --------
Total dividends and distributions ........................... ( 1.08) ( 0.71) ( 0.47)
-------- -------- --------
Net asset value, end of year ................................. $ 16.92 $ 15.74 $ 13.87
-------- -------- --------
Total return (c) ............................................. 14.60% 18.81% 5.23%
-------- -------- --------
Ratios/Supplemental Data:
Net assets, end of year (000's) .............................. $997,041 $686,140 $421,698
Ratio of expenses to average net assets ...................... 0.60% 0.61% 0.69%
Ratio of net investment income to average net assets ......... 1.28% 1.76% 1.41%
Portfolio turnover rate ...................................... 59% 67% 71%
</TABLE>
Footnotes appear on page 65.
---------------------- The Hudson River Trust
<PAGE>
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58
- --------------------------------------------------------------------------------
ALLIANCE INTERNATIONAL PORTFOLIO:
<TABLE>
<CAPTION>
Year Ended December 31, April 3, 1995
--------------------------------------- to
1998 1997 1996 December 31, 1995
------------ ------------- ------------ ------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period (b) .......................... $ 10.27 $ 11.50 $ 10.87 $ 10.00
------- ------- ------- ---------------
Income from investment operations:
Net investment income ............................................ 0.09 0.10 0.13 0.14
Net realized and unrealized gain (loss) on investments and foreign
currency transactions ........................................... 0.97 ( 0.45) 0.94 0.98
------- ------- ------- ---------------
Total from investment operations ................................. 1.06 ( 0.35) 1.07 1.12
------- ------- ------- ---------------
Less distributions:
Dividends from net investment income ............................. ( 0.20) ( 0.32) ( 0.10) ( 0.07)
Dividends in excess of net investment income ..................... - - ( 0.09) ( 0.13)
Distributions from realized gains ................................ ( 0.00) ( 0.56) ( 0.25) ( 0.05)
-------- ------- -------- ---------------
Total dividends and distributions ................................ ( 0.20) ( 0.88) ( 0.44) ( 0.25)
-------- ------- -------- ---------------
Net asset value, end of period .................................... $ 11.13 $ 10.27 $ 11.50 $ 10.87
-------- ------- -------- ---------------
Total return (c) .................................................. 10.57% ( 2.98)% 9.82% 11.29%
-------- ------- -------- ---------------
Ratios/Supplemental Data:
Net assets, end of period (000's) ................................. $204,767 $190,611 $151,907 $ 28,684
Ratio of expenses to average net assets ........................... 1.06 % 1.08% 1.06% 1.03%(d)
Ratio of net investment income to average net assets .............. 0.81% 0.83% 1.10% 1.71%(d)
Portfolio turnover rate ........................................... 59% 59% 48% 56%
</TABLE>
Footnotes appear on page 65.
<PAGE>
- -----
59
- --------------------------------------------------------------------------------
ALLIANCE AGGRESSIVE STOCK PORTFOLIO:
<TABLE>
<CAPTION>
Year Ended December
31,
-----------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Net asset value, beginning of year (b) .......................... $ 36.22 $ 35.85
--------- ---------
Income from investment operations:
Net investment income .......................................... 0.09 0.04
Net realized and unrealized gain (loss) on investments ......... ( 0.28) 3.71
---------- ---------
Total from investment operations ............................... ( 0.19) 3.75
---------- ---------
Less distributions:
Dividends from net investment income ........................... ( 0.16) ( 0.05)
Dividends in excess of net investment income ................... - -
Distributions from realized gains .............................. ( 1.72) ( 3.33)
Distributions in excess of realized gains ...................... - -
Tax return of capital distributions ............................ - -
---------- ----------
Total dividends and distributions .............................. ( 1.88) ( 3.38)
---------- ----------
Net asset value, end of year .................................... $ 34.15 $ 36.22
---------- ----------
Total return (c) ................................................ 0.29% 10.94%
---------- ----------
Ratios/Supplemental Data:
Net assets, end of year (000's) ................................. $4,346,907 $4,589,771
Ratio of expenses to average net assets ......................... 0.56% 0.54%
Ratio of net investment income to average net assets ............ 0.24% 0.11%
Portfolio turnover rate ......................................... 105% 123%
<CAPTION>
Year Ended December 31,
---------------------------------------------
1996 1995 1994
-------------- -------------- ---------------
<S> <C> <C> <C>
Net asset value, beginning of year (b) .......................... $ 35.68 $ 30.63 $ 31.89
--------- --------- ---------
Income from investment operations:
Net investment income .......................................... 0.09 0.10 0.04
Net realized and unrealized gain (loss) on investments ......... 7.52 9.54 ( 1.26)
--------- --------- ---------
Total from investment operations ............................... 7.61 9.64 ( 1.22)
--------- --------- ---------
Less distributions:
Dividends from net investment income ........................... ( 0.09) ( 0.10) ( 0.04)
Dividends in excess of net investment income ................... ( 0.00) - -
Distributions from realized gains .............................. ( 7.33) ( 4.49) -
Distributions in excess of realized gains ...................... ( 0.02) - -
Tax return of capital distributions ............................ - - ( 0.00)
---------- ---------- ---------
Total dividends and distributions .............................. ( 7.44) ( 4.59) ( 0.04)
---------- ---------- ---------
Net asset value, end of year .................................... $ 35.85 $ 35.68 $ 30.63
---------- ---------- ---------
Total return (c) ................................................ 22.20% 31.63% ( 3.81)%
---------- ---------- ---------
Ratios/Supplemental Data:
Net assets, end of year (000's) ................................. $3,865,256 $2,700,515 $1,832,164
Ratio of expenses to average net assets ......................... 0.48% 0.49% 0.49%
Ratio of net investment income to average net assets ............ 0.24% 0.28% 0.12%
Portfolio turnover rate ......................................... 108% 127% 92%
</TABLE>
Footnotes appear on page 65.
---------------------- The Hudson River Trust
<PAGE>
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60
- --------------------------------------------------------------------------------
ALLIANCE SMALL CAP GROWTH PORTFOLIO:
<TABLE>
<CAPTION>
May 1, 1997
Year Ended to
December 31, 1998 December 31, 1997
------------------- ------------------
<S> <C> <C>
Net asset value, beginning of period (b) ........................ $ 12.35 $ 10.00
------- --------
Income from investment operations:
Net investment income .......................................... 0.01 0.01
Net realized and unrealized gain (loss) on investments ......... ( 0.54) 2.65
------- --------
Total from investment operations ............................... ( 0.53) 2.66
------- --------
Less distributions:
Dividends from net investment income ........................... - ( 0.01)
Distributions from realized gains .............................. - ( 0.30)
------- --------
Total dividends and distributions .............................. - ( 0.31)
------- --------
Net asset value, end of period .................................. $ 11.82 $ 12.35
------- --------
Total return (c) ................................................ ( 4.28)% 26.74%
------- --------
Ratios/Supplemental Data:
Net assets, end of period (000's) ............................... $198,360 $ 94,676
Ratio of expenses to average net assets ......................... 0.96% 0.95%(d)
Ratio of net investment income to average net assets ............ 0.08% 0.10%(d)
Portfolio turnover rate ......................................... 94% 96%
</TABLE>
Footnotes appear on page 65.
<PAGE>
- -----
61
- --------------------------------------------------------------------------------
FIXED INCOME SERIES
ALLIANCE MONEY MARKET PORTFOLIO:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year (b) ....................... $ 10.18 $ 10.17 $ 10.16 $ 10.14 $ 10.12
------- ------- ------- ------- --------
Income from investment operations:
Net investment income ....................................... 0.53 0.54 0.54 0.57 0.41
Net realized and unrealized loss on investments ............. - - ( 0.01) - -
-------- -------- -------- -------- --------
Total from investment operations ............................ 0.53 0.54 0.53 0.57 0.41
-------- -------- -------- -------- --------
Less distributions:
Dividends from net investment income ........................ ( 0.49) ( 0.53) ( 0.52) ( 0.55) ( 0.39)
-------- -------- -------- -------- --------
Net asset value, end of year ................................. $ 10.22 $ 10.18 $ 10.17 $ 10.16 $ 10.14
-------- -------- -------- -------- --------
Total return (c) ............................................. 5.34% 5.42% 5.33% 5.74% 4.02%
-------- -------- -------- -------- --------
Ratios/Supplemental Data:
Net assets, end of year (000's) .............................. $723,311 $449,960 $463,422 $386,691 $325,391
Ratio of expenses to average net assets ...................... 0.37% 0.39% 0.43% 0.44% 0.42%
Ratio of net investment income to average net assets ......... 5.13% 5.28% 5.17% 5.53% 4.01%
<CAPTION>
<S> <C>
Net asset value, beginning of year (b) .......................
Income from investment operations:
Net investment income .......................................
Net realized and unrealized loss on investments .............
Total from investment operations ............................
Less distributions:
Dividends from net investment income ........................
Net asset value, end of year .................................
Total return (c) .............................................
Ratios/Supplemental Data:
Net assets, end of year (000's) ..............................
Ratio of expenses to average net assets ......................
Ratio of net investment income to average net assets .........
</TABLE>
Footnotes appear on page 65.
---------------------- The Hudson River Trust
<PAGE>
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62
- --------------------------------------------------------------------------------
ALLIANCE INTERMEDIATE GOVERNMENT SECURITIES PORTFOLIO (E):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year (b) .......................... $ 9.44 $ 9.29 $ 9.47 $ 8.87 $ 10.08
------- ------- ------- ------- -------
Income from investment operations:
Net investment income .......................................... 0.50 0.53 0.54 0.58 0.65
Net realized and unrealized gain (loss) on investments ......... 0.21 0.13 ( 0.19) 0.57 ( 1.08)
------- ------- ------- ------- -------
Total from investment operations ............................... 0.71 0.66 0.35 1.15 ( 0.43)
------- ------- ------- ------- -------
Less distributions:
Dividends from net investment income ........................... ( 0.48) ( 0.51) ( 0.53) ( 0.55) ( 0.78)
-------- -------- ------- ------- -------
Net asset value, end of year .................................... $ 9.67 $ 9.44 $ 9.29 $ 9.47 $ 8.87
-------- -------- ------- ------- -------
Total return (c) ................................................ 7.74% 7.29% 3.78% 13.33% ( 4.37)%
-------- -------- ------- ------- -------
Ratios/Supplemental Data:
Net assets, end of year (000's) ................................. $153,383 $115,114 $88,384 $71,780 $48,518
Ratio of expenses to average net assets ......................... 0.55% 0.55% 0.56% 0.57% 0.56%
Ratio of net investment income to average net assets ............ 5.21% 5.61% 5.73% 6.15% 6.75%
Portfolio turnover rate ......................................... 539% 285% 318% 255% 133%
</TABLE>
Footnotes appear on page 65.
<PAGE>
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63
- --------------------------------------------------------------------------------
ALLIANCE QUALITY BOND PORTFOLIO:
<TABLE>
<CAPTION>
Year Ended December
31,
-------------------------
1998 1997
------------ ------------
<S> <C> <C>
Net asset value, beginning of year (b) ....................... $ 9.74 $ 9.49
------- -------
Income from investment operations:
Net investment income ....................................... 0.55 0.60
Net realized and unrealized gain (loss) on investments and
foreign currency transactions .............................. 0.28 0.24
------- -------
Total from investment operations ............................ 0.83 0.84
------- -------
Less distributions:
Dividends from net investment income ........................ ( 0.53) ( 0.59)
Dividends in excess of net investment income ................ - -
Distribution from realized gains ............................ ( 0.20) -
Tax return of capital distributions ......................... - -
-------- --------
Total dividends and distributions ........................... ( 0.73) ( 0.59)
-------- --------
Net asset value, end of year ................................. $ 9.84 $ 9.74
-------- --------
Total return (c) ............................................. 8.69% 9.14%
-------- --------
Ratios/Supplemental Data:
Net assets, end of year (000's) .............................. $322,418 $203,233
Ratio of expenses to average net assets ...................... 0.57% 0.57%
Ratio of net investment income to average net assets ......... 5.48% 6.19%
Portfolio turnover rate ...................................... 194% 374%
<CAPTION>
Year Ended December 31,
---------------------------------------
1996 1995 1994
------------ ------------ -------------
<S> <C> <C> <C>
Net asset value, beginning of year (b) ....................... $ 9.61 $ 8.72 $ 9.82
------- ------- -------
Income from investment operations:
Net investment income ....................................... 0.57 0.57 0.66
Net realized and unrealized gain (loss) on investments and
foreign currency transactions .............................. ( 0.07) 0.88 ( 1.16)
-------- ------- -------
Total from investment operations ............................ 0.50 1.45 ( 0.50)
-------- ------- -------
Less distributions:
Dividends from net investment income ........................ ( 0.60) ( 0.56) ( 0.55)
Dividends in excess of net investment income ................ ( 0.02) - -
Distribution from realized gains ............................ - - -
Tax return of capital distributions ......................... - - ( 0.05)
-------- -------- -------
Total dividends and distributions ........................... ( 0.62) ( 0.56) ( 0.60)
-------- -------- -------
Net asset value, end of year ................................. $ 9.49 $ 9.61 $ 8.72
-------- -------- -------
Total return (c) ............................................. 5.36% 17.02% ( 5.10)%
-------- -------- -------
Ratios/Supplemental Data:
Net assets, end of year (000's) .............................. $155,023 $157,443 $127,575
Ratio of expenses to average net assets ...................... 0.59% 0.59% 0.59%
Ratio of net investment income to average net assets ......... 6.06% 6.13% 7.17%
Portfolio turnover rate ...................................... 431% 411% 222%
</TABLE>
Footnotes appear on page 65.
---------------------- The Hudson River Trust
<PAGE>
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64
- --------------------------------------------------------------------------------
ALLIANCE HIGH YIELD PORTFOLIO:
<TABLE>
<CAPTION>
Year Ended December
31,
--------------------------
1998 1997
------------- ------------
<S> <C> <C>
Net asset value, beginning of year (b) .......................... $ 10.41 $ 10.02
------- -------
Income from investment operations:
Net investment income .......................................... 1.07 1.04
Net realized and unrealized gain (loss) on investments ......... ( 1.56) 0.75
------- -------
Total from investment operations ............................... ( 0.49) 1.79
------- -------
Less distributions:
Dividends from net investment income ........................... ( 1.03) ( 0.97)
Dividends in excess of net investment income ................... - -
Distributions from realized gains .............................. ( 0.18) ( 0.43)
------- --------
Total dividends and distributions .............................. ( 1.21) ( 1.40)
------- --------
Net asset value, end of year .................................... $ 8.71 $ 10.41
------- --------
Total return (c) ................................................ ( 5.15)% 18.48%
------- --------
Ratios/Supplemental Data:
Net assets, end of year (000's) ................................. $405,308 $355,473
Ratio of expenses to average net assets ......................... 0.63% 0.62%
Ratio of net investment income to average net assets ............ 10.67% 9.82%
Portfolio turnover rate ......................................... 181% 390%
<CAPTION>
Year Ended December 31,
-------------------------------------
1996 1995 1994
------------ ------------ -----------
<S> <C> <C> <C>
Net asset value, beginning of year (b) .......................... $ 9.64 $ 8.91 $ 10.08
------- ------- -------
Income from investment operations:
Net investment income .......................................... 1.02 0.98 0.89
Net realized and unrealized gain (loss) on investments ......... 1.07 0.73 ( 1.17)
------- ------- -------
Total from investment operations ............................... 2.09 1.71 ( 0.28)
------- ------- -------
Less distributions:
Dividends from net investment income ........................... ( 0.98) ( 0.94) ( 0.88)
Dividends in excess of net investment income ................... ( 0.03) ( 0.04) ( 0.01)
Distributions from realized gains .............................. ( 0.70) - -
-------- -------- -------
Total dividends and distributions .............................. ( 1.71) ( 0.98) ( 0.89)
-------- -------- -------
Net asset value, end of year .................................... $ 10.02 $ 9.64 $ 8.91
-------- -------- -------
Total return (c) ................................................ 22.89% 19.92% ( 2.79)%
-------- -------- -------
Ratios/Supplemental Data:
Net assets, end of year (000's) ................................. $199,360 $118,129 $73,895
Ratio of expenses to average net assets ......................... 0.59% 0.60% 0.61%
Ratio of net investment income to average net assets ............ 9.93% 10.34% 9.23%
Portfolio turnover rate ......................................... 485% 350% 248%
</TABLE>
Footnotes appear on page 65.
<PAGE>
- -----
65
- --------------------------------------------------------------------------------
FOOTNOTES TO FINANCIAL HIGHLIGHTS
(a) Net investment income and capital changes per share are based upon
monthly average shares outstanding.
(b) Date as of which funds were first allocated to the Portfolios are as
follows:
Alliance Common Stock Portfolio - June 16, 1975 Alliance Money Market
Portfolio - July 13, 1981 Alliance Balanced Portfolio - January 27, 1986
Alliance Aggressive Stock Portfolio - January 27, 1986 Alliance High Yield
Portfolio - January 2, 1987 Alliance Global Portfolio - August 27, 1987
Alliance Conservative Investors Portfolio - October 2, 1989 Alliance Growth
Investors Portfolio - October 2, 1989
Alliance Intermediate Government Securities Portfolio - April 1, 1991
Alliance Quality Bond Portfolio - October 1, 1993
Alliance Growth and Income Portfolio - October 1, 1993
Alliance Equity Index Portfolio - March 1, 1994
Alliance International Portfolio - April 3, 1995
Alliance Small Cap Growth Portfolio - May 1, 1997
(c) Total return is calculated assuming an initial investment made at
net asset value at the beginning of the period, reinvestment of all
dividends and distributions at net asset value during the period,
and redemption on the last day of the period. Total return
calculated for a period of less than one year is not annualized.
(d) Annualized.
(e) On February 22, 1994 shares of the Alliance Intermediate Government
Securities Portfolio of the Trust were substituted for shares of the
Trust's Alliance Short-Term World Income Portfolio.
---------------------- The Hudson River Trust
<PAGE>
8
Appendix A
- ----------
A-1
- --------------------------------------------------------------------------------
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.
<PAGE>
- ----------
A-2
- --------------------------------------------------------------------------------
o Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
o Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
o Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
o Bonds which are rated Ca represent obligations which are speculative to a
high degree. Such issues are often in default or have other marked
shortcomings.
o Bonds which are rated C are the lowest class of bonds and issues so rated
can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies modifiers to each rating classification from Aa through B to
indicate relative ranking within its rating categories. The modifier "1"
indicates that a security ranks in the higher end of its rating category; the
modifier "2" indicates a mid-range ranking; and the modifier "3" indicates
that the issue ranks in the lower end of its rating category.
<PAGE>
9
Appendix B
- ----------
B-1
- --------------------------------------------------------------------------------
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.
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. If the fund scores in the top 10% of its class it
receives 5 stars; if it falls in the next 22.5% it receives 4 stars; a place
in the middle 35% earns it 3 stars; those in the next 22.5% receive 2 stars;
and the bottom 10% get 1 star.
<PAGE>
- ----------
B-2
- --------------------------------------------------------------------------------
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") 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
Russell 2000 Growth Index ("Russell 2000 Growth") consists of that half of the
2,000 smallest of the 3,000 largest capitalization U.S. companies that has
higher price-to-book ratios and higher forecasted growth.
The Lehman Intermediate Government Bond Index represents an unmanaged group of
securities consisting of all United States Treasury and agency securities with
remaining maturities of from one to ten years and issue amounts of at least
$100 million outstanding.
The Lehman Aggregate Bond Index is an index comprised of investment grade
fixed income securities, including U.S. Treasury, mortgage-backed, corporate
and "Yankee" bonds (U.S. dollar-denominated bonds issued outside the United
States).
The Merrill Lynch High Yield Master Index ("ML Master") represents an
unmanaged group of securities widely regarded by investors as representative
of the high yield bond market.
The "blended" performance numbers (e.g., 50% S&P 400/50% Russell 2000) in all
cases assume a static mix of the two indices.
The dates as of which funds were first allocated to the Portfolios are as
follows: the Alliance Common Stock Portfolio on June 16, 1975; the Alliance
Money Market Portfolio on July 13, 1981; the Alliance Balanced and Alliance
Aggressive Stock Portfolios 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 Quality Bond and Alliance Growth and
Income Portfolios on October 1, 1993; the Alliance Equity Index Portfolio on
March 1, 1994; the Alliance International Portfolio on April 3, 1995; and the
Alliance Small Cap Growth Portfolio on May 1, 1997. In the "Since Inception"
columns of Table I and Table II below, the performance of
<PAGE>
- ----------
B-3
- --------------------------------------------------------------------------------
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 variable 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 Balanced Funds and Small Company Growth Funds
Averages, from January 1, 1986; and for the Lipper Global Funds Average, from
August 28, 1987.
The Trust's Portfolios serve as the underlying investment vehicles for
variable 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 variable contract prospectus for further information about your
variable contract including a description of all charges and expenses.
---------------------------------------------- The Hudson River Trust
<PAGE>
- -----
B-4
- --------------------------------------------------------------------------------
TABLE I
ANNUALIZED RATES OF RETURN
PERIODS ENDING DECEMBER 31, 1998
Like the tables on pages 5-18, this table provides the average annual returns
on each Portfolio's Class IA shares over the designated periods, but extends
the information further into the past for Portfolios that have been in
operation for more than ten years.
<TABLE>
<CAPTION>
Since
PORTFOLIO/Benchmarks 1 Year 3 Years 5 Years 10 Years 15 Years 20 Years Inception
- ------------------------------------------------ ----------- ---------- ---------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
THE ASSET ALLOCATION SERIES
Conservative Investors ........................ 13.88% 10.71% 9.40% - - - 9.99%
Lipper Flexible Portfolio Avg. ................ 14.20 15.62 14.31 - - - 12.55
70% Lehman Treasury/30% S&P500e** ............. 15.59 14.45 13.37 - - - 12.08
- ------------------------------------------------ ----------- ---------- ---------- ----------- ----------- ----------- ----------
Balanced ...................................... 18.11 14.92 10.82 12.51% - - 12.73
Lipper Balanced Mutual Funds Avg. ............. 13.48 15.79 13.84 12.97 - - 12.32
50% S&P 500e**/50% Lehman GC .................. 19.02 18.70 16.88 15.21 - - 14.64
- ------------------------------------------------ ----------- ---------- ---------- ----------- ----------- ----------- ----------
Growth Investors .............................. 19.13 16.17 13.92 - - - 16.09
Lipper Flexible Portfolio Avg. ................ 14.20 15.62 14.31 - - - 12.55
70% S&P 500e**/30% Lehman GC .................. 22.85 22.69 19.96 - - - 15.55
- ------------------------------------------------ ----------- ---------- ---------- ----------- ----------- ----------- ----------
THE EQUITY SERIES
Growth & Income ............................... 20.86 22.58 17.84 - - - 16.86
Lipper Growth & Income Funds Avg. ............. 15.61 21.25 18.35 - - - 17.89
75% S&P 500e**/25% Value Line Conv. ........... 20.10 23.99 21.07 - - - 20.48
- ------------------------------------------------ ----------- ---------- ---------- ----------- ----------- ----------- ----------
Equity Index .................................. 28.07 27.61 - - - - 24.31
Lipper S&P 500 Index Funds Avg. .............. 28.05 27.67 - - - - 24.31
S&P 500e** .................................... 28.58 28.23 - - - - 24.79
- ------------------------------------------------ ----------- ---------- ---------- ----------- ----------- ----------- ----------
Common Stock .................................. 29.39 27.67 21.95 18.65 17.45% 18.61% 16.39
Lipper Growth Mutual Funds Avg. ............... 22.86 22.23 18.63 16.72 14.65 16.30 16.01
S&P 500e** .................................... 28.58 28.23 24.06 19.21 17.90 17.76 15.98
- ------------------------------------------------ ----------- ---------- ---------- ----------- ----------- ----------- ----------
Global ........................................ 21.80 15.95 14.28 14.81 - - 12.55
Lipper Global Mutual Funds Avg. ............... 14.34 14.67 11.98 11.21 - - 9.64
MSCI World .................................... 24.34 17.77 15.68 10.66 - - 9.55
- ------------------------------------------------ ----------- ---------- ---------- ----------- ----------- ----------- ----------
International ................................. 10.57 5.61 - - - - 7.49
Lipper International Funds Avg. ............... 13.02 9.94 - - - - 10.74
MSCI EAFE Index ............................... 20.00 9.00 - - - - 9.68
- ------------------------------------------------ ----------- ---------- ---------- ----------- ----------- ----------- ----------
Aggressive Stock .............................. 0.29 10.78 11.47 18.90 - - 17.81
Lipper Mid-Cap Growth Funds Avg. .............. 12.16 16.33 14.87 15.44 - - 13.69
50% S&P Mid-Cap TR/50% Russell 2000 ........... 8.28 17.77 15.56 16.49 - - 14.78
- ------------------------------------------------ ----------- ---------- ---------- ----------- ----------- ----------- ----------
Small Cap. Growth ............................. (4.28) - - - - - 12.27
Lipper Small Company Growth Funds Avg. ........ (0.33) - - - - - 16.72
Russell 2000 Growth ........................... 1.23 - - - - - 16.58
- ------------------------------------------------ ----------- ---------- ---------- ----------- ----------- ----------- ----------
THE FIXED INCOME SERIES
Money Market .................................. 5.34 5.36 5.17 5.58 6.35 - 7.06
Lipper Money Market Mutual Funds Avg. ......... 4.84 4.87 4.77 5.20 5.94 - 6.77
3-Mo. T-Bill .................................. 5.05 5.18 5.11 5.44 6.07 - 6.76
- ------------------------------------------------ ----------- ---------- ---------- ----------- ----------- ----------- ----------
Intermediate Gov't. Securities ................ 7.74 6.26 5.39 - - - 7.10
Lipper Intermediate Govt. Funds Avg. .......... 7.68 6.21 5.91 - - - 7.25
Lehman Intermediate Govt. Bond ................ 8.49 6.74 6.45 - - - 7.60
- ------------------------------------------------ ----------- ---------- ---------- ----------- ----------- ----------- ----------
Quality Bond .................................. 8.69 7.72 6.78 - - - 6.34
Lipper Corporate Debt Funds A Rated Avg. ...... 7.47 6.38 6.54 - - - 6.21
Lehman Aggregate Bond ......................... 8.69 7.29 7.27 - - - 6.92
- ------------------------------------------------ ----------- ---------- ---------- ----------- ----------- ----------- ----------
High Yield .................................... (5.15) 11.36 9.99 11.17 - - 10.49
Lipper High Current Yield Bond Funds Avg. ..... (0.44) 8.21 7.37 9.34 - - 8.97
Merrill Lynch Master High Yield ............... 3.66 9.11 9.01 11.08 - - 10.72
- ------------------------------------------------ ----------- ---------- ---------- ----------- ----------- ----------- ----------
</TABLE>
<PAGE>
- -----
B-5
- --------------------------------------------------------------------------------
TABLE II
CUMULATIVE RATES OF RETURN
PERIODS ENDING DECEMBER 31, 1998
This table represents the total (cumulative) return on an investment in each
Portfolio's Class IA shares over the designated periods.
<TABLE>
<CAPTION>
Portfolio/Benchmarks 1 Year 3 Years 5 Years
- ----------------------------------------------- ---------------- ---------- ----------
<S> <C> <C> <C>
THE ASSET ALLOCATION SERIES
Alliance Conservative Investors .............. 13.88% 35.69% 56.68%
Lipper Flexible Portfolio Avg. ............... 14.20 55.28 97.15
70% Lehman Treasury/30% S&P 500e** ........... 15.59 49.92 87.28
- ----------------------------------------------- ---------------- ---------- ----------
Alliance Balanced ............................ 18.11 51.77 67.16
Lipper Balanced Mutual Funds Avg. ............ 13.48 55.60 91.92
50% S&P 500e**/50% Lehman GC ................. 19.02 67.24 118.08
- ----------------------------------------------- ---------------- ---------- ----------
Alliance Growth Investors .................... 19.13 56.78 91.90
Lipper Flexible Portfolio Avg. ............... 14.20 55.28 97.15
70% S&P 500e**/30% Lehman GC ................. 22.85 84.68 148.41
- ----------------------------------------------- ---------------- ---------- ----------
THE EQUITY SERIES
Alliance Growth & Income ..................... 20.86 84.18 127.21
Lipper Growth & Income Funds Avg. ............ 15.61 79.05 133.95
75% S&P 500e**/25% Value Line Conv. .......... 20.10 90.62 160.09
- ----------------------------------------------- ---------------- ---------- ----------
Alliance Equity Index ........................ 28.07 107.81 -
Lipper S&P 500 Index Funds Avg. .............. 28.05 108.12 -
S&P 500e** ................................... 28.58 110.85 -
- ----------------------------------------------- ---------------- ---------- ----------
Alliance Common Stock ........................ 29.39 108.08 169.69
Lipper Growth Mutual Funds Avg. .............. 22.86 84.52 138.97
S&P 500e** ................................... 28.58 110.85 193.91
- ----------------------------------------------- ---------------- ---------- ----------
Alliance Global .............................. 21.80 55.88 94.90
Lipper Global Mutual Funds Avg. .............. 14.34 51.58 77.94
MSCI World ................................... 24.34 63.34 107.19
- ----------------------------------------------- ---------------- ---------- ----------
Alliance International ....................... 10.57 17.80 -
Lipper International Funds Avg. .............. 13.02 33.62 -
MSCI EAFE Index .............................. 20.00 29.52 -
- ----------------------------------------------- ---------------- ---------- ----------
Alliance Aggressive Stock .................... 0.29 35.96 72.14
Lipper Mid-Cap Growth Funds Avg. ............. 12.16 58.64 102.73
50% S&P Mid-Cap TR/50% Russell 2000 .......... 8.28 63.35 106.12
- ----------------------------------------------- ---------------- ---------- ----------
Alliance Small Cap. Growth ................... ( 4.28) - -
Lipper Small Company Growth Funds Avg. ...... ( 0.33) - -
Russell 2000 Growth .......................... 1.23 - -
- ----------------------------------------------- ---------------- ---------- ----------
THE FIXED INCOME SERIES
Alliance Money Market ........................ 5.34 16.96 28.65
Lipper Money Market Mutual Funds Avg. ....... 4.84 15.34 26.25
3-Mo. T-Bill ................................. 5.05 16.35 28.27
- ----------------------------------------------- ------ ------ ------
Alliance Intermediate Govt. Securities ....... 7.74 19.97 30.01
Lipper Intermediate Govt. Funds Avg. ......... 7.68 19.84 33.36
Lehman Intermediate Govt. Bond ............... 8.49 21.61 36.71
- ----------------------------------------------- ---------------- ---------- ----------
Alliance Quality Bond ........................ 8.69 24.98 38.80
Lipper Corporate Debt Funds A Rated Avg. ..... 7.47 20.42 37.37
Lehman Aggregate Bond ........................ 8.69 23.51 42.06
- ----------------------------------------------- ---------------- ---------- ----------
Alliance High Yield .......................... ( 5.15) 38.11 61.01
Lipper High Current Yield Bond Funds Avg ..... .(0.44) 26.80 43.00
Merrill Lynch Master High Yield .............. 3.66 29.90 53.96
- ----------------------------------------------- ---------------- ---------- ----------
<PAGE>
<CAPTION>
Since
Portfolio/Benchmarks 10 Years 15 Years 20 Years Inception
- ----------------------------------------------- ----------- -------------- -------------- ------------
<S> <C> <C> <C> <C>
THE ASSET ALLOCATION SERIES
Alliance Conservative Investors .............. - - - 141.34%
Lipper Flexible Portfolio Avg. ............... - - - 202.48
70% Lehman Treasury/30% S&P 500e** ........... - - - 187.40
- ------------------------------------------------ ------ -------- -------- --------
Alliance Balanced ............................ 225.02% - - 371.10
Lipper Balanced Mutual Funds Avg. ............ 240.69 - - 351.90
50% S&P 500e**/50% Lehman GC ................. 311.86 - - 485.45
- ------------------------------------------------ ------ -------- -------- --------
Alliance Growth Investors .................... - - - 297.55
Lipper Flexible Portfolio Avg. ............... - - - 202.48
70% S&P 500e**/30% Lehman GC ................. - - - 280.88
- ------------------------------------------------ ------ -------- -------- --------
THE EQUITY SERIES
Alliance Growth & Income ..................... - - - 126.64
Lipper Growth & Income Funds Avg. ............ - - - 139.10
75% S&P 500e**/25% Value Line Conv. .......... - - - 166.00
- ------------------------------------------------ ------ -------- -------- --------
Alliance Equity Index ........................ - - - 186.69
Lipper S&P 500 Index Funds Avg. .............. - - - 186.34
S&P 500e** ................................... - - - 192.17
- ------------------------------------------------ ------ -------- -------- --------
Alliance Common Stock ........................ 452.96 1,017.02% 2,936.74% 3,163.67
Lipper Growth Mutual Funds Avg. .............. 388.00 727.63 2,185.68 3,490.04
S&P 500e** ................................... 479.62 1,081.76 2,530.43 2,919.92
- ------------------------------------------------ ------ -------- -------- --------
Alliance Global .............................. 298.00 - - 282.78
Lipper Global Mutual Funds Avg. .............. 194.96 - - 188.08
MSCI World ................................... 175.31 - - 181.57
- ------------------------------------------------ ------ -------- -------- --------
Alliance International ....................... - - - 31.10
Lipper International Funds Avg. .............. - - - 47.74
MSCI EAFE Index .............................. - - - 41.40
- ------------------------------------------------ ------ -------- -------- --------
Alliance Aggressive Stock .................... 464.50 - - 732.43
Lipper Mid-Cap Growth Funds Avg. ............. 334.88 - - 448.32
50% S&P Mid-Cap TR/50% Russell 2000 .......... 360.30 - - 494.67
- ------------------------------------------------ ------ -------- -------- --------
Alliance Small Cap. Growth ................... - - - 21.32
Lipper Small Company Growth Funds Avg. ...... - - - 28.98
Russell 2000 Growth .......................... - - - 29.23
- ------------------------------------------------ ------ -------- -------- --------
THE FIXED INCOME SERIES
Alliance Money Market ........................ 72.10 151.79 - 229.45
Lipper Money Market Mutual Funds Avg. ....... 66.09 137.69 - 214.68
3-Mo. T-Bill ................................. 69.88 142.02 - 214.45
- ------------------------------------------------ ------ -------- -------- --------
Alliance Intermediate Govt. Securities ....... - - - 70.15
Lipper Intermediate Govt. Funds Avg. ......... - - - 72.35
Lehman Intermediate Govt. Bond ............... - - - 76.55
- ------------------------------------------------ ------ -------- -------- --------
Alliance Quality Bond ........................ - - - 38.10
Lipper Corporate Debt Funds A Rated Avg. ..... - - - 37.26
Lehman Aggregate Bond ........................ - - - 42.14
- ------------------------------------------------ ------ -------- -------- --------
Alliance High Yield .......................... 188.22 - - 231.11
Lipper High Current Yield Bond Funds Avg ..... 145.62 - - 182.21
Merrill Lynch Master High Yield .............. 186.01 - - 239.69
- ------------------------------------------------ ------ -------- -------- --------
</TABLE>
---------------------- The Hudson River Trust
<PAGE>
- -----
B-6
- --------------------------------------------------------------------------------
TABLE III
ANNUAL RATES OF RETURN
Like the bar charts on pages 5-18, this table represents the specific returns
on each Portfolio's Class IA shares for each year individually, but extends the
information further into the past for Portfolios that have been in operation
for more than ten years.
<TABLE>
<CAPTION>
Alliance Alliance Alliance Alliance Alliance
Year Ending Common Money Aggressive Alliance High Alliance Conserv.
December 31 Stock Market Stock Balanced Yield Global Investors
- --------------- ----------- ----------- ------------ ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
1976 ......... 9.2%*
1977 ......... -9.2
1978 ......... 8.2
1979 ......... 29.8
1980 ......... 50.1
1981 ......... -5.8 7.1%*
1982 ......... 17.6 13.0
1983 ......... 26.1 8.9
1984 ......... -2.0 10.9
1985 ......... 33.4 8.2
1986 ......... 17.3 6.6 35.9%* 29.1%*
1987 ......... 7.5 6.6 7.3 -0.9 4.7%* -13.3%*
1988 ......... 22.4 7.3 1.1 13.3 9.7 10.9
1989 ......... 25.6 9.2 43.5 25.8 5.1 26.7 3.1%*
1990 ......... -8.1 8.2 8.2 0.3 -1.1 -6.1 6.3
1991 ......... 37.9 6.2 86.9 41.3 24.5 30.5 19.8
1992 ......... 3.2 3.6 -3.2 -2.8 12.3 -0.5 5.6
1993 ......... 24.8 3.0 16.8 12.3 23.2 32.1 10.8
1994 ......... -2.1 4.0 -3.8 -8.0 -2.8 5.2 -4.1
1995 ......... 32.5 5.7 31.6 19.8 19.9 18.8 20.4
1996 ......... 24.3 5.3 22.2 11.7 22.9 14.6 5.2
1997 ......... 29.4 5.4 10.9 15.1 18.5 11.7 13.3
1998 ......... 29.4 5.3 0.3 18.1 -5.2 21.8 13.9
<CAPTION>
Alliance
Alliance Alliance Alliance Growth Alliance Alliance
Year Ending Growth Intermediate Quality and Equity Alliance Small Cap
December 31 Investors Govt. Securities Bond Income Index International Growth
- --------------- ----------- ------------------ ----------- ------------ ----------- --------------- ------------
<S> <C> <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 -0.5%* -0.3%*
1994 ......... -3.2 -4.4 -5.1 -0.6 1.1%*
1995 ......... 26.4 13.3 17.0 24.1 36.5 11.3%*
1996 ......... 12.6 3.8 5.4 20.1 22.4 9.8
1997 ......... 16.9 7.3 9.1 26.9 32.6 -2.98 26.7%*
1998 ......... 19.1 7.7 8.7 20.9 28.1 10.6 -4.3
</TABLE>
*Unannualized from the inception date described in this Prospectus at pages B-2
and B-3 through the end of the calendar year indicated.
<PAGE>
- ----------
B-7
- --------------------------------------------------------------------------------
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 fifteen full calendar years during which
Alliance has managed the Historical Portfolios. As of December 31, 1998, the
assets in the Historical Portfolios totaled approximately $1,291.5 million and
the average size of a Historical Portfolio was $53.8 million. Each Historical
Portfolio has a nearly identical composition of individual investment holdings
and related percentage weightings.
The performance data is net of all fees (including brokerage commissions)
charged to those accounts. The performance data is computed in accordance with
standards formulated by the Association of Investment Management and Research
and has not been adjusted to reflect any fees that will be payable by Alliance
Small Cap Growth Portfolio, which are higher than the fees imposed on the
Historical Portfolios and will result in a higher expense ratio and lower
returns for Alliance Small Cap Growth Portfolio. 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 on a daily basis
and cash flows weighted daily. Composite investment performance for all
portfolios has been determined on an asset weighted basis. New accounts are
included in the composite investment performance computations at the beginning
of the quarter following the initial contribution. The total returns set forth
below are calculated using a method that links the monthly return amounts for
the disclosed periods, resulting in a time-weighted rate of return.
As reflected below, the Historical Portfolios have over time performed
favorably when compared with the performance of recognized performance
indices. The Russell 2000 universe of securities is complied by Frank Russell
Company and consists of the 2000 smallest of the 3000 largest capitalization
U.S. companies. The Russell 2000 Index is segmented into two style indices,
based on the capitalization-weighted median book-to-price ratio of each of the
securities. At each reconstitution, the Russell 2000 constituents are ranked
by their book-to-price ratio. Once so ranked, the breakpoint for the two
styles is determined by the median market capitalization of the Russell 2000.
Thus, those securities falling within the top fifty percent of the cumulative
market capitalization (as ranked by descending book-to-price) become members
of the Russell 2000 Growth Index. The Russell 2000 Growth Index is,
accordingly, designed to include those Russell 2000 securities with a
greater-than-average growth orientation. In contrast with the securities in
the Russell 2000 Index, companies in the Growth Index tend to exhibit higher
price-to-book and price-earnings ratios, lower dividend yield and higher
forecasted growth values.
To the extent 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 Alliance Small Cap
Growth Portfolio. The Russell Indices are included to illustrate material
economic and market factors that existed
---------------------------------------------- The Hudson River Trust
<PAGE>
- -----
B-8
- --------------------------------------------------------------------------------
during the time period shown. The Russell Indices do not reflect the deduction
of any fees. If Alliance Small Cap Growth Portfolio were to purchase a
portfolio of securities substantially identical to the securities comprising
the Russell Indices, Alliance Small Cap Growth Portfolio's performance
relative to the index would be reduced by 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 Alliance Small Cap Growth
Portfolio's shareholders of sales charges and income taxes.
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 small company 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 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*
<TABLE>
<CAPTION>
Lipper
Russell Russell Small Co.
Historical 2000 2000 Growth
Portfolios Index Growth Index Fund Index
Total Return** Total Return Total Return Total Return
---------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Year ended December 31:
1998 .................. ( 3.65)% ( 2.55)% 1.23% ( 0.85)%
1997 .................. 21.95 22.37 12.94 15.05
1996 .................. 36.65 16.50 11.26 14.37
1995 .................. 54.14 28.45 31.04 31.62
1994 .................. ( 3.54) ( 1.82) ( 2.43) ( 0.48)
1993 .................. 14.11 18.88 13.36 16.93
1992 .................. 2.99 18.41 7.77 11.18
1991 .................. 37.34 46.04 51.19 48.53
1990 .................. (22.69) (19.48) (17.41) (13.78)
1989 .................. 27.78 16.26 20.17 21.06
1988 .................. 27.45 25.02 20.37 20.34
1987 .................. ( 7.72) ( 8.80) (10.48) ( 5.48)
1986 .................. 15.08 5.68 3.58 6.04
1985 .................. 42.06 31.05 30.97 27.27
1984 .................. (11.74) ( 7.30) (15.83) ( 9.18)
1983 .................. 32.18 29.13 20.13 29.80
</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.
<PAGE>
- -----
B-9
- --------------------------------------------------------------------------------
The average annual total returns presented below are based upon the cumulative
total return as of December 31, 1998 and, for more than one year, assume a
steady compounded rate of return and are not year-by-year results, which
fluctuated over the periods as shown.
AVERAGE ANNUAL TOTAL RETURNS
<TABLE>
<CAPTION>
Lipper
Small Co.
Historical Russell 2000 Russell 2000 Growth
Portfolios Index Growth Index Fund Index
-------------- ---------------- ---------------- -------------
<S> <C> <C> <C> <C>
One year ...................... (3.65)% (2.55)% 1.23% (0.85)%
Three years ................... 17.10 11.58 8.35 9.26
Five years .................... 19.01 11.86 10.22 11.30
Ten years ..................... 14.30 12.92 11.54 13.16
Since January 1, 1983 ......... 14.34 12.27 9.71 12.11
</TABLE>
---------------------- The Hudson River Trust
<PAGE>
- --------------------------------------------------------------------------------
The Trust's statement of additional information ("SAI") dated May 1, 1999
contains additional information about the Portfolios. It is incorporated by
reference into this prospectus, which means that it is part of this prospectus
for legal purposes. You may obtain free copies of the SAI and the Trust's
annual and semi-annual reports, request other information about the Trust, or
make shareholder inquiries by writing to the Trust at the address below or by
telephoning 1-800-221,5672.
The SAI has been filed with the Securities and Exchange Commission. You may
review and copy information about the Trust, including the SAI, at the
Commission's Public Reference Room in Washington, D.C. You may call the
Commission at 1-800-SEC-0330 for information about the operation of the Public
Reference Room. The Commission maintains a World Wide Web site at
http://www.sec.gov, which contains reports and other information about the
Trust. You may also obtain copies of these materials, upon payment of a
duplicating fee, by writing the Public Reference Section of the Commission,
Washington, D.C. 20549-6009.
Address correspondence to:
The Hudson River Trust
1345 Avenue of the Americas
New York, New York 10105
1-800-221-5672
Shareholder Services
1-800-221-5672
Investment Company Act File No. 811-4185
<PAGE>
The Hudson River Trust
PROSPECTUS DATED MAY 1, 1999
- -----
1
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
THE ASSET ALLOCATION SERIES
- ------------------------------------------------------------------------------
Alliance Conservative Investors Portfolio
Alliance Balanced Portfolio
Alliance Growth Investors Portfolio
THE EQUITY SERIES THE FIXED INCOME SERIES
- --------------------------------------- ---------------------------------
Alliance Growth and Income Portfolio Alliance Money Market Portfolio
Alliance Equity Index Portfolio Alliance Intermediate Government
Alliance Common Stock Portfolio Securities Portfolio
Alliance Global Portfolio Alliance Quality Bond Portfolio
Alliance International Portfolio Alliance High Yield Portfolio
Alliance Aggressive Stock Portfolio
Alliance Small Cap Growth Portfolio
</TABLE>
This Prospectus describes the Portfolios that are available as underlying
investments through your variable contract. For information about your variable
contract, including information about insurance-related expenses, see the
prospectus for your variable contract, which accompanies this Prospectus. This
Prospectus relates to the Class IB shares of each Portfolio. Another Prospectus
that relates to the Class IA shares of each Portfolio has been filed with the
Securities and Exchange Commission.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIME.
V.IA
<PAGE>
Contents of this prospectus
- ----------
3
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
1
- --
RISK/RETURN SUMMARY 4
- ------------------------------------ ------
2
- --
DESCRIPTION OF THE PORTFOLIOS 22
- ------------------------------------ -------
The Asset Allocation Series 22
The Equity Series 25
The Fixed Income Series 30
3
- --
INVESTMENT TECHNIQUES 38
- ------------------------------------ -------
4
- --
MANAGEMENT OF THE TRUST 45
- ------------------------------------ -------
5
- --
DESCRIPTION OF THE TRUST'S SHARES 49
- ------------------------------------ -------
6
- --
DIVIDENDS, DISTRIBUTIONS AND TAXES 51
- ------------------------------------ -------
7
- --
FINANCIAL HIGHLIGHTS 52
- ------------------------------------ -------
8
- --
APPENDIX A-DESCRIPTION OF BOND
RATINGS A-1
- -- -------
9
--
APPENDIX B-PERFORMANCE INFORMATION B-1
- ------------------------------------ -------
</TABLE>
<PAGE>
1
Risk/Return Summary
- ----------
4
- --------------------------------------------------------------------------------
The following is a summary of certain key information about the Hudson River
Trust Portfolios. You will find additional information about each Portfolio,
including a detailed description of the risks of an investment in each
Portfolio, after this Summary.
This Summary identifies each Portfolio's investment objective, principal
investment strategies and principal risks. The summary of each Portfolio's
principal investment strategies is accompanied by a short discussion of some
of the Portfolio's principal risks. The principal risks of each Portfolio are
identified and more fully discussed beginning on page 18.
You can find more detailed descriptions of the Portfolios, including the risks
associated with investing in the Portfolios, further back in this Prospectus.
Please be sure to read this additional information BEFORE you invest. Each of
the Portfolios (except for the Alliance Money Market Portfolio) may at times
use certain types of investment derivatives such as options, futures, forwards
and swaps. The use of these techniques involves special risks that are
discussed in this Prospectus. This Risk/Return Summary includes a table for
each Portfolio showing its average annual returns and a bar chart showing its
annual returns. The table and bar chart provide an indication of the
historical risk of an investment in each Portfolio by showing:
o how the Portfolio's average annual returns for one, five, and 10 years (or
over the life of the Portfolio if the Portfolio is less than 10 years old)
compare to those of a broad based securities market index (you will find
more information on each referenced index in Appendix B); and
o changes in the Portfolio's performance from year to year over 10 years (or
over the life of the Portfolio if the Portfolio is less than 10 years
old).
A Portfolio's past performance, of course, does not
necessarily indicate how it will perform in the future.
Other important things for you to note:
o You may lose money by investing in the Portfolios.
o An investment in the Portfolios is not a deposit in a bank and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any
other government agency.
<PAGE>
THE ASSET ALLOCATION SERIES
- ----------
5
- --------------------------------------------------------------------------------
ALLIANCE CONSERVATIVE INVESTORS PORTFOLIO
OBJECTIVE:
This Portfolio seeks to achieve a high total return without, in the opinion of
Alliance Capital Management L.P., the Portfolio's investment adviser
("Alliance"), undue risk to principal.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS:
The Portfolio invests varying portions of its assets in debt and equity
securities. Investment grade debt securities generally represent between 50%
and 90% of the Portfolio's holdings, with equity securities comprising the
remainder of the Portfolio's assets. The Portfolio may invest in foreign
securities and may also make use of various other investment strategies,
including securities lending. The Portfolio may use derivatives.
Among the principal risks of investing in the Portfolio are market risk,
management risk, credit risk, derivatives risk and leveraging risk. The
Portfolio is subject to credit risk through its investments in debt securities
and to foreign investment risk and currency risk through its investments in
foreign securities.
YEARLY PERFORMANCE (%)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
6.2 19.6 5.5 10.5 -4.4 20.2 5.0 13.0 13.6
90 91 92 93 94 95 96 97 98
Calendar Year End
</TABLE>
During the periods shown above, the highest quarterly return was 7.59% for the
quarter ended 12/31/98, and the lowest was -3.27% for the quarter ended
3/31/94. For the quarter ended March 31, 1999, the Portfolio's return was
1.82%.
The information below shows how the Portfolio's performance compares with the
returns of an index of funds with similar investment objectives, the returns
of a blend of fixed income and equity securities indices and the returns of a
broad based equity securities market index.
PERFORMANCE TABLE
<TABLE>
<CAPTION>
Average Annual
Total Returns (for Since
periods ending Inception
December 31, Past One Past Five (October 2,
1998) Year Years 1989)
<S> <C> <C> <C>
Class IB Shares 13.60 9.13 9.71
Lipper Flexible 14.20 14.31 12.55
Portfolio Average
70% Lehman 15.59 13.37 12.08
Treasury/30% S&P
500
S&P 500 28.58 24.06 17.62
</TABLE>
For periods prior to the inception of Class IB shares (5/2/97), performance
information shown is the performance of Class IA adjusted to reflect the 12b-1
fees paid by Class IB. Index returns are from the end of the month of
inception of Class IA shares. The average annual total return for Class IB
since its actual inception date was 15.42%. Index return for the comparable
period (which dates from month-end of Class IB inception date) was 17.64%.
<PAGE>
THE ASSET ALLOCATION SERIES (CONTINUED)
- ----------
6
- --------------------------------------------------------------------------------
ALLIANCE BALANCED PORTFOLIO
OBJECTIVE:
This Portfolio seeks to achieve a high return through both appreciation of
capital and current income.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS:
The Portfolio invests varying portions of its assets in debt and equity
securities. The Portfolio's debt securities may have equity features such as
conversion or exchange rights, stock warrants or participations based on
revenues, rates or profits. There will be times when the Portfolio places
significantly greater emphasis on equity securities or debt securities, but
over time the Portfolio's holdings are expected, on average, to be equally
divided between debt securities and equity securities. The Portfolio may
invest in foreign securities and may also make use of various other investment
strategies, including securities lending. The Portfolio may use derivatives.
Among the principal risks of investing in the Portfolio are market risk,
management risk, credit risk, derivatives risk, liquidity risk and leveraging
risk. The Portfolio is subject to foreign investment risk and currency risk
through its investments in foreign securities.
YEARLY PERFORMANCE (%)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
25.6 0.0 41.0 -3.1 12.0 -8.3 19.5 11.4 14.8 17.8
89 90 91 92 93 94 95 96 97 98
Calendar Year End
</TABLE>
During the periods shown above, the highest quarterly return was 15.07% for
the quarter ended 12/31/91, and the lowest -8.35% was for the quarter ended
9/30/90. For the quarter ended March 31, 1999, the Portfolio's return was
2.79%.
The information below shows how the Portfolio's performance compares with the
returns of an index of funds with similar investment objectives, the returns
of a blend of fixed income and equity securities indices and the returns of a
broad based equity securities market index.
PERFORMANCE TABLE
<TABLE>
<CAPTION>
Average Annual
Total Returns (for
periods ending
December 31, Past One Past Five Past Ten
1998) Year Years Years
<S> <C> <C> <C>
Class IB Shares 17.82 10.56 12.25
Lipper Balanced 13.48 13.84 12.97
Mutual Funds
Average
50% S&P 500/50% 19.02 16.88 15.21
Lehman Gov't Corp.
S&P 500 28.58 24.06 19.21
</TABLE>
For periods prior to the inception of Class IB shares (7/8/98), performance
information shown is the performance of Class IA adjusted to reflect the 12b-1
fees paid by Class IB. The average annual total return for Class IB since its
actual inception date was 4.92%. Index return for the comparable period (which
dates from month-end of the Class IB inception date) was 14.89%.
<PAGE>
THE ASSET ALLOCATION SERIES (CONTINUED)
- ----------
7
- --------------------------------------------------------------------------------
ALLIANCE GROWTH INVESTORS PORTFOLIO
OBJECTIVE:
This Portfolio seeks to achieve the highest total return consistent with
Alliance's determination of reasonable risk.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS:
The Portfolio invests varying portions of its assets in equity and debt
securities. Over time, the Portfolio's holdings, on average, are expected to
be allocated 70% to equity securities and 30% to debt securities. The
Portfolio's equity securities may include foreign stocks as well as preferred
stocks and convertible securities and may include securities of intermediate
and small-sized companies. The Portfolio's debt securities may include foreign
debt securities as well as lower quality, higher yielding debt securities
commonly known as "junk bonds." The Portfolio may also make use of various
other investment strategies, including securities lending. The Portfolio may
use derivatives.
Among the principal risks of investing in the Portfolio are market and
interest rate risk, management risk, credit risk, leveraging risk, derivatives
risk, smaller company risk, liquidity risk, foreign investment risk and
currency risk. The Portfolio is subject to heightened credit risk through its
investments in lower quality debt securities.
YEARLY PERFORMANCE (%)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
10.4 48.7 4.7 15.0 -3.4 26.1 12.4 16.6 18.8
90 91 92 93 94 95 96 97 98
Calendar Year End
</TABLE>
During the periods shown above, the highest quarterly return was 18.10 for the
quarter ended 12/31/98, and the lowest was -10.66 for the quarter ended
9/30/90. For the quarter ended March 31, 1999, the Portfolio's return was
4.71%.
The information below shows how the Portfolio's performance compares with the
returns of an index of funds with similar investment objectives, the returns
of a blend of fixed income and equity securities indices and the returns of a
broad based equity securities market index.
PERFORMANCE TABLE
<TABLE>
<CAPTION>
Average Annual
Total Returns (for Since
periods ending Inception
December 31, Past One Past Five (October 2,
1998) Year Years 1989)
<S> <C> <C> <C>
Class IB Shares 18.83 13.36 15.81
Lipper Flexible 14.20 14.31 12.55
Portfolio Average
70% S&P 500/30% 22.85 19.96 15.55
Lehman Gov't Corp.
S&P 500 28.58 24.06 17.62
</TABLE>
For periods prior to the inception of Class IB shares (10/1/96), performance
information shown is the performance of Class IA adjusted to reflect the 12b-1
fees paid by Class IB. Index returns are from the end of the month of
inception of Class IA shares. The average annual total return for Class IB
since its actual inception date was 17.94%. Index return for the comparable
period (which dates from month-end of Class IB inception date) was 25.17%.
---------------------------------------------- The Hudson River Trust
<PAGE>
THE EQUITY SERIES
- ----------
8
- --------------------------------------------------------------------------------
ALLIANCE GROWTH AND INCOME PORTFOLIO
OBJECTIVE:
This Portfolio seeks 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.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS:
The Portfolio invests primarily in stocks and securities convertible into
stocks, and may invest up to 30% of its total assets in high yield debt
securities that are convertible into stocks. The Portfolio may invest in
foreign securities and may also make use of various other investment
strategies. The Portfolio may use derivatives.
Among the principal risks of investing in the Portfolio are market risk,
management risk, leveraging risk, derivatives risk, smaller company risk,
foreign investment risk and currency risk. The Portfolio is subject to
heightened credit risk through its investments in high yield debt securities.
YEARLY PERFORMANCE (%)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- -0.8 23.8 19.8 26.6 20.6
94 95 96 97 98
Calendar Year End
</TABLE>
During the periods shown above, the highest quarterly return was 26.22% for
the quarter ended 12/31/98, and the lowest was -15.09% for the quarter ended
9/30/98. For the quarter ended March 31, 1999, the Portfolio's return was
2.78%.
The information below shows how the Portfolio's performance compares with the
returns of an index of funds with similar investment objectives, the returns
of a blend of convertible and equity securities indices and the returns of a
broad based equity securities market index.
PERFORMANCE TABLE
<TABLE>
<CAPTION>
Average Annual
Total Returns (for Since
periods ending Inception
December 31, Past One Past Five (October 1,
1998) Year Years 1993)
<S> <C> <C> <C>
Class IB Shares 20.56 17.57 16.56
Lipper Growth and 15.61 18.35 17.89
Income Funds
Average
75% S&P 20.10 21.07 20.48
500/25%Value Line
Convertible
S&P 500 28.58 24.06 23.32
</TABLE>
For periods prior to the inception of Class IB shares (5/2/97), performance
information shown is the performance of Class IA adjusted to reflect the 12b-1
fees paid by Class IB. Index returns are from the end of the month of
inception of Class IA shares. The average annual total return for Class IB
since its actual inception date was 26.25%. Index return for the comparable
period (which dates from month-end of Class IB inception date) was 25.94%.
<PAGE>
THE EQUITY SERIES (CONTINUED)
- ----------
9
- --------------------------------------------------------------------------------
ALLIANCE EQUITY INDEX PORTFOLIO
OBJECTIVE:
This Portfolio seeks a total return before expenses that approximates the total
return performance of the Standard & Poor's (S&P) 500 Composite Stock Price
Index, including reinvestment of dividends, at a risk level consistent with
that of the Index.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS:
Through the use of proprietary models, the Portfolio attempts to track the
Index by investing in many of the Index's largest capitalization securities
while trying to maintain industry diversification by investing in some smaller
and medium-sized capitalization companies as well. The Portfolio may also make
use of various other investment strategies, including securities lending. The
Portfolio may use derivatives.
Among the principal risks of investing in the Portfolio are market risk,
credit risk, derivatives risk, leveraging risk and management risk. The
Portfolio is subject to smaller company risk through its investments in
smaller capitalization companies.
YEARLY PERFORMANCE (%)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
36.2 22.1 32.3 27.7
95 96 97 98
Calendar Year End
</TABLE>
During the periods shown above, the highest quarterly return was 21.07% for
the quarter ended 12/31/98, and the lowest was -10.03% for the quarter ended
9/30/98. For the quarter ended March 31, 1999, the Portfolio's return was
4.84%.
The information below shows how the Portfolio's performance compares with the
returns of an index of funds with similar investment objectives and the
returns of a broad based equity securities market index.
PERFORMANCE TABLE
<TABLE>
<CAPTION>
Average Annual
Total Returns (for Since
periods ending Inception
December 31, Past One (March 1,
1998) Year 1994)
<S> <C> <C>
Class IB Shares 27.74 24.07
Lipper S&P 500 28.05 24.31
Index Funds
Average
S&P 500 28.58 24.79
</TABLE>
For periods prior to the inception of Class IB shares (5/2/97), performance
information shown is the performance of Class IA adjusted to reflect the 12b-1
fees paid by Class IB. Index returns are from the end of the month of
inception of Class IA shares. The average annual total return for Class IB
since its actual inception date was 30.61%. Index return for the comparable
period (which dates from month-end of Class IB inception date) was 31.38%.
---------------------------------------------- The Hudson River Trust
<PAGE>
THE EQUITY SERIES (CONTINUED)
- ----------
10
- --------------------------------------------------------------------------------
ALLIANCE COMMON STOCK PORTFOLIO
OBJECTIVE:
This Portfolio seeks to achieve long-term growth of its capital and increase
income.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS:
The Portfolio invests primarily in stock and other equity securities (such as
preferred stocks or convertible debt). The Portfolio may also make use of
various other investment strategies, including investment in foreign
securities, securities lending and investments in debt securities (including
high yield securities). The Portfolio may use derivatives.
Among the principal risks of investing in the Portfolio are market risk,
credit risk, foreign investment risk, currency risk, leveraging risk,
derivatives risk, smaller company risk and management risk. The Portfolio is
subject to foreign investment risk and currency risk through its investments
in foreign securities.
YEARLY PERFORMANCE (%)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
25.3 -8.4 37.6 3.0 24.6 -2.4 32.2 24.0 29.1 29.1
89 90 91 92 93 94 95 96 97 98
Calendar Year End
</TABLE>
During the periods shown above, the highest quarterly return was 28.36% for
the quarter ended 12/31/98, and the lowest was -20.28% for the quarter ended
9/30/90. For the quarter ended March 31, 1999, the Portfolio's return was
4.34%.
The information below shows how the Portfolio's performance compares with the
returns of an index of funds with similar investment objectives and the
returns of a broad based equity securities market index.
PERFORMANCE TABLE
<TABLE>
<CAPTION>
Average Annual
Total Returns (for
periods ending
December 31, Past One Past Five Past Ten
1998) Year Years Years
<S> <C> <C> <C>
Class IB Shares 29.06 21.67 18.38
Lipper Growth 22.86 18.63 16.72
Equity Mutual Funds
Average
S&P 500 28.58 24.06 19.21
</TABLE>
For periods prior to the inception of Class IB shares (10/1/96), performance
information shown is the performance of Class IA adjusted to reflect the 12b-1
fees paid by Class IB. The average annual total return for Class IB since its
actual inception date was 30.09%. Index return for the comparable period
(which dates from month-end of the Class IB inception date) was 31.69%.
<PAGE>
THE EQUITY SERIES (CONTINUED)
- ----------
11
- --------------------------------------------------------------------------------
ALLIANCE GLOBAL PORTFOLIO
OBJECTIVE:
This Portfolio seeks long-term growth of capital.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS:
The Portfolio invests primarily in a diversified mix of equity securities of
U.S. and established foreign companies. The Portfolio may also make use of
various other investment strategies, including the purchase and sale of shares
of other mutual funds investing in foreign securities, investments in debt
securities and securities lending. The Portfolio may use derivatives.
Among the principal risks of investing in the Portfolio are foreign investment
risk, currency risk, market risk, credit risk, leveraging risk, derivatives
risk, liquidity risk and management risk.
YEARLY PERFORMANCE (%)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
26.5 -6.3 30.2 -0.7 31.9 5.0 18.6 14.4 11.4 21.5
89 90 91 92 93 94 95 96 97 98
Calendar Year End
</TABLE>
During the periods shown above, the highest quarterly return was 26.53% for
the quarter ended 12/31/98, and the lowest was -17.05% for the quarter ended
9/30/98. For the quarter ended March 31, 1999, the Portfolio's return was
6.47%.
The information below shows how the Portfolio's performance compares with the
returns of an index of funds with similar investment objectives and the
returns of a broad based equity securities market index.
PERFORMANCE TABLE
<TABLE>
<CAPTION>
Average Annual
Total Returns (for
periods ending
December 31, Past One Past Five Past Ten
1998) Year Years Years
<S> <C> <C> <C>
Class IB Shares 21.50 14.01 14.55
Lipper Global 14.34 11.98 11.21
Mutual Funds
Average
MSCI World 24.34 15.68 10.66
</TABLE>
For periods prior to the inception of Class IB shares (10/1/96), performance
information shown is the performance of Class IA adjusted to reflect the 12b-1
fees paid by Class IB. The average annual total return for Class IB since its
actual inception date was 16.89%. Index return for the comparable period
(which dates from month-end of the Class IB inception date) was 20.40%.
---------------------------------------------- The Hudson River Trust
<PAGE>
THE EQUITY SERIES (CONTINUED)
- ----------
12
- --------------------------------------------------------------------------------
ALLIANCE INTERNATIONAL PORTFOLIO
OBJECTIVE:
This Portfolio seeks 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.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS:
The Portfolio may invest anywhere in the world (including developing countries
or "emerging markets"), although it will not generally invest in the United
States. The Portfolio may purchase securities of developing countries, which
include, among others, Mexico, Brazil, Hong Kong, India, Poland, Turkey and
South Africa. The Portfolio may also make use of various other investment
strategies, including the purchase and sale of shares of other mutual funds
investing in foreign securities, investments in debt securities and securities
lending. The Portfolio may use derivatives.
Among the principal risks of investing in the Portfolio are foreign investment
risk, currency risk, market risk, credit risk, leveraging risk, derivatives
risk, liquidity risk and management risk.
YEARLY PERFORMANCE (%)
<TABLE>
<CAPTION>
<S> <C> <C>
9.6 -3.2 10.3
96 97 98
Calendar Year End
</TABLE>
During the periods shown above, the highest quarterly return was 16.49% for
the quarter ended 12/31/98, and the lowest was 15.74% for the quarter ended
9/30/98. For the quarter ended March 31, 1999, the Portfolio's return was
2.98%.
The information below shows how the Portfolio's performance compares with the
returns of an index of funds with similar investment objectives and the
returns of a broad based equity securities market index.
PERFORMANCE TABLE
<TABLE>
<CAPTION>
Average Annual
Total Returns (for Since
periods ending Inception
December 31, Past One (April 3,
1998) Year 1995)
<S> <C> <C>
Class IB Shares 10.30 7.22
Lipper International 13.02 10.74
Mutual Funds
Average
MSCI EAFE 20.00 9.68
</TABLE>
For periods prior to the inception of Class IB shares (5/1/97), performance
information shown is the performance of Class IA adjusted to reflect the 12b-1
fees paid by Class IB. Index returns are from the end of the month of
inception of Class IA shares. The average annual total return for Class IB
since its actual inception date was 4.42%. Index return for the comparable
period (which dates from month-end of Class IB inception date) was 13.77%.
<PAGE>
THE EQUITY SERIES (CONTINUED)
- ----------
13
- --------------------------------------------------------------------------------
ALLIANCE AGGRESSIVE STOCK PORTFOLIO
OBJECTIVE:
This Portfolio seeks to achieve long-term growth of capital.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS:
The Portfolio invests primarily in stocks and other equity securities of small
and medium-sized companies. The Portfolio may also invest in securities of
companies in cyclical industries, companies whose securities are temporarily
undervalued, companies in special situations and less widely known companies.
The Portfolio may invest in foreign securities and may also make use of
various other investment strategies, including investments in debt securities
and securities lending. The Portfolio may use derivatives.
Among the principal risks of investing in the Portfolio are smaller company
risk, market risk, credit risk, leveraging risk, derivatives risk, liquidity
risk and management risk. The Portfolio is subject to foreign investment risk
and currency risk through its investments in foreign securities.
YEARLY PERFORMANCE (%)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
43.2 7.9 86.6 -3.4 16.5 -4.1 31.4 22.1 10.7 0.1
89 90 91 92 93 94 95 96 97 98
Calendar Year End
</TABLE>
During the periods shown above, the highest quarterly return was 40.04% for
the quarter ended 3/31/91, and the lowest was -27.25% for the quarter ended
9/30/98. For the quarter ended March 31, 1999, the Portfolio's return was
-1.68%.
The information below shows how the Portfolio's performance compares with the
returns of an index of funds with similar investment objectives, the returns
of a blend of two securities indices and the returns of a broad based equity
securities market index.
PERFORMANCE TABLE
<TABLE>
<CAPTION>
Average Annual
Total Returns (for
periods ending
December 31, Past One Past Five Past Ten
1998) Year Years Years
<S> <C> <C> <C>
Class IB Shares 0.10 11.25 18.65
Lipper Small Mid 12.16 14.87 15.44
Cap Growth Funds
Average
50% S&P 400 8.28 15.56 16.49
Mid-Cap/50%
Russell 2000
S&P 400 Mid-Cap 19.11 18.84 19.29
</TABLE>
For periods prior to the inception of Class IB shares (10/1/96), performance
information shown is the performance of Class IA adjusted to reflect the 12b-1
fees paid by Class IB. The average annual total return for Class IB since its
actual inception date was 5.70%. Index return for the comparable period (which
dates from month-end of the Class IB inception date) was 18.11%.
---------------------------------------------- The Hudson River Trust
<PAGE>
THE EQUITY SERIES (CONTINUED)
- ----------
14
- --------------------------------------------------------------------------------
ALLIANCE SMALL CAP GROWTH PORTFOLIO
OBJECTIVE:
This Portfolio seeks to achieve long-term growth of capital.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS:
The Portfolio invests primarily in stocks and other equity securities of
smaller companies. The Portfolio may at times invest in companies in cyclical
industries, companies whose securities are temporarily undervalued, companies
in special situations and less widely known companies. The Portfolio may
invest in foreign securities and may also make use of various other investment
strategies, including securities lending and investments in debt securities.
The Portfolio may use derivatives.
Among the principal risks of investing in the Portfolio are smaller company
risk, market risk, credit risk, leveraging risk, derivatives risk, liquidity
risk and management risk. The Portfolio is subject to foreign investment risk
and currency risk through its investments in foreign securities.
YEARLY PERFORMANCE (%)
- -4.4
98
Calendar Year End
During the periods shown above, the highest quarterly return was 22.92% for
the quarter ended 12/31/98, and the lowest was -28.13% for the quarter ended
9/30/98. For the quarter ended March 31, 1999, the Portfolio's return was
-10.01%.
The information below shows how the Portfolio's performance compares with the
returns of an index of funds with similar investment objectives and the
returns of a broad based equity securities market index.
PERFORMANCE TABLE
<TABLE>
<CAPTION>
Average Annual
Total Returns (for Since
periods ending Inception
December 31, Past One (May 1,
1998) Year 1997)
<S> <C> <C>
Class IB Shares (4.44) 12.06
Lipper Small (0.33) 16.72
Company Growth
Funds Average
Russell 2000 1.23 16.58
Growth
</TABLE>
Index returns are from the end of the month of inception.
<PAGE>
THE FIXED INCOME SERIES
- ----------
15
- --------------------------------------------------------------------------------
ALLIANCE MONEY MARKET PORTFOLIO
OBJECTIVE:
This Portfolio seeks to obtain a high level of current income, preserve its
assets and maintain liquidity.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS:
The Portfolio invests in high quality U.S. dollar denominated money market
instruments. Its investments are limited to those which, in the opinion of
Alliance, present minimal credit risk. The Portfolio will maintain a
dollar-weighted average portfolio maturity of 90 days or less. The Portfolio
may make use of various other investment strategies, including investments in
U.S. dollar denominated foreign money market instruments and securities
lending.
Among the principal risks of investing in the Portfolio are money market risk,
market risk, credit risk, leveraging risk and management risk. The Portfolio
is subject to foreign investment risk through its investments in foreign money
market instruments and is subject to credit risk through its involvement with
securities lending.
An investment in the Portfolio is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency. Although the
Portfolio seeks to preserve the value of your investment, it is possible to
lose money by investing in the Portfolio.
YEARLY PERFORMANCE (%)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
8.9 8.0 5.9 3.3 2.7 3.8 5.5 5.1 5.2 5.1
89 90 91 92 93 94 95 96 97 98
Calendar Year End
</TABLE>
During the periods shown above, the highest quarterly return was 2.31% for the
quarter ended 6/30/89, and the lowest was 0.63% for the quarter ended
12/31/92. For the quarter ended March 31, 1999, the Portfolio's return was
1.09%. The Portfolio's 7-day yield for the quarter ended December 31, 1998 was
4.45%.
The information below shows how the Portfolio's performance compares with the
returns of an index of funds with similar investment objectives and the
returns on 3-month U.S. Treasury bills.
PERFORMANCE TABLE
<TABLE>
<CAPTION>
Average Annual
Total Returns (for
periods ending
December 31, Past One Past Five Past Ten
1998) Year Years Years
<S> <C> <C> <C>
Class IB Shares 5.08 4.91 5.33
Lipper Money 4.84 4.77 5.20
Market Mutual
Funds Average
3 Month Treasury 5.05 5.11 5.44
Bill
</TABLE>
For periods prior to the inception of Class IB shares (10/1/96), performance
information shown is the performance of Class IA adjusted to reflect the 12b-1
fees paid by Class IB. The average annual total return for Class IB since its
actual inception date was 5.13%. Index return for the comparable period (which
dates from month-end of the Class IB inception date) was 5.04%.
<PAGE>
THE FIXED INCOME SERIES (CONTINUED)
- ----------
16
- --------------------------------------------------------------------------------
ALLIANCE INTERMEDIATE GOVERNMENT SECURITIES PORTFOLIO
OBJECTIVE:
This Portfolio seeks 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 its
agencies or instrumentalities.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS:
The Portfolio invests primarily in U.S. Government securities, which for these
purposes include repurchase agreements and forward commitments related to U.S.
Government securities. The Portfolio may also purchase debt securities of
non-government issuers that own mortgages. The Portfolio's investments will
generally have a final maturity of not more than ten years or a duration
(Alliance's measure of a debt instrument's sensitivity to interest rates) not
exceeding that of a 10-year Treasury note. The Portfolio may also make use of
various other investment strategies, including short sales, the purchase or
sale of securities on a when-issued, delayed delivery or forward commitment
basis, and repurchase agreements. The Portfolio uses derivatives.
Among the principal risks of investing in the Portfolio are market risk,
credit risk, leveraging risk, derivatives risk and management risk.
YEARLY PERFORMANCE (%)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
5.4 10.3 -4.6 13.1 3.5 7.0 7.5
92 93 94 95 96 97 98
Calendar Year End
</TABLE>
During the periods shown above, the highest quarterly return was 5.25% for the
quarter ended 9/30/91, and the lowest was -3.03% for the quarter ended
3/31/94. For the quarter ended March 31, 1999, the Portfolio's return was
-0.32%.
The information below shows how the Portfolio's performance compares with the
returns of an index of funds with similar investment objectives and the
returns of a broad based securities market index.
PERFORMANCE TABLE
<TABLE>
<CAPTION>
Average Annual
Total Returns (for Since
periods ending Inception
December 31, Past One Past Five (April 1,
1998) Year Years 1991)
<S> <C> <C> <C>
Class IB Shares 7.48 5.13 6.83
Lipper Intermediate 7.68 5.91 7.25
Government Funds
Average
Lehman 8.49 6.45 7.60
Intermediate
Government Bond
</TABLE>
For periods prior to the inception of Class IB shares (5/2/97), performance
information shown is the performance of Class IA adjusted to reflect the 12b-1
fees paid by Class IB. Index returns are from the end of the month of
inception of Class IA shares. The average annual total return for Class IB
since its actual inception date was 8.01%. Index return for the comparable
period (which dates from month-end of Class IB inception date) was 9.08%.
<PAGE>
THE FIXED INCOME SERIES (CONTINUED)
- ----------
17
- --------------------------------------------------------------------------------
ALLIANCE QUALITY BOND PORTFOLIO
OBJECTIVE:
This Portfolio seeks to achieve high current income consistent with
preservation of capital by investing primarily in investment grade fixed income
securities.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS:
In addition to investment grade debt securities (securities rated at least BBB
by S&P or determined by Alliance to be of comparable quality), the Portfolio
may at times invest in convertible debt securities, preferred stock and
dividend-paying common stocks. The Portfolio may invest in foreign securities
and also make use of various other investment strategies, including zero
coupon securities, securities lending, the purchase or sale of securities on a
when-issued, delayed delivery or forward commitment basis and repurchase
agreements. The Portfolio may use derivatives.
Among the principal risks of investing in the Portfolio are market risk,
management risk, leveraging risk, derivatives risk and credit risk. The
Portfolio is subject to foreign investment risk and currency risk through its
investments in foreign securities.
YEARLY PERFORMANCE (%)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- -5.4 16.8 5.1 8.9 8.4
94 95 96 97 98
Calendar Year End
</TABLE>
During the periods shown above, the highest quarterly return was 6.13% for the
quarter ended 6/30/95, and the lowest was -4.09% for the quarter ended
3/31/94. For the quarter ended March 31, 1999, the Portfolio's return was
-0.88%.
The information below shows how the Portfolio's performance compares with the
returns of an index of funds with similar investment objectives and the
returns of a broad based securities market index.
PERFORMANCE TABLE
<TABLE>
<CAPTION>
Average Annual
Total Returns (for Since
periods ending Inception
December 31, Past One Past Five (October 1,
1998) Year Years 1993)
<S> <C> <C> <C>
Class IB Shares 8.43 6.52 6.05
Lipper Corporate 7.47 6.54 6.21
Debt Funds A Rated
Average
Lehman Aggregate 8.69 7.27 6.92
Bond
</TABLE>
For periods prior to the inception of Class IB shares (7/8/98), performance
information shown is the performance of Class IA adjusted to reflect the 12b-1
fees paid by Class IB. Index returns are from the end of the month of
inception of Class IA shares. The average annual total return for Class IB
since its actual inception date was 4.05%. Index return for the comparable
period (which dates from month-end of Class IB inception date) was 9.37%.
---------------------------------------------- The Hudson River Trust
<PAGE>
THE FIXED INCOME SERIES (CONTINUED)
- ----------
18
- --------------------------------------------------------------------------------
ALLIANCE HIGH YIELD PORTFOLIO
OBJECTIVE:
This Portfolio seeks to achieve a high return by maximizing current income and,
to the extent consistent with that objective, capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES AND RISKS:
The Portfolio invests primarily in high yield debt securities (so-called "junk
bonds"). The Portfolio may also make use of various other investment
strategies, including investments in common stocks and other equity securities
and securities lending. The Portfolio may use derivatives.
Among the principal risks of investing in the Portfolio are credit risk,
market and interest rate risk, leveraging risk, derivatives risk, liquidity
risk, currency risk, foreign investment risk, smaller company risk and
management risk. Credit risk is particularly high for the Portfolio because of
its extensive investment in high yield debt securities.
YEARLY PERFORMANCE (%)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
4.9 -1.4 24.2 12.1 22.9 -3.0 19.7 22.6 18.2 -5.4
89 90 91 92 93 94 95 96 97 98
Calendar Year End
</TABLE>
During the periods shown above, the highest quarterly return was 7.90% for the
quarter ended 6/30/97, and the lowest was -11.03% for the quarter ended
9/30/98. For the period ended March 31, 1999, the Portfolio's return was
-0.83%.
The information below shows how the Portfolio's performance compares with the
returns of an index of funds with similar investment objectives and the
returns of a broad based securities market index.
PERFORMANCE TABLE
<TABLE>
<CAPTION>
Average Annual
Total Returns (for
periods ending
December 31, Past One Past Five Past Ten
1998) Year Years Years
<S> <C> <C> <C>
Class IB Shares (5.38) 9.74 10.91
Lipper High Current (0.44) 7.37 9.34
Yield Bond Funds
Average
ML Master 3.66 9.01 11.08
</TABLE>
For periods prior to the inception of Class IB shares (10/1/96), performance
information shown is the performance of Class IA adjusted to reflect the 12b-1
fees paid by Class IB. The average annual total return for Class IB since its
actual inception date was 6.63%. Index return for the comparable period (which
dates from month-end of the Class IB inception date) was 9.06%.
<PAGE>
SUMMARY OF PRINCIPAL RISKS
- ----------
19
- --------------------------------------------------------------------------------
The value of your investment in a Portfolio changes with the values of the
Portfolio's investments. Many factors can affect those values. This summary
describes the principal risks that may affect a particular Portfolio's
investments as a whole. The chart at the end of this section displays similar
information. Any Portfolio could be subject to additional principal risks
because the types of investments made by the Portfolios can change over time.
Investments mentioned in this summary and described in greater detail under
"Description of the Portfolios" or "Investment Techniques" appear in BOLD
TYPE. Those sections also include more information about the Portfolios, their
investments and the related risks.
o MARKET AND INTEREST RATE RISK. Each of the Portfolios is subject to market
risk, which is the general risk of unfavorable changes in the market value
of a Portfolio's securities. The Portfolios that invest in common stock,
preferred stock, convertible securities and other equity securities are
exposed to the risks of changes in the value of those securities based on
market fluctuations and business variables. These include the risks of
broader market declines as well as more company-specific risks, such as
poor management performance, inappropriate financial leverage, industry
problems and reduced demand for a particular company's products.
Interest rate risk is the risk that interest rates will rise causing a
portfolio's investments to decline in value. Portfolios that invest in
debt securities such as bonds, notes and ASSET-BACKED SECURITIES are
subject to this type of market risk. Debt securities are obligations of an
issuer to make fixed payments of principal and/or interest on future
dates. If the interest rate paid by an issuer on a particular debt
security is high relative to market interest rates, that security is
attractive to investors and valuable. Accordingly, if market interest
rates rise, your investment in a Portfolio that holds debt securities is
likely to become less valuable because its debt securities are likely to
drop in value.
Even the Alliance Intermediate Government Securities Portfolio is
subject to interest rate risk despite the fact that it generally invests a
substantial portion of its assets in the highest quality debt securities,
such as U.S. Government Securities. Interest rate risk is generally
greater, however, for Portfolios, such as the Alliance Growth Investors
Portfolio and the Alliance High Yield Portfolio, that invest in lower
rated securities or comparable unrated securities.
All the Portfolios, except the Alliance Equity Index Portfolio, may
invest in MORTGAGE-BACKED SECURITIES. Market risk generally is greater for
Portfolios that may invest to a material extent in MORTGAGE-RELATED or
other ASSET-BACKED SECURITIES that may be prepaid. These securities bear
greater market risk because they have variable maturities that tend to
lengthen when that is least desirable-when interest rates are rising.
Increased market risk is also likely for Portfolios that invest to a
material extent in debt securities paying no interest, such as ZERO
COUPON, principal-only and interest-only securities, or paying non-cash
interest in the form of other debt securities (pay-in-kind securities).
o CREDIT RISK. Credit risk is the risk that the issuer or the guarantor of a
debt security or the counterparty to a Portfolio's transaction will be
unable or unwilling to make timely principal and/or interest payments, or
otherwise to honor its obligations. Each of the Portfolios may be subject
to credit risk to the extent that it invests in debt securities or engages
in transactions, such as SECURITIES LOANS, which involve a promise by a
third party to honor an obligation to the Portfolio. Varying degrees of
credit risk, often reflected in credit ratings, apply to different third
parties and related transactions.
Credit risk is particularly significant for Portfolios, such as the
Alliance Growth Investors Portfolio and the Alliance High Yield Portfolio,
that invest a material portion of their assets in LOWER-RATED SECURITIES.
These debt securities and similar unrated securities (commonly known as
"junk bonds") have speculative elements or are
<PAGE>
SUMMARY OF PRINCIPAL RISKS (CONTINUED)
- ----------
20
- --------------------------------------------------------------------------------
predominantly speculative credit risks. Even debt securities that are
"investment grade" may have some speculative characteristics. Portfolios
such as the Alliance Growth Investors Portfolio and the Alliance High
Yield Portfolio may also be subject to greater credit risk because they
may invest in debt securities issued in connection with corporate
restructurings by highly leveraged issuers or in debt securities not
current in the payment of interest or principal, or in default. Portfolios
such as the Alliance Global Portfolio and the Alliance International
Portfolio that may invest in FOREIGN SECURITIES are also subject to
increased credit risk because of the difficulties of requiring foreign
entities, including issuers of sovereign debt, to honor their contractual
commitments, and because a number of foreign governments and other issuers
are already in default.
o CURRENCY RISK. Portfolios such as the Alliance Global Portfolio and the
Alliance International Portfolio that invest in securities denominated in,
and/or receiving revenues in, FOREIGN CURRENCIES will be subject to
currency risk. This is the risk that those currencies will decline in
value relative to the U.S. Dollar, or, in the case of hedging positions,
that the U.S. Dollar will decline in value relative to the currency
hedged. In either event, the dollar value of such investments would be
adversely affected.
o FOREIGN INVESTMENT RISK. Portfolios with foreign investments, such as the
Alliance Global Portfolio and the Alliance International Portfolio may
experience more rapid and extreme changes in value than Portfolios with
investments solely in securities of U.S. companies. This is because the
securities markets of many foreign countries are relatively small, with a
limited number of companies representing a small number of industries.
Additionally, FOREIGN SECURITIES issuers are usually not subject to
the same degree of regulation as U.S. issuers. Reporting, accounting and
auditing standards of foreign countries differ, in some cases
significantly, from U.S. standards. Also, nationalization, expropriation
or confiscatory taxation, currency blockage, political changes or
diplomatic developments could adversely affect a Portfolio's investments
in a foreign country. In the event of nationalization, expropriation or
other confiscation, a Portfolio could lose its entire investment.
o LEVERAGING RISK. When a Portfolio is borrowing money or otherwise
leveraging its portfolio, the value of an investment in that Portfolio
will be more volatile and all other risks will tend to be compounded. All
of the Portfolios may take on leveraging risk by investing collateral from
SECURITIES LOANS and by borrowing money to meet redemption requests.
o DERIVATIVES RISK. All the Portfolios, except the Alliance Money Market
Portfolio, may use DERIVATIVES, which are financial contracts whose value
depends on, or is derived from, the value of an underlying asset,
reference rate or index. Alliance will sometimes use DERIVATIVES as part
of a strategy designed to reduce other risks and sometimes will use
DERIVATIVES for leverage, which increases opportunities for gain but also
involves greater risk. In addition to other risks such as the credit risk
of the counterparty, DERIVATIVES involve the risk of mispricing or
improper valuation and the risk that changes in the value of a derivative
may not correlate perfectly with relevant assets, rates and indices.
o LIQUIDITY RISK. Liquidity risk exists when particular investments are
difficult to purchase or sell, possibly preventing a Portfolio from
selling out of these illiquid securities at an advantageous price.
Portfolios such as the Alliance Global Portfolio, the Alliance
International Portfolio, the Alliance Growth Investors Portfolio, the
Alliance Aggressive Stock Portfolio, the Alliance Small Cap Growth
Portfolio and the Alliance High Yield Portfolio are subject to liquidity
risk because foreign investments and securities involving substantial
market and/or credit risk tend to be harder to sell. In addition,
liquidity risk for the Alliance High Yield Portfolio tends to increase to
the extent
<PAGE>
SUMMARY OF PRINCIPAL RISKS (CONTINUED)
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that it invests in LOAN PARTICIPATIONS AND ASSIGNMENTS, whose sale may be
restricted by law or by contract.
o SMALLER COMPANY RISK. Market risk and liquidity risk are particularly
pronounced for Portfolios, such as the Alliance Aggressive Stock Portfolio
and the Alliance Small Cap Growth Portfolio, that invest a significant
percentage of their assets in the stocks of companies with relatively
small market capitalizations. These companies may have limited product
lines, markets or financial resources or may depend on a few key
employees.
o MONEY MARKET RISK. While money market funds are designed to be relatively
low risk investments, they are not entirely free of risk. Despite the
short maturities and high credit quality of the Alliance Money Market
Portfolio's investments, increases in interest rates and deteriorations in
the credit quality of the instruments the Portfolio has purchased may
reduce the Portfolio's net asset value. In addition, the Portfolio is
still subject to the risk that the value of an investment may be eroded
over time by inflation.
o MANAGEMENT RISK. Each Portfolio is subject to management risk because it is
an actively managed investment portfolio. Alliance will apply its
investment techniques and risk analyses in making investment decisions for
the Portfolios, but there can be no guarantee that they will produce the
desired results. In some cases, certain investments may be unavailable or
Alliance may choose not to use them under market conditions when, in
retrospect, their use would have been beneficial to the Portfolios.
PRINCIPAL RISKS BY PORTFOLIO
The following chart summarizes the principal risks of each Portfolio. Risks not
marked for a particular Portfolio may, however, still apply to some extent to
that Portfolio at various times.
<TABLE>
<CAPTION>
Market
and
Interest Foreign
Alliance Rate Credit Currency Investment
Portfolio Risk Risk Risk Risk
<S> <C> <C> <C> <C>
Conservative Investors X X X X
Balanced X X X X
Growth Investors X X X X
Growth and Income X X X X
Equity Index X X
Common Stock X X X X
Global X X X X
International X X X X
Aggressive Stock X X X X
Small Cap Growth X X X X
Money Market X X X
Intermediate X X
Government Securities
Quality Bond X X X X
High Yield X X X X
<CAPTION>
Smaller Money
Alliance Leveraging Derivatives Liquidity Company Market Management
Portfolio Risk Risk Risk Risk Risk Risk
<S> <C> <C> <C> <C> <C> <C>
Conservative Investors X X X
Balanced X X X X
Growth Investors X X X X X
Growth and Income X X X X
Equity Index X X X X
Common Stock X X X X
Global X X X X
International X X X X
Aggressive Stock X X X X X
Small Cap Growth X X X X X
Money Market X X X
Intermediate X X X
Government Securities
Quality Bond X X X
High Yield X X X X X
</TABLE>
---------------------- The Hudson River Trust
<PAGE>
2
Description of the Portfolios
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This section of the Prospectus provides a more complete description of the
principal investment objectives, strategies, and risks of the Portfolios. Of
course, there can be no assurance that any portfolio will achieve its
investment objective.
Please note that:
o Additional discussion of the Portfolios' investments, including the risks
of the investments, can be found in the discussion under "Investment
Techniques" following this section.
o The description of the principal risks for a Portfolio may include risks
described in the "Summary of Risks" above. Additional information about
the risks of investing in a Portfolio can be found in the discussion below
under "Investment Techniques."
o Additional descriptions of each Portfolio's strategies, investments and
risks can be found in the Portfolios' Statement of Additional Information,
or SAI.
o Except as noted, (i) the Portfolios' investment objectives are
"fundamental" and cannot be changed without shareholder vote, and (ii) the
Portfolios' investment policies are not fundamental and thus can be
changed without a shareholder vote.
THE ASSET ALLOCATION SERIES
The Alliance Conservative Investors Portfolio, the Alliance Balanced 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.
The "balanced investor" is somewhat less aggressive than the growth investor
and has a medium- to long-term investment horizon. This investor is sensitive
to risk, but is willing to take on some risk in seeking high total return.
Consequently, the asset mix for the Alliance Balanced Portfolio attempts to
capture a sizable portion of the market's upside while diversifying risk among
asset classes.
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.
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
<PAGE>
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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.
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, 1998, the duration of a 10-year Treasury bond was
considered by Alliance to be 4.68 years.
---------------------------------------------- The Hudson River Trust
<PAGE>
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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 BALANCED PORTFOLIO-INVESTMENT POLICIES
The Alliance Balanced Portfolio attempts to achieve its objective by investing
varying portions of its assets in publicly-traded equity and debt securities
and money market instruments. The Alliance Balanced Portfolio attempts to
achieve long-term growth of capital by investing in common stock and other
equity-type instruments. It will try to achieve a competitive level of current
income and capital appreciation through investments in publicly traded debt
securities and a high level of current income through investments in money
market instruments.
The portion of the Alliance Balanced Portfolio's assets invested in each type
of security will vary in accordance with economic conditions, the general
level of common stock prices, interest rates and other relevant
considerations, including the risks associated with each investment medium.
Although the Alliance Balanced Portfolio will seek to reduce the risks
associated with any one investment medium by utilizing a variety of
investments, performance will depend upon Alliance's ability to assess
accurately and react to changing market conditions.
The Alliance Balanced Portfolio will at all times hold at least 25% of its
assets in fixed income securities (including, for these purposes, that portion
of the value of securities convertible into common stock which is attributable
to the fixed income characteristics of those securities, as well as money
market instruments). The Portfolio's equity securities will always comprise at
least 25%, but never more than 75%, of the Portfolio's total assets.
Consequently, the Portfolio will have "Core Holdings" of at least 25% fixed
income securities and 25% equity securities. Over time, holdings by the
Portfolio are currently expected to average approximately 50% in fixed income
securities and approximately 50% in equity securities. Actual asset mixes will
be adjusted in response to economic and credit market cycles.
The equity securities invested in by the Alliance Balanced Portfolio will
consist of the types of securities in which the Alliance Common Stock
Portfolio may invest. The money market securities will consist of the types of
securities and credit quality in which the Alliance Money Market Portfolio may
invest. The debt securities will consist principally of bonds, notes,
debentures and equipment trust certificates. The Portfolio may also buy debt
securities with equity features such as conversion or exchange rights or
warrants for the acquisition of stock or participations based on revenues,
rates or profits. These debt securities will principally be investment grade
securities rated at least Baa by Moody's or BBB by S&P, or will be issued or
guaranteed by the U.S. Government, its agencies or instrumentalities. If such
Baa or BBB debt securities held by the Portfolio fall below those ratings, the
Portfolio will not be obligated to dispose of them and may continue to hold
them if Alliance considers them appropriate investments under the
circumstances. In addition, the Alliance Balanced Portfolio may at times hold
some of its assets in cash. The Portfolio may invest up to 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 Balanced Portfolio may write covered call and
put options and may purchase call and put options on all the types of
securities in which it may invest, as well as securities indexes and foreign
currencies. The Alliance Balanced Portfolio may also purchase and sell stock
index, interest rate and foreign currency futures contracts and options
thereon. See "Investment Techniques-Options," "Investment
<PAGE>
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Techniques-Futures" and "Investment Techniques-Risk Factors in Options and
Futures," below.
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, 1998, approximately 22.3% of the Portfolio
was invested in fixed income securities. 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
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
---------------------------------------------- The Hudson River Trust
<PAGE>
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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 EQUITY INDEX PORTFOLIO-INVESTMENT POLICIES
The Alliance Equity Index Portfolio's investment objective is to seek a total
return before expenses that approximates the total return of the S&P 500
Composite Stock Price Index (the "Index"), including reinvestment of
dividends, at a risk level consistent with that of the Index. The Index is a
widely publicized index that tracks 500 companies traded on the New York and
American Stock Exchanges and in the over-the-counter market. It is weighted by
market value so that each company's stock influences the Index in proportion
to its market importance. While most issuers are among the 500 largest U.S.
companies in terms of aggregate market value, some other stocks are included
by S&P for purposes of diversification. The value of the Index may change over
time due to a variety of factors, including economic factors and events
affecting issuers included in the Index.
In managing the Alliance Equity Index Portfolio, the Trust's investment
adviser will not utilize customary economic, financial or market analyses or
other traditional investment techniques. Rather, the investment adviser will
use proprietary modeling techniques to construct a portfolio that it believes
will, in the aggregate, approximate the performance results of the Index. The
investment adviser will first select from the largest capitalization
securities in the Index on a capitalization-weighted basis. Generally, the
largest capitalization securities reasonably track the Index because the Index
is significantly influenced by a small number of securities. However,
selecting securities on the basis of their capitalization alone would distort
the Alliance Equity Index Portfolio's industry diversification, and therefore
economic events could potentially have a dramatically different impact on the
performance of the Alliance Equity Index Portfolio from that of the Index.
Recognizing this fact, the modeling techniques also consider industry
<PAGE>
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diversification when selecting investments for the Alliance Equity Index
Portfolio. The investment adviser also seeks to diversify the Alliance Equity
Index Portfolio's assets with respect to market capitalization. As a result,
the Alliance Equity Index Portfolio will include securities of smaller and
medium-sized capitalization companies in the Index.
Although the modeling techniques are intended to produce a portfolio whose
performance approximates that of the Index (before expenses), there can be no
assurance that these techniques will reduce "tracking error" (i.e., the
difference between the Alliance Equity Index Portfolio's investment results
(before expenses) and the Index's). Tracking error may arise as a result of
brokerage costs, fees and operating expenses and a lack of correlation between
the Alliance Equity Index Portfolio's investments and the Index.
Cash may be accumulated in the Alliance Equity Index Portfolio until it
reaches approximately 1% of the value of the Alliance Equity Index Portfolio
at which time such cash will be invested in common stocks as described above.
Accumulation of cash increases tracking error. The Alliance Equity Index
Portfolio will, however, remain substantially fully invested in common stocks
even when common stock prices are generally falling. Also, adverse performance
of a stock will ordinarily not result in its elimination from the Alliance
Equity Index Portfolio.
In order to reduce brokerage costs, maintain liquidity to meet shareholder
redemptions or minimize tracking error when the Alliance Equity Index
Portfolio holds cash, the Alliance Equity Index Portfolio may from time to
time buy and hold futures contracts on the Index and options on such futures
contracts. See "Investment Techniques-Futures" and "Investment Techniques-Risk
Factors in Options and Futures," below. The contract value of futures
contracts purchased by the Alliance Equity Index Portfolio plus the contract
value of futures contracts underlying call options purchased by the Alliance
Equity Index Portfolio will not exceed 20% of the Alliance Equity Index
Portfolio's total assets.
The Alliance Equity Index Portfolio may seek to increase income by lending
securities with a value of up to 50% of its total assets to brokers-dealers.
See "Investment Techniques-Securities Lending," below.
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 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
---------------------------------------------- The Hudson River Trust
<PAGE>
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December 31, 1998, 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
U.S. 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 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
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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
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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.
ALLIANCE SMALL CAP GROWTH PORTFOLIO-
INVESTMENT POLICIES
The Alliance Small Cap Growth Portfolio pursues 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
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high-quality U.S. dollar-denominated money market instruments. The instruments
in which the Portfolio invests include: (1) marketable obligations of, or
guaranteed by, the U.S. Government, its agencies or instrumentalities
(collectively, the "U.S. Government"); (2) certificates of deposit, bankers'
acceptances, bank notes, time deposits and interest bearing savings deposits
issued or guaranteed by (a) domestic banks (including their foreign branches)
or savings and loan associations having total assets of more than $1 billion
and which are members of the Federal Deposit Insurance Corporation ("FDIC") in
the case of banks, or insured by the FDIC, in the case of savings and loan
associations or (b) foreign banks (either by their foreign or U.S. branches)
having total assets of at least $5 billion and having an issue of either
commercial paper rated at least A-1 by S&P or Prime-1 by Moody's or long term
debt rated at least AA by S&P or Aa by Moody's; (3) commercial paper (rated at
least A-1 by S&P or Prime-1 by Moody's or, if not rated, issued by domestic or
foreign companies having outstanding debt securities rated at least AA by S&P
or Aa by Moody's) and participation interests in loans extended by banks to
such companies; (4) mortgage-backed securities and asset-backed securities;
(5) corporate debt obligations with remaining maturities of less than one
year, rated at least AA by S&P or Aa by Moody's, as well as corporate debt
obligations rated at least A by S&P or Moody's, provided the corporation also
has outstanding an issue of commercial paper rated at least A-1 by S&P or
Prime-1 by Moody's; (6) floating rate or master demand notes; and (7)
repurchase agreements covering securities issued or guaranteed by the U.S.
Government (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
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which are issued in maturities of one year or less. No interest is paid on
Treasury Bills; instead, they are issued at a discount and repaid at full
face value when they mature. They are backed by the full faith and credit
of the U.S. Government.
o U.S. Treasury Notes-Direct obligations of the U.S. Treasury issued in
maturities which vary between one and ten years, with interest payable
every six months. They are backed by the full faith and credit of the U.S.
Government.
o U.S. Treasury Bonds-These direct obligations of the U.S. Treasury are
issued in maturities more than ten years from the date of issue, with
interest payable every six months. They are backed by the full faith and
credit of the U.S. Government.
o "Ginnie Maes"-Ginnie Maes are debt securities issued by a mortgage banker
or other mortgagee and represent an interest in a pool of mortgages
insured by the Federal Housing Administration or the Farmer's Home
Administration or guaranteed by the Veteran's Administration. The
Government National Mortgage Association ("GNMA") guarantees the timely
payment of principal and interest. Ginnie Maes, although not direct
obligations of the U.S. Government, are guaranteed by the U.S. Treasury.
o "Fannie Maes"-The Federal National Mortgage Association ("FNMA") is a
government-sponsored corporation owned entirely by private stockholders
that purchases residential mortgages from a list of approved
seller/servicers. Pass-through securities issued by FNMA are guaranteed as
to timely payment of principal and interest by FNMA and supported by
FNMA's right to borrow from the U.S. Treasury, at the discretion of the
U.S. Treasury. Fannie Maes are not backed by the full faith and credit of
the U.S. Government.
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
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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, 1998, the duration of a 10-year Treasury bond was
considered by Alliance to be 4.68 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.
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 CMOs only if they are 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.
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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 QUALITY BOND PORTFOLIO-INVESTMENT POLICIES
The Alliance Quality Bond Portfolio expects to invest in readily marketable
securities with relatively attractive yields, but which do not, in the opinion
of Alliance, involve undue risk of loss of capital. The Alliance Quality Bond
Portfolio will follow a policy of investing at least 65% of its total assets
in securities which are rated at the time of purchase at least Baa by Moody's
or BBB by S&P, or in unrated fixed income securities determined by Alliance to
be of comparable quality. In the event that the credit rating of a security
held by the Alliance Quality Bond Portfolio falls below investment grade (or,
in the case of unrated securities, Alliance determines that the quality of
such security has deteriorated below investment grade), the Alliance Quality
Bond Portfolio will not be obligated to dispose of such security and may
continue to hold the obligation if, in the opinion of Alliance, such
investment is appropriate in the circumstances. The Alliance Quality Bond
Portfolio will also seek to maintain an average aggregate quality rating of
its portfolio securities of at least A (Moody's and S&P). For more information
concerning the bond ratings assigned by Moody's and S&P, see Appendix A.
The Alliance Quality Bond Portfolio has complete flexibility as to the types
of securities in which it will invest and the relative proportions thereof,
and the Alliance Quality Bond Portfolio plans to vary the proportions of its
holdings of long- and short-term fixed income securities (including debt
securities, convertible debt securities and U.S. Government obligations) and
preferred stocks in order to reflect Alliance's assessment of prospective
cyclical changes even if such action may adversely affect current income.
The Alliance Quality Bond Portfolio may invest in foreign securities. The
Alliance Quality Bond Portfolio will not invest more than 20% of its total
assets in securities denominated in currencies other than the U.S. dollar. See
"Investment Techniques-Foreign Securities and Currencies," below. The
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Alliance Quality Bond Portfolio may enter into foreign currency futures
contracts (and related options), forward foreign currency exchange contracts
and options on foreign currencies for hedging purposes. See "Investment
Techniques-Forward Foreign Currency Exchange Contracts," below.
For temporary defensive purposes, the Alliance Quality Bond Portfolio may
invest in certain money market instruments. See "Investment Techniques-Certain
Money Market Instruments," below.
The Alliance Quality Bond Portfolio may purchase put and call options and
write covered put and call options on securities it may purchase. The Alliance
Quality Bond Portfolio also intends to write covered call options for
cross-hedging purposes. A call option is for cross-hedging purposes if it is
designed to provide a hedge against a decline in value of another security
which the Portfolio owns or has the right to acquire. See "Investment
Techniques-Options," below.
INTEREST RATE TRANSACTIONS. The Alliance Quality Bond Portfolio may seek to
protect the value of its investments from interest rate fluctuations by
entering into various hedging transactions, such as interest rate swaps and
the purchase or sale of interest rate caps and floors. The Portfolio expects
to enter into these transactions primarily to preserve a return or spread on a
particular investment or portion of its portfolio. The Alliance Quality Bond
Portfolio may also enter into these transactions to protect against an
increase in the price of securities the Portfolio anticipates purchasing at a
later date. The Alliance Quality Bond Portfolio intends to use these
transactions as a hedge and not as a speculative investment. Interest rate
swaps involve the exchange by the Alliance Quality Bond Portfolio with another
party of their respective commitments to pay or receive interest, e.g., an
exchange of floating rate payments for fixed rate payments. The purchase of an
interest rate cap entitles the purchaser, to the extent that a specified index
exceeds a predetermined interest rate, to receive payments on a notional
principal amount from the party selling such interest rate cap. The purchase
of an interest rate floor entitles the purchaser, to the extent that a
specified index falls below a predetermined interest rate, to receive payments
of interest on a notional principal amount from the party selling such
interest rate floor.
The Alliance Quality Bond Portfolio may enter into interest rate swaps, caps
and floors on either an asset-based or liability-based basis depending on
whether it is hedging its assets or its liabilities, and will only enter into
such swaps, caps and floors on a net basis, i.e., the two payment streams are
netted out, with the Alliance Quality Bond Portfolio receiving or paying, as
the case may be, only the net amount of the two payments. The net amount of
the excess, if any, of the Alliance Quality Bond Portfolio's obligations over
its entitlements with respect to each interest rate swap, cap or floor will be
accrued on a daily basis and an amount of cash or liquid securities having an
aggregate net asset value at least equal to the accrued excess will be
maintained in a segregated account by the custodian. The Alliance Quality Bond
Portfolio will not enter into any interest rate swap, cap or floor transaction
unless the unsecured senior debt or the claims-paying ability of the other
party thereto is rated in the highest rating category of at least one NRSRO at
the time of entering into such transaction. If there is a default by the other
party to such a transaction, the Alliance Quality Bond Portfolio will have
contractual remedies pursuant to the agreements related to the transaction.
Caps and floors are relatively recent innovations which may be illiquid.
ZERO COUPON SECURITIES. To the extent consistent with its investment
objective, the Alliance Quality Bond Portfolio may invest in "zero coupon"
securities, which are debt securities that have been stripped of their
unmatured interest coupons, and receipts or certificates representing
interests in such stripped debt obligations and coupons. A zero coupon
security pays no interest to its holder during its life. Accordingly, such
securities usually trade at a deep discount from their face or par value and
will be subject to greater fluctuations in market value in response to
changing
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interest rates than debt obligations of comparable maturities that make
current distributions of interest. The Alliance Quality Bond Portfolio may
also invest in "pay-in-kind" debentures (i.e., debt obligations the interest
on which may be paid in the form of additional obligations of the same type
rather than cash) which have characteristics similar to zero coupon
securities.
The Alliance Quality Bond Portfolio may invest in collateralized mortgage
obligations or CMOs. See "Investment Techniques-Mortgage-Backed and
Asset-Backed Securities," below. The Portfolio may purchase and sell interest
rate futures contracts and options thereon and may make loans of securities
with a value of up to 50% of its total assets. See "Investment
Techniques-Futures," "Investment Techniques-Risk Factors in Options and
Futures" and "Investment Techniques-Securities Lending," below.
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.
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, 1998, 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: 5.3% in securities
rated AAA or its equivalent, 2.3% of securities rated BBB or equivalent, 8.2%
in securities rated BB or its equivalent, 79.1% in securities rated B or its
equivalent and 5.1% in securities rated CCC or its equivalent. Of these
securities, 94% were rated by an NRSRO and 6% were unrated. All of the unrated
securities were considered by the investment adviser to be of comparable
quality to the Portfolio's investments rated by an NRSRO.
The Portfolio may also invest in fixed income securities which are providing
high current yields because of risks other than credit, such as prepayment
risks, in the case of mortgage-backed securities, or currency risks, in the
case of non-U.S. dollar denominated foreign securities. 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
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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.
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Investment Techniques
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The Portfolios have the flexibility to invest, within limits, in a variety of
instruments designed to enhance their investment capabilities. All of the
Portfolios, other than the Alliance Equity Index Portfolio, may make
investments in repurchase agreements, and all of the Portfolios may purchase
or sell securities on a when-issued, delayed delivery or forward commitment
basis. The Portfolios, other than the Alliance Money Market and the Alliance
Equity Index Portfolios, may write (i.e., sell) covered put and call options
and buy put and call options on securities and securities indexes. The
Portfolios, other than the Alliance Money Market, Alliance Equity Index 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 Balanced, 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, Alliance Quality Bond, Alliance
Growth and Income and Alliance Equity Index 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.
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, other than the Alliance Equity Index Portfolio, 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.
DERIVATIVES
o Futures
The Alliance High Yield, Alliance Global, Alliance International, Alliance
Conservative Investors, Alliance Growth Investors, Alliance Intermediate
Government Securities, Alliance Balanced and Alliance Quality Bond Portfolios
may each purchase and sell futures contracts and related options on debt
securities and on indexes of debt securities to hedge against anticipated
changes in interest rates that might otherwise have an adverse effect on the
value of their assets or assets they intend to acquire. In addition, each
Portfolio listed above (except the Alliance Intermediate Government Securities
and Alliance Quality Bond Portfolios) 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). In the case of the Alliance Equity Index Portfolio,
futures contracts and related options on the S&P 500 Index may be purchased in
order to reduce brokerage costs, maintain liquidity to meet
<PAGE>
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shareholder redemptions or minimize tracking error. As described below under
"Foreign Securities and Currencies," the Alliance High Yield, Alliance Global,
Alliance International, Alliance Conservative Investors, Alliance Growth
Investors, Alliance Balanced, Alliance Common Stock, Alliance Aggressive
Stock, Alliance Small Cap Growth, Alliance Quality Bond 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
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. In addition, the contract value of futures contracts
purchased by the Alliance Equity Index Portfolio plus the contract value of
futures contracts underlying call options purchased by the Alliance Equity
Index Portfolio will not exceed 20% of the Alliance Equity Index Portfolio's
total assets. When a Portfolio purchases or sells a futures contract or writes
a put or call option on a futures contract, the Portfolio will segregate with
its custodian 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.
o Options
The Portfolios, other than the Alliance Money Market and Alliance Equity Index
Portfolios, may write (sell) covered put and call options and buy put and call
options, including options relating to individual securities and securities
indexes. The Portfolios, other than the Alliance Money Market, Alliance
Intermediate Government Securities and Alliance Equity Index Portfolios, may
also write covered put and call options and buy put and call options on
foreign currencies.
A call option is a contract that gives to the holder the right to buy a
specified amount of the underlying security at a fixed or determinable price
(called the exercise or strike price) upon exercise of the option. A put
option is a contract that gives the holder the right to sell a specified
amount of the underlying security at a fixed or determinable price upon
exercise of the option. In the case of index options, exercises are settled
through the payment of cash rather than the delivery of property. A call
option on a security will be considered covered, for example, if the Portfolio
holds the security upon which the option is written. The Portfolios may write
call options on securities or securities indexes for the purpose of increasing
their return or to provide a partial hedge against a decline in the value of
their portfolio securities or both. The Portfolios may write put options on
securities or securities indexes in order to earn additional income or (in the
case of put options written on individual securities) to purchase the
underlying security at a price below the current market price. If a Portfolio
writes an option which expires unexercised or is closed out by the Portfolio
at a profit, it will retain all or part of the premium received for the
option, which will increase its gross income. If the option is exercised, the
Portfolio will be required to sell or purchase the underlying security at a
disadvantageous price, or, in the case of index options, deliver an amount of
cash, which loss may only be partially offset by the amount of premium
received. Each of the Portfolios noted above may also purchase put or call
options on securities and securities indexes in order to hedge against changes
in interest rates or stock prices which may adversely affect the prices of
securities that the Portfolio wants to purchase at a later date, to hedge its
existing investments against a decline in value, or to attempt to reduce the
risk of missing a market or
---------------------------------------------- The Hudson River Trust
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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, such options
are subject to the risk that the counterparty may fail to meet its obligations
to the Fund, and 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, Alliance Intermediate
Government Securities and Alliance Equity Index Portfolios, may purchase put
and call options and write covered put and call options on foreign currencies
for the purpose of protecting against declines in the dollar value of
portfolio securities and against increases in the dollar cost of securities to
be acquired. Such investment strategies will be used as a hedge and not for
speculation. As in the case of other types of options, however, the writing of
an option on foreign currency will constitute only a partial hedge, up to the
amount of the premium received, and the Portfolio could be required to
purchase or sell foreign currencies at disadvantageous exchange rates, thereby
incurring losses. The purchase of an option on foreign currency may constitute
an effective hedge against fluctuations in exchange rates although, in the
event of rate movements adverse to the Portfolio's position, it may forfeit
the entire amount of the premium plus related transaction costs. Options on
foreign currencies may be traded on the national securities exchanges or in
the over-the-counter market. As described above, options traded in the
over-the-counter market may not be as actively traded as those on an exchange,
so it may be more difficult to value such options. In addition, such options
are subject to the risk that the counterparty may fail to meet its obligations
to the Fund, and it may be difficult to enter into closing transactions with
respect to options traded over-the-counter.
o 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
<PAGE>
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the investment adviser's ability to predict correctly the direction of
securities prices, interest rates and other economic factors.
FIXED INCOME SECURITIES
Fixed income securities include preferred and preference stocks and all types
of debt obligations of both domestic and foreign issuers (such as bonds,
debentures, notes, equipment lease certificates, equipment trust certificates,
conditional sales contracts, commercial paper, mortgage-backed securities and
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities).
Corporate debt securities may bear fixed, contingent or variable rates of
interest and may involve equity features, such as conversion or exchange
rights or warrants for the acquisition of stock of the same or a different
issuer or participation based on revenues, sales or profits or the purchase of
common stock in a unit transaction (where corporate debt securities and common
stock are offered as a unit).
FOREIGN SECURITIES AND CURRENCIES
All of the Portfolios, except the Alliance Intermediate Government Securities
and Alliance Equity Index Portfolios, may invest in foreign securities. For
these purposes, "foreign securities" are securities of foreign issuers that
are not traded in U.S. markets. Each of the Portfolios, except the Alliance
Intermediate Government Securities Portfolio, may invest in American
depositary receipts and securities of foreign issuers that are traded in U.S.
markets. These securities may involve certain of the risks described below for
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.
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.
---------------------------------------------- The Hudson River Trust
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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 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 Portfolio 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.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
All the Portfolios, except the Alliance Money Market, Alliance Intermediate
Government Securities and Alliance Equity Index Portfolios, may enter into
contracts for the purchase or sale of a specific currency at a future date at
a price set at the time of the contract.
Generally, such forward contracts will be for a period of less than three
months. The Portfolios will enter into forward contracts for hedging purposes
only. These transactions will include forward purchases or sales of foreign
currencies for the purpose of protecting the 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.
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.
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.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
The Portfolios, other than the Alliance Equity Index Portfolio, may invest in
mortgage-backed securities, which are mortgage loans made by banks, savings
and loan institutions and other lenders that are assembled into pools, that
are (i) issued by an agency of the U.S. Government (such as GNMA) whose
securities are guaranteed by the U.S. Treasury, (ii) issued by an
instrumentality of the U.S. Government (such as FNMA) whose securities are
supported by the instrumentality's right to borrow from the U.S. Treasury, at
the discretion of the U.S. Treasury, though not backed by the full faith and
credit of the U.S. Government itself, or (iii) collateralized by U.S. Treasury
obligations or U.S. Government agency securities. Interests in such pools are
described in this prospectus as mortgage-backed securities. The Portfolios,
other than the Equity Index
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Portfolio, may invest in (i) mortgage-backed securities, including GNMA, FNMA
and FHLMC certificates, (ii) CMOs that are issued by non-governmental entities
and collateralized by U.S. Treasury obligations or by U.S. Government agency
or instrumentality securities, (iii) REMICs and (iv) other asset-backed
securities. Other asset-backed securities (unrelated to mortgage loans) may
include securities such as certificates for automobile receivables ("CARS")
and credit card receivable securities ("CARDS") as well as other asset-backed
securities that may be developed in the future.
The rate of return on mortgage-backed securities, such as GNMA, FNMA and FHLMC
certificates and CMOs, and, to a lesser extent, asset-backed securities may be
affected by early prepayment of principal on the underlying loans or
receivables. Prepayment rates vary widely and may be affected by changes in
market interest rates. It is not possible to 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."
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.
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."
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
---------------------------------------------- The Hudson River Trust
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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.
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.
<PAGE>
4
Management of the Trust
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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 Balanced 0.450% 0.400% 0.350% 0.325% 0.300 %
- ---------------------------------------------- ----- ----- ----- ----- ------
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 Quality Bond 0.525% 0.500% 0.475% 0.455% 0.445 %
- ---------------------------------------------- ----- ----- ----- ----- ------
Alliance Intermediate Government Securities 0.500% 0.475% 0.450% 0.430% 0.420 %
- ---------------------------------------------- ----- ----- ----- ----- ------
Alliance Equity Index 0.325% 0.300% 0.275% 0.255% 0.245 %
- ---------------------------------------------- ----- ----- ----- ----- ------
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.
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For 1998, the Portfolios paid the following advisory fees (as a percentage
of each Portfolio's average daily net assets):
<TABLE>
<S> <C>
Alliance International 0.90%
- ------------------------------------------------------- ----
Alliance Global 0.64%
- ------------------------------------------------------- ----
Alliance Aggressive Stock 0.54%
- ------------------------------------------------------- ----
Alliance Common Stock 0.36%
- ------------------------------------------------------- ----
Alliance Growth and Income 0.55%
- ------------------------------------------------------- ----
Alliance Small Cap Growth 0.90%
- ------------------------------------------------------- ----
Alliance Growth Investors 0.51%
- ------------------------------------------------------- ----
Alliance Balanced 0.41%
- ------------------------------------------------------- ----
Alliance Conservative Investors 0.48%
- ------------------------------------------------------- ----
Alliance High Yield 0.60%
- ------------------------------------------------------- ----
Alliance Quality Bond 0.53%
- ------------------------------------------------------- ----
Alliance Intermediate Government Securities 0.50%
- ------------------------------------------------------- ----
Alliance Equity Index 0.31%
- ------------------------------------------------------- ----
Alliance Money Market 0.35%
- ------------------------------------------------------- ----
</TABLE>
THE PORTFOLIO MANAGERS
THE ASSET ALLOCATION SERIES
ALLIANCE CONSERVATIVE INVESTORS, ALLIANCE BALANCED AND ALLIANCE GROWTH
INVESTORS PORTFOLIOS
Robert G. Heisterberg has been the person principally responsible for the
Alliance Conservative Investors, Alliance Balanced 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.
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 1996 and Mr. Kuck since the Portfolio's inception. Mr.
Rissman, a Senior 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 EQUITY INDEX PORTFOLIO
Judith A. DeVivo has been the person principally responsible for the Alliance
Equity Index Portfolio's investment program since its inception. Ms. DeVivo, a
Vice President of Alliance, has been associated with Alliance since 1970.
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.*
---------------------------------
* Prior to July 22, 1993, with Equitable Capital Management Corporation
("Equitable Capital"). On that date Alliance acquired the business and
substantially all of the assets of Equitable Capital and became the
investment adviser to the Trust.
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ALLIANCE GLOBAL AND ALLIANCE INTERNATIONAL PORTFOLIOS
Sandra L. Yeager has been the person principally responsible for the Alliance
Global Portfolio's investment program since 1998. Ms. Yeager has also been the
person principally responsible for the Alliance International Portfolio's
investment program since January 1999. Ms. Yeager, a Senior Vice President of
Alliance Capital Management L.P. ("Alliance"), has been associated with
Alliance since 1990.
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 Senior Vice President of
Alliance, has been associated with Alliance since 1988.*
ALLIANCE SMALL CAP GROWTH PORTFOLIO
Mark J. Cunneen has been the person principally responsible for the Alliance
Small Cap Growth Portfolio's investment program since January 1999. Mr.
Cunneen, a Senior Vice President of Alliance, has been associated with
Alliance since January 1999. Prior to joining Alliance, Mr. Cunneen had been
associated with INVESCO since May 1998, and before that with Chancellor LGT
Asset Management, Inc. ("Chancellor") since 1992. Mr. Cunneen had been the
head of Chancellor's Small Cap Equity Group since 1997.
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 Senior
Vice President of Alliance, has been associated with Alliance since 1990.*
ALLIANCE INTERMEDIATE GOVERNMENT SECURITIES PORTFOLIO
Jeffrey S. Phlegar has been the person principally responsible for the
Alliance Intermediate Government Securities Portfolio's investment program
since January 1999. Mr. Phlegar, a Senior Vice President of Alliance, has been
associated with Alliance since 1998.
ALLIANCE QUALITY BOND PORTFOLIO
Matthew Bloom has been the person principally responsible for the Alliance
Quality Bond Portfolio's investment program since 1995. Mr. Bloom, a Senior
Vice President of Alliance, has been associated with Alliance since 1989.
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 Senior Vice
President of Alliance, has been associated with Alliance since 1987.*
---------------------------------
* Prior to July 22, 1993, with Equitable Capital Management Corporation
("Equitable Capital"). On that date Alliance acquired the business and
substantially all of the assets of Equitable Capital and became the
investment adviser to the Trust.
---------------------------------------------- The Hudson River Trust
<PAGE>
- ----------
48
- --------------------------------------------------------------------------------
YEAR 2000
Many computer software systems in use today cannot properly process
date-related information relating to periods from and after January 1, 2000.
Should any of the computer systems employed by the Trust's major service
providers fail to process this type of information properly, that could have a
negative impact on the Trust's operations and services that are provided to
the Trust's shareholders. Alliance has advised the Trust that it is reviewing
all of its computer systems with the goal of modifying or replacing such
systems prior to January 1, 2000, to the extent necessary to foreclose any
such negative impact. In addition, Alliance has been advised by the Trust's
custodian that it is also in the process of reviewing its systems with the
same goal. As of the date of this prospectus, the Trust and Alliance have no
reason to believe that these goals will not be achieved. Similarly, the values
of certain of the portfolio securities held by the Trust may be adversely
affected by the inability of the securities' issuers or of third parties to
process this type of information properly.
<PAGE>
5
Description of the Trust's Shares
- ----------
49
- --------------------------------------------------------------------------------
PURCHASE AND REDEMPTION
The Trust will offer and sell its shares without a sales charge, at each
Portfolio's net asset value per share. The price at which a purchase is
effected is based on the next calculation of net asset value after an order is
placed by an insurance company investing in the Trust. Net asset value per
share is calculated for purchases and redemption of shares of each Portfolio
by dividing the value of total Portfolio assets, less liabilities (including
Trust expenses, which are accrued daily), by the total number of shares of
that Portfolio outstanding. The net asset value per share of each Portfolio is
determined each business day at 4:00 p.m. Eastern time. Values are not
calculated on national business holidays.
All shares may be redeemed in accordance with the Trust's Agreement and
Declaration of Trust and By-Laws. Shares will be redeemed at their net asset
value. Sales and redemptions of shares of the same class by the same
shareholder on the same day will be netted. All redemption requests will be
processed and payment with respect thereto will be made within seven days
after tenders.
The Trust may also suspend redemption, if permitted by the Investment Company
Act, for any period during which the New York Stock Exchange is closed or
during which trading is restricted by the SEC or the SEC declares that an
emergency exists. Redemption may also be suspended during other periods
permitted by the SEC for the protection of the Trust's shareholders.
HOW ASSETS ARE VALUED
Values are determined according to accepted accounting practices and all laws
and regulations that apply. The assets of each Portfolio are generally valued
at the close of regular trading on the New York Stock Exchange 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. Because foreign markets may be open at
different times than the New York Stock Exchange, the value of a
Portfolio's shares may change on days when shareholders are not able to
buy or sell them. If events materially affecting the values of the
Portfolio's foreign investments occur between the close of foreign markets
and the close of regular trading on the New York Stock Exchange, these
investments may be valued at their fair value.
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.
DISTRIBUTION PLAN
As explained in the SAI, the Trust has distribution agreements with each of
Equitable Distributors, Inc. ("EDI") and EQ Financial Consultants, Inc. ("EQ
Financial") (each a "Distributor" and, collectively, the "Distributors") with
respect to the Class IB shares. Both EDI and EQ Financial are indirect, wholly
owned subsidiaries of Equitable and affiliates of Alliance. The address for
EDI is 787 Seventh Avenue, New York, New York 10019. The address for EQ
Financial is 1290 Avenue of the Americas, New York, New York 10104.
The Trust has adopted a distribution plan (the "Distribution Plan") pursuant
to Rule 12b-1 under the Investment Company Act for the Class IB shares of the
Trust. Pursuant
<PAGE>
- ----------
50
- --------------------------------------------------------------------------------
to the Distribution Plan, the Trust compensates each 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
Class IB shares. It is anticipated that a portion of the amounts received by
the Distributors will be used to defray various costs incurred or paid by the
Distributors in connection with the printing and mailing of Trust
prospectuses, statements of additional information, any supplements thereto
and shareholder reports and holding seminars and sales meetings with wholesale
and retail sales personnel designed to promote the distribution of Class IB
shares. The Distributors may also use a portion of the amounts received to
provide compensation to financial intermediaries and third-party
broker-dealers for their services in connection with the distribution of Class
IB shares.
The Distribution Plan provides that the Trust, on behalf of each Portfolio,
may pay annually up to 0.50% of the average daily net assets of a Portfolio
attributable to its Class IB shares in respect of activities primarily
intended to result in the sale of Class IB shares. Under the distribution
agreement, however, payments to the Distributors for activities pursuant to
the Distribution Plan are limited to payments at an annual rate equal to 0.25%
of average daily net assets of each Portfolio, other than the Alliance Small
Cap Growth Portfolio, attributable to its Class IB shares. With respect to the
Alliance Small Cap Growth Portfolio, the Distributors will receive an annual
fee not to exceed the lesser of (a) 0.25% of the average daily net assets of
the Portfolio attributable to Class IB shares, and (b) an amount that, when
added to certain other expenses of the Class IB shares, would result in the
ratio of expenses to average daily net assets attributable to Class IB shares
equaling 1.20%. Under the terms of the Distribution Plan and the distribution
agreement, each Portfolio is authorized to make payments monthly to the
Distributors which may be used to pay or reimburse entities providing
distribution and shareholder servicing with respect to the Class IB shares for
such entities' fees or expenses incurred or paid in that regard.
The Distribution Plan is of a type known as a "compensation" plan because
payments are made for services rendered to the Trust with respect to Class IB
shares regardless of the level of expenditures by the Distributors. The
Trustees will, however, take into account such expenditures for purposes of
reviewing operations under the Distribution Plan and in connection with their
annual consideration of the Plan's renewal. The Distributors have indicated
that they expect their expenditures to include, without limitation: (a) the
printing and mailing of Trust prospectuses, statements of additional
information, any supplements thereto and shareholder reports for prospective
Contract owners with respect to the Class IB shares of the Trust; (b) those
relating to the development, preparation, printing and mailing of
advertisements, sales literature and other promotional materials describing
and/or relating to the Class IB shares of the Trust; (c) holding seminars and
sales meetings designed to promote the distribution of the Trust's 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 a
Distributor determines is primarily intended to result in the sale of Class IB
shares.
Because these fees are paid out of the Fund's assets on an on-going basis,
over time these fees will increase the cost of your investment and may cost
you more than paying other types of sales charges.
<PAGE>
6
Dividends, Distributions and Taxes
- ----------
51
- --------------------------------------------------------------------------------
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 order for investors to receive the favorable tax treatment generally
available to holders of variable annuity and variable life contracts, the
separate accounts underlying such contracts, as well as the Portfolios in
which such accounts invest, must meet certain diversification requirements.
Each Portfolio intends to comply with these requirements. If a Portfolio does
not meet such requirements, income allocable to the variable annuity and
variable life contracts (other than "pension plan contracts"), including
accumulated investment earnings, would be immediately taxable to the holders
of such contracts.
A more complete discussion of this and other issues appears in the SAI.
For more information regarding the tax implications for owners of variable
contracts investing in the Trust, refer to the prospectuses for those
products.
<PAGE>
7
Financial Highlights
- -----
52
- --------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the
Portfolio's financial performance for the past 5 years (or, if shorter, the
period of the Portfolio's operations). Certain information reflects financial
results for a single Portfolio share. The total returns in the table represent
the rate that an investor would have earned (or lost) on an investment in the
Portfolio (assuming reinvestment of all dividends and distributions). This
information has been audited by PricewaterhouseCoopers LLP, the Trust's
independent accountants. The December 31, 1998 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.
FINANCIAL HIGHLIGHTS
PER SHARE INCOME AND CAPITAL CHANGES
(FOR A CLASS IB SHARE OUTSTANDING THROUGHOUT THE PERIOD)(C)
ALLIANCE MONEY MARKET
<TABLE>
<CAPTION>
October 2,
Year Ended December 31, 1996 to
------------------------------- December 31,
1998 1997 1996
-------------- -------------- ----------------
<S> <C> <C> <C>
Net asset value, beginning of period(a) ...................... $ 10.17 $ 10.16 $ 10.16
--------- --------- -------
Income from investment operations:
Net investment income ....................................... 0.49 0.52 0.11
Net realized and unrealized gain on investments ............. 0.02 - 0.01
--------- ---------- -------
Total from investment operations ............................ 0.51 0.52 0.12
--------- ---------- -------
Less distributions:
Dividends from net investment income ........................ (0.47) (0.51) (0.02)
Dividends in excess of net investment income ................ - - (0.10)
---------- ---------- -------
Total dividends and distributions ........................... (0.47) (0.51) (0.12)
---------- ---------- -------
Net asset value, end of period ............................... $ 10.21 $ 10.17 $10.16
---------- ---------- -------
Total return(d) .............................................. 5.08% 5.16% 1.29%
---------- -------------- -----------
Ratios/Supplemental Data:
Net assets, end of period (000's) ............................ $386,718 $123,675 $3,184
Ratio of expenses to average net assets ...................... 0.62% 0.63% 0.67%(b)
Ratio of net investment income to average net assets ......... 4.82% 5.02% 4.94%(b)
</TABLE>
Footnotes appear on page 66.
<PAGE>
- -----
53
- --------------------------------------------------------------------------------
ALLIANCE INTERMEDIATE GOVERNMENT SECURITIES
<TABLE>
<CAPTION>
May 1, 1997
Year Ended to
December 31, 1998 December 31, 1997
------------------- ------------------
<S> <C> <C>
Net asset value, beginning of period(a) ...................... $ 9.43 $9.27
-------- ------
Income from investment operations:
Net investment income ....................................... 0.47 0.32
Net realized and unrealized gain on investments ............. 0.22 0.22
-------- ------
Total from investment operations ............................ 0.69 0.54
-------- ------
Less distributions:
Dividends from net investment income ........................ (0.46) (0.38)
--------- ------
Net asset value, end of period ............................... $ 9.66 $9.43
--------- ------
Total return(d) .............................................. 7.48% 5.83%
----------------- -------------
Ratios/Supplemental Data:
Net assets, end of period (000's) ............................ $30,898 $5,052
Ratio of expenses to average net assets ...................... 0.80% 0.81%(b)
Ratio of net investment income to average net assets ......... 4.87% 5.15%(b)
Portfolio turnover rate ...................................... 539% 285%
</TABLE>
Footnotes appear on page 66.
---------------------- The Hudson River Trust
<PAGE>
- -----
54
- --------------------------------------------------------------------------------
ALLIANCE QUALITY BOND
<TABLE>
<CAPTION>
July 8, 1998
to
December 31, 1998
------------------
<S> <C>
Net asset value, beginning of period(a) ...................... $9.90
------
Income from investment operations:
Net investment income ....................................... 0.25
Net realized and unrealized gain on investments ............. 0.14
------
Total from investment operations ............................ 0.39
------
Less distributions:
Dividends from net investment income ........................ (0.25)
Distributions from realized gains ........................... (0.20)
------
Total dividends and distributions ........................... (0.45)
------
Net asset value, end of period ............................... $9.84
------
Total return(d) .............................................. 4.05%
-------------
Ratios/Supplemental Data:
Net assets, end of period (000's) ............................ $10
Ratio of expenses to average net assets ...................... 0.81%(b)
Ratio of net investment income to average net assets ......... 5.06%(b)
Portfolio turnover rate ...................................... 194%
</TABLE>
Footnotes appear on page 66.
<PAGE>
- -----
55
- --------------------------------------------------------------------------------
ALLIANCE HIGH YIELD
<TABLE>
<CAPTION>
Year Ended December 31, October 2, 1996
------------------------- to
1998 1997 December 31, 1996
------------- ----------- ------------------
<S> <C> <C> <C>
Net asset value, beginning of period(a) ..................... $ 10.39 $10.01 $ 10.25
------- ------- -------
Income from investment operations:
Net investment income ...................................... 1.04 1.05 0.19
Net realized and unrealized gain (loss) on investments ..... (1.56) 0.71 0.15
------- ------- -------
Total from investment operations ........................... (0.52) 1.76 0.34
------- ------- -------
Less distributions:
Dividends from net investment income ....................... (1.00) (0.95) (0.03)
Dividends in excess of net investment income ............... - - (0.25)
Distributions from realized gains .......................... (0.18) (0.43) (0.01)
Distributions in excess of realized gains .................. - - (0.29)
------- ------- -------
Total dividends and distributions .......................... (1.18) (1.38) (0.58)
------- ------- -------
Net asset value, end of period .............................. $ 8.69 $10.39 $10.01
------- ------- -------
Total return(d) ............................................. (5.38)% 18.19% 3.32%
------- -------- --------
Ratios/Supplemental Data:
Net assets, end of period (000's) ........................... $207,042 $66,338 $685
Ratio of expenses to average net assets ..................... 0.88% 0.88% 0.82%(b)
Ratio of net investment income to average net assets ........ 10.60% 9.76% 8.71%(b)
Portfolio turnover rate ..................................... 181% 390% 485%
</TABLE>
Footnotes appear on page 66.
---------------------- The Hudson River Trust
<PAGE>
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56
- --------------------------------------------------------------------------------
ALLIANCE GROWTH AND INCOME
<TABLE>
<CAPTION>
May 1, 1997
Year Ended to
December 31, 1998 December 31, 1997
------------------- ------------------
<S> <C> <C>
Net asset value, beginning of period(a) ...................... $ 15.36 $13.42
--------- --------
Income from investment operations:
Net investment income ....................................... 0.03 0.05
Net realized and unrealized gain on investments ............. 3.07 2.91
--------- --------
Total from investment operations ............................ 3.10 2.96
--------- --------
Less distributions:
Dividends from net investment income ........................ (0.03) (0.09)
Distributions from realized gains ........................... (1.48) (0.93)
---------- --------
Total dividends and distributions ........................... (1.51) (1.02)
---------- --------
Net asset value, end of period ............................... $ 16.95 $15.36
---------- --------
Total return(d) .............................................. 20.56% 22.41%
----------------- --------
Ratios/Supplemental Data:
Net assets, end of period (000's) ............................ $120,558 $32,697
Ratio of expenses to average net assets ...................... 0.83% 0.83%(b)
Ratio of net investment income to average net assets ......... 0.17% 0.43%(b)
Portfolio turnover rate ...................................... 74% 79%
</TABLE>
Footnotes appear on page 66.
<PAGE>
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57
- --------------------------------------------------------------------------------
ALLIANCE EQUITY INDEX
<TABLE>
<CAPTION>
May 1, 1997
Year Ended to
December 31, 1998 December 31, 1997
------------------- ------------------
<S> <C> <C>
Net asset value, beginning of period(a) ........................................... $ 19.73 $ 16.35
------- --------
Income from investment operations:
Net investment income ............................................................ 0.22 0.14
Net realized and unrealized gain on investments and foreign currency transactions 5.24 3.48
------- --------
Total from investment operations ................................................. 5.46 3.62
------- --------
Less distributions:
Dividends from net investment income ............................................. (0.20) (0.17)
Distributions from realized gains ................................................ (0.01) (0.07)
-------- --------
Total dividends and distributions ................................................ (0.21) (0.24)
-------- --------
Net asset value, end of period .................................................... $ 24.98 $ 19.73
-------- --------
Total return(d) ................................................................... 27.74% 22.28%
-------- --------
Ratios/Supplemental Data:
Net assets, end of period (000's) ................................................. $ 443 $ 110
Ratio of expenses to average net assets ........................................... 0.59% 0.62%(b)
Ratio of net investment income to average net assets .............................. 0.98% 1.10%(b)
Portfolio turnover rate ........................................................... 6% 3%
</TABLE>
Footnotes appear on page 66.
---------------------- The Hudson River Trust
<PAGE>
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58
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ALLIANCE COMMON STOCK
<TABLE>
<CAPTION>
Year Ended December 31, October 2, 1996
------------------------------- to
1998 1997 December 31, 1996
-------------- -------------- ------------------
<S> <C> <C> <C>
Net asset value, beginning of period(a) ............................. $ 21.58 $ 18.22 $ 17.90
--------- --------- --------
Income from investment operations:
Net investment income .............................................. 0.10 0.10 0.02
Net realized and unrealized gain on investments and foreign currency
transactions ...................................................... 6.00 5.11 1.52
--------- --------- --------
Total from investment operations ................................... 6.10 5.21 1.54
--------- --------- --------
Less distributions:
Dividends from net investment income ............................... (0.10) ( 0.08) (0.00)
Dividends in excess of net investment income ....................... - - (0.03)
Distributions from realized gains .................................. (3.28) ( 1.77) (0.16)
Distributions in excess of realized gains .......................... - - (1.03)
---------- ---------- --------
Total dividends and distributions .................................. (3.38) ( 1.85) (1.22)
---------- ---------- --------
Net asset value, end of period ...................................... $ 24.30 $ 21.58 $ 18.22
---------- ---------- --------
Total return(d) ..................................................... 29.06% 29.07% 8.49%
---------- ---------- --------
Ratios/Supplemental Data:
Net assets, end of period (000's) ................................... $ 834,144 $228,780 $ 1,244
Ratio of expenses to average net assets ............................. 0.64% 0.64% 0.63%(b)
Ratio of net investment income to average net assets ................ 0.44% 0.46% 0.61%(b)
Portfolio turnover rate ............................................. 46% 52% 55%
</TABLE>
Footnotes appear on page 66.
Financial Highlights
<PAGE>
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59
- --------------------------------------------------------------------------------
ALLIANCE GLOBAL
<TABLE>
<CAPTION>
Year Ended December 31, October 2, 1996
--------------------------- to
1998 1997 December 31, 1996
------------ ------------ ------------------
<S> <C> <C> <C>
Net asset value, beginning of period(a) ............................. $ 17.27 $ 16.91 $ 16.57
------- ------- --------
Income from investment operations:
Net investment income .............................................. 0.08 0.12 0.02
Net realized and unrealized gain on investments and foreign currency
transactions ...................................................... 3.56 1.76 0.81
------- ------- --------
Total from investment operations ................................... 3.64 1.88 0.83
------- ------- --------
Less distributions:
Dividends from net investment income ............................... (0.19) (0.33) -
Dividends in excess of net investment income ....................... - - (0.11)
Distributions from realized gains .................................. (1.31) (1.19) (0.10)
Distributions in excess of realized gains .......................... - - (0.28)
Tax return of capital distributions ................................ - - (0.00)
-------- -------- --------
Total dividends and distributions .................................. (1.50) (1.52) (0.49)
-------- -------- --------
Net asset value, end of period ...................................... $ 19.41 $ 17.27 $ 16.91
-------- -------- --------
Total return(d) ..................................................... 21.50% 11.38% 4.98%
-------- -------- --------
Ratios/Supplemental Data:
Net assets, end of period (000's) ................................... $47,982 $21,520 $ 290
Ratio of expenses to average net assets ............................. 0.96% 0.97% 0.86%(b)
Ratio of net investment income to average net assets ................ 0.41% 0.67% 0.48%(b)
Portfolio turnover rate ............................................. 105% 57% 59%
</TABLE>
Footnotes appear on page 66.
---------------------- The Hudson River Trust
<PAGE>
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60
- --------------------------------------------------------------------------------
ALLIANCE INTERNATIONAL
<TABLE>
<CAPTION>
May 1, 1997
Year Ended to
December 31, 1998 December 31, 1997
------------------- ------------------
<S> <C> <C>
Net asset value, beginning of period(a) .................................... $ 10.26 $ 11.39
------- --------
Income from investment operations:
Net investment income ..................................................... 0.05 0.02
Net realized and unrealized gain (loss) on investments and foreign currency
transactions ............................................................. 0.98 (0.31)
------- --------
Total from investment operations .......................................... 1.03 (0.29)
------- --------
Less distributions:
Dividends from net investment income ...................................... (0.18) (0.28)
Distributions from realized gains ......................................... (0.00) (0.56)
-------- --------
Total dividends and distributions ......................................... (0.18) (0.84)
-------- --------
Net asset value, end of period ............................................. $ 11.11 $ 10.26
-------- --------
Total return(d) ............................................................ 10.30% (2.54)%
-------- --------
Ratios/Supplemental Data:
Net assets, end of period (000's) .......................................... $ 7,543 $ 3,286
Ratio of expenses to average net assets .................................... 1.31% 1.38%(b)
Ratio of net investment income to average net assets ....................... 0.44% 0.20%(b)
Portfolio turnover rate .................................................... 59% 59%
</TABLE>
Footnotes appear on page 66.
<PAGE>
- -----
61
- --------------------------------------------------------------------------------
ALLIANCE AGGRESSIVE STOCK
<TABLE>
<CAPTION>
Year Ended December 31, October 2, 1996
----------------------------- to
1998 1997 December 31, 1996
-------------- ------------ ------------------
<S> <C> <C> <C>
Net asset value, beginning of period(a) ............................. $ 36.13 $35.83 $ 37.28
--------- ------- ---------
Income from investment operations:
Net investment income (loss) ....................................... 0.01 (0.11) (0.01)
Net realized and unrealized gain (loss) on investments and foreign
currency transactions ............................................. (0.29) 3.77 0.85
---------- ------- ---------
Total from investment operations ................................... (0.28) 3.66 0.84
---------- ------- ---------
Less distributions:
Dividends from net investment income ............................... (0.12) (0.03) -
Dividends in excess of net investment income ....................... - - (0.02)
Distributions from realized gains .................................. (1.72) (3.33) (0.23)
Distributions in excess of realized gains .......................... - - (2.04)
---------- ------- ---------
Total dividends and distributions .................................. (1.84) (3.36) (2.29)
---------- ------- ---------
Net asset value, end of period ...................................... $ 34.01 $36.13 $ 35.83
---------- ------- ---------
Total return(d) ..................................................... 0.05% 10.66% 2.32%
---------- ------- ---------
Ratios/Supplemental Data:
Net assets, end of period (000's) ................................... $153,782 $73,486 $ 613
Ratio of expenses to average net assets ............................. 0.82% 0.81% 0.73%(b)
Ratio of net investment income (loss) to average net assets ......... 0.02% (0.28)% (0.10)%(b)
Portfolio turnover rate ............................................. 105% 123% 108%
</TABLE>
Footnotes appear on page 66.
---------------------- The Hudson River Trust
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
- -----
62
- --------------------------------------------------------------------------------
ALLIANCE SMALL CAP GROWTH
<TABLE>
<CAPTION>
May 1, 1997
Year Ended to
December 31, 1998 December 31, 1997
------------------- ------------------
<S> <C> <C>
Net asset value, beginning of period(a) .................................... $ 12.34 $ 10.00
--------- ---------
Income from investment operations:
Net investment income (loss) .............................................. ( 0.02) ( 0.01)
Net realized and unrealized gain (loss) on investments and foreign currency
transactions ............................................................. ( 0.53) 2.65
--------- ---------
Total from investment operations .......................................... ( 0.55) 2.64
--------- ---------
Less distributions:
Distributions from realized gains ......................................... - ( 0.30)
--------- ---------
Net asset value, end of period ............................................. $ 11.79 $ 12.34
--------- ---------
Total return(d) ............................................................ ( 4.44)% 26.57%
--------- ---------
Ratios/Supplemental Data:
Net assets, end of period (000's) .......................................... $112,254 $ 46,324
Ratio of expenses to average net assets .................................... 1.20% 1.15%(b)
Ratio of net investment loss to average net assets ......................... ( 0.17)% ( 0.12)%(b)
Portfolio turnover rate .................................................... 94% 96%
</TABLE>
Footnotes appear on page 66.
<PAGE>
- -----
63
- --------------------------------------------------------------------------------
ALLIANCE CONSERVATIVE INVESTORS
<TABLE>
<CAPTION>
May 1, 1997
Year Ended to
December 31, 1998 December 31, 1997
------------------- ------------------
<S> <C> <C>
Net asset value, beginning of period(a) ............................. $ 11.88 $ 11.29
------- --------
Income from investment operations:
Net investment income .............................................. 0.46 0.31
Net realized and unrealized gain on investments and foreign currency
transactions ...................................................... 1.12 1.01
------- --------
Total from investment operations ................................... 1.58 1.32
------- --------
Less distributions:
Dividends from net investment income ............................... (0.45) (0.36)
Distributions from realized gains .................................. (0.70) (0.37)
-------- --------
Total dividends and distributions .................................. (1.15) (0.73)
-------- --------
Net asset value, end of period ...................................... $ 12.31 $ 11.88
-------- --------
Total return(d) ..................................................... 13.60% 11.84%
-------- --------
Ratios/Supplemental Data:
Net assets, end of period (000's) ................................... $32,653 $ 5,694
Ratio of expenses to average net assets ............................. 0.78% 0.80%(b)
Ratio of net investment income to average net assets ................ 3.68% 3.82%(b)
Portfolio turnover rate ............................................. 103% 206%
</TABLE>
Footnotes appear on page 66.
---------------------- The Hudson River Trust
<PAGE>
- -----
64
- --------------------------------------------------------------------------------
ALLIANCE BALANCED
<TABLE>
<CAPTION>
July 8, 1998
to
December 31, 1998
------------------
<S> <C>
Net asset value, beginning of period(a) ........................................... $ 19.48
--------
Income from investment operations:
Net investment income ............................................................ 0.24
Net realized and unrealized gain on investments and foreign currency transactions 0.66
--------
Total from investment operations ................................................. 0.90
--------
Less distributions:
Dividends from net investment income ............................................. ( 0.20)
Distributions from realized gains ................................................ ( 1.67)
--------
Total dividends and distributions ................................................ ( 1.87)
--------
Net asset value, end of period .................................................... $ 18.51
--------
Total return(d) ................................................................... 4.92%
--------
Ratios/Supplemental Data:
Net assets, end of period (000's) ................................................. $ 10
Ratio of expenses to average net assets ........................................... 0.70%(b)
Ratio of net investment income to average net assets .............................. 2.65%(b)
Portfolio turnover rate ........................................................... 95%
</TABLE>
Footnotes appear on page 66.
<PAGE>
- -----
65
- --------------------------------------------------------------------------------
ALLIANCE GROWTH INVESTORS
<TABLE>
<CAPTION>
Year Ended December 31, October 2, 1996
--------------------------- to
1998 1997 December 31, 1996
------------ ------------ ------------------
<S> <C> <C> <C>
Net asset value, beginning of period(a) ...................... $ 18.52 $ 17.19 $ 16.78
------- ------- --------
Income from investment operations:
Net investment income ....................................... 0.36 0.36 0.07
Net realized and unrealized gain on investments and foreign
currency transactions ...................................... 3.03 2.43 0.71
------- ------- --------
Total from investment operations ............................ 3.39 2.79 0.78
------- ------- --------
Less distributions:
Dividends from net investment income ........................ (0.36) (0.43) (0.02)
Dividends in excess of net investment income ................ - - (0.09)
Distributions from realized gains ........................... (1.71) (1.03) (0.02)
Distributions in excess of realized gains ................... - - (0.24)
-------- -------- --------
Total dividends and distributions ........................... (2.07) (1.46) (0.37)
-------- -------- --------
Net asset value, end of period ............................... $ 19.84 $ 18.52 $ 17.19
-------- -------- --------
Total return(d) .............................................. 18.83% 16.58% 4.64%
-------- -------- --------
Ratios/Supplemental Data:
Net assets, end of period (000's) ............................ $92,027 $35,730 $472
Ratio of expenses to average net assets ...................... 0.80% 0.82% 0.84%(b)
Ratio of net investment income to average net assets ......... 1.85% 1.88% 1.69%(b)
Portfolio turnover rate ...................................... 102% 121% 190%
</TABLE>
Footnotes appear on page 66.
---------------------- The Hudson River Trust
<PAGE>
- -----
66
- --------------------------------------------------------------------------------
FOOTNOTES TO FINANCIAL HIGHLIGHTS
(a) Date as of which funds were first allocated to the Class IB shares of the
Portfolios are as follows: Alliance Money Market, Alliance High Yield,
Alliance Common Stock, Alliance Global, Alliance Aggressive Stock and
Alliance Growth Investors Portfolios-October 2, 1996. Alliance
Intermediate Government Securities, Alliance Growth and Income, Alliance
Equity Index, Alliance International, Alliance Small Cap Growth and
Alliance Conservative Investors Portfolios-May 1, 1997. Alliance Quality
Bond and Alliance Balanced Portfolios-July 8, 1998.
(b) Annualized.
(c) Net investment income and capital changes per share are based upon monthly
average shares outstanding.
(d) Total return is calculated assuming an initial investment made at 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.
<PAGE>
8
APPENDIX A
- ----------
A-1
- --------------------------------------------------------------------------------
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.
>
<PAGE>
- ----------
A-2
- --------------------------------------------------------------------------------
o Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
o Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
o Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
o Bonds which are rated Ca represent obligations which are speculative to a
high degree. Such issues are often in default or have other marked
shortcomings.
o Bonds which are rated C are the lowest class of bonds and issues so rated
can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies modifiers to each rating classification from Aa through B to
indicate relative ranking within its rating categories. The modifier "1"
indicates that a security ranks in the higher end of its rating category; the
modifier "2" indicates a mid-range ranking; and the modifier "3" indicates
that the issue ranks in the lower end of its rating category.
>
<PAGE>
9
Appendix B
- ----------
B-1
- --------------------------------------------------------------------------------
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.
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. If the fund scores in the top 10% of its class it
receives 5 stars; if it falls in the next 22.5% it receives 4 stars; a place
in the middle 35% earns it 3 stars; those in the next 22.5% receive 2 stars;
and the bottom 10% get 1 star.
<PAGE>
- ----------
B-2
- --------------------------------------------------------------------------------
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") 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
Russell 2000 Growth Index ("Russell 2000 Growth") consists of that half of the
2,000 smallest of the 3,000 largest capitalization U.S. companies that has
higher price-to-book ratios and higher forecasted growth.
The Lehman Intermediate Government Bond Index represents an unmanaged group of
securities consisting of all United States Treasury and agency securities with
remaining maturities of from one to ten years and issue amounts of at least
$100 million outstanding.
The Lehman Aggregate Bond Index is an index comprised of investment grade
fixed income securities, including U.S. Treasury, mortgage-backed, corporate
and "Yankee" bonds (U.S. dollar-denominated bonds issued outside the United
States).
The Merrill Lynch High Yield Master Index ("ML Master") represents an
unmanaged group of securities widely regarded by investors as representative
of the high yield bond market.
The "blended" performance numbers (e.g., 50% S&P 400/50% Russell 2000) in all
cases assume a static mix of the two indices.
The dates as of which funds were first allocated to the Portfolios are as
follows: the Alliance Common Stock Portfolio on June 16, 1975; the Alliance
Money Market Portfolio on July 13, 1981; the Alliance Balanced and Alliance
Aggressive Stock Portfolios 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 Quality Bond and Alliance Growth and
Income Portfolios on October 1, 1993; the Alliance Equity Index Portfolio on
March 1, 1994; the Alliance International Portfolio on April 3, 1995; and the
Alliance Small Cap Growth Portfolio on May 1, 1997. In the "Since Inception"
columns of Table I and Table II below, the performance of
<PAGE>
- ----------
B-3
- --------------------------------------------------------------------------------
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 variable 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 Balanced Funds and Small Company Growth Funds
Averages, from January 1, 1986; and for the Lipper Global Funds Average, from
August 28, 1987.
The Trust's Portfolios serve as the underlying investment vehicles for
variable 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 variable contract prospectus for further information about your
variable contract including a description of all charges and expenses.
---------------------------------------------- The Hudson River Trust
>
<PAGE>
- -----
B-4
- --------------------------------------------------------------------------------
TABLE I
ANNUALIZED RATES OF RETURN
PERIODS ENDING DECEMBER 31, 1998
Like the tables on pages 5-18, this table provides the average annual returns
over the designated periods, but extends the information further into the past
for Portfolios that have been in operation for more than ten years. The figures
reflect the performance of each Portfolio's Class IB shares since the inception
of that class. For periods prior to the inception of Class IB, the figures are
based on the performance of the relevant Portfolio's Class IA shares, adjusted
to reflect the expenses and fees of Class IB.
<TABLE>
<CAPTION>
Since
PORTFOLIO/Benchmarks 1 Year 3 Years 5 Years 10 Years 15 Years 20 Years Inception
- ------------------------------------------------ ----------- ---------- ---------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
THE ASSET ALLOCATION SERIES
Alliance Conservative Investors ............... 13.60% 10.44% 9.13% - - - 9.71%
Lipper Flexible Portfolio Average ............. 14.20 15.62 14.31 - - - 12.55
70% Lehman Treasury/30% S&P 500 ............... 15.59 14.45 13.37 - - - 12.08
- ------------------------------------------------ ----------- ---------- ---------- ----------- ----------- ----------- ----------
Alliance Balanced ............................. 17.82 14.66 10.56 12.25% - - 12.49
Lipper Balanced Mutual Funds Average .......... 13.48 15.79 13.84 12.97 - - 12.32
50% S&P 500/50% Lehman Gov't Corp. ............ 19.02 18.70 16.88 15.21 - - 14.64
- ------------------------------------------------ ----------- ---------- ---------- ----------- ----------- ----------- ----------
Alliance Growth Investors ..................... 18.83 15.89 13.66 - - - 15.81
Lipper Flexible Portfolio Average ............. 14.20 15.62 14.31 - - - 12.55
70% S&P 500/30% Lehman Gov't Corp. ............ 22.85 22.69 19.96 - - - 15.55
- ------------------------------------------------ ----------- ---------- ---------- ----------- ----------- ----------- ----------
THE EQUITY SERIES
Alliance Growth and Income .................... 20.56 22.30 17.57 - - - 16.56
Lipper Growth & Income Funds Average .......... 15.61 21.25 18.35 - - - 17.89
75% S&P 500/25% Value Line Convertible ........ 20.10 23.99 21.07 - - - 20.48
- ------------------------------------------------ ----------- ---------- ---------- ----------- ----------- ----------- ----------
Alliance Equity Index ......................... 27.74 27.31 - - - - 24.07
Lipper S&P 500 Index Funds Average ............ 28.05 27.67 - - - - 24.31
S&P 500 ....................................... 28.58 28.23 - - - - 24.79
- ------------------------------------------------ ----------- ---------- ---------- ----------- ----------- ----------- ----------
Alliance Common Stock ......................... 29.06 27.36 21.67 18.38 17.19% 18.35% 16.13
Lipper Growth Equity Mutual Funds Average ..... 22.86 22.23 18.63 16.72 14.65 16.30 16.01
S&P 500 ....................................... 28.58 28.23 24.06 19.21 17.90 17.76 15.98
- ------------------------------------------------ ----------- ---------- ---------- ----------- ----------- ----------- ----------
Alliance Global ............................... 21.50 15.67 14.01 14.55 - - 12.34
Lipper Global Mutual Funds Average ............ 14.34 14.67 11.98 11.21 - - 9.64
MSCI World .................................... 24.34 17.77 15.68 10.66 - - 9.55
- ------------------------------------------------ ----------- ---------- ---------- ----------- ----------- ----------- ----------
Alliance International ........................ 10.30 5.36 - - - - 7.22
Lipper International Mutual Funds Average ..... 13.02 9.94 - - - - 10.74
MSCI EAFE ..................................... 20.00 9.00 - - - - 9.68
- ------------------------------------------------ ----------- ---------- ---------- ----------- ----------- ----------- ----------
Alliance Aggressive Stock ..................... 0.05 10.57 11.25 18.65 - - 17.57
Lipper Small Company Growth Funds Average ..... 12.16 16.33 14.87 15.44 - - 13.69
50% S&P 400/50% Russell 2000 .................. 8.28 17.77 15.56 16.49 - - 14.78
- ------------------------------------------------ ----------- ---------- ---------- ----------- ----------- ----------- ----------
Alliance Small Cap Growth ..................... (4.44) - - - - - 12.06
Lipper Small Company Growth Funds Average ..... (0.33) - - - - - 16.72
Russell 2000 Growth ........................... 1.23 - - - - - 16.58
- ------------------------------------------------ ----------- ---------- ---------- ----------- ----------- ----------- ----------
THE FIXED INCOME SERIES
Alliance Money Market ......................... 5.08 5.11 4.91 5.33 6.10 - 6.82
Lipper Money Market Mutual Funds Average ...... 4.84 4.87 4.77 5.20 5.94 - 6.77
3 Month T-Bill ................................ 5.05 5.18 5.11 5.44 6.07 - 6.76
- ------------------------------------------------ ----------- ---------- ---------- ----------- ----------- ----------- ----------
</TABLE>
<PAGE>
- -----
B-5
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since
PORTFOLIO/Benchmarks 1 Year 3 Years 5 Years 10 Years 15 Years 20 Years Inception
- --------------------------------------------------- --------- ---------- ---------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Alliance Intermediate Government Securities ...... 7.48 5.99 5.13 - - - 6.83
Lipper Intermediate Government Funds Average ..... 7.68 6.21 5.91 - - - 7.25
Lehman Intermediate Government Bond .............. 8.49 6.74 6.45 - - - 7.60
- ------------------------------------------------ ----------- ---------- ---------- ----------- ----------- ----------- ----------
Alliance Quality Bond ............................ 8.43 7.46 6.52 - - - 6.05
Lipper Corporate Debt Funds A Rated Average ...... 7.47 6.38 6.54 - - - 6.21
Lehman Aggregate Bond ............................ 8.69 7.29 7.27 - - - 6.92
- ------------------------------------------------ ----------- ---------- ---------- ----------- ----------- ----------- ----------
Alliance High Yield .............................. (5.38) 11.10 9.74 10.91 - - 10.24
Lipper High Current Yield Mutual Funds Average ... (0.44) 8.21 7.37 9.34 - - 8.97
ML Master ........................................ 3.66 9.11 9.01 11.08 - - 10.72
- ------------------------------------------------ ----------- ---------- ---------- ----------- ----------- ----------- ----------
</TABLE>
---------------------- The Hudson River Trust
<PAGE>
- -----
B-6
- --------------------------------------------------------------------------------
TABLE II
CUMULATIVE RATES OF RETURN
PERIODS ENDING DECEMBER 31, 1998
This table represents the total (cumulative) return on an investment in each
Portfolio over the designated periods. The figures represent the performance of
each Portfolio's Class IB shares since the inception of that class. For periods
prior to the inception of Class IB, the figures are based on the performance of
the relevant Portfolio's Class IA shares, adjusted to reflect the expenses and
fees of Class IB.
<TABLE>
<CAPTION>
Portfolio/Benchmarks 1 Year 3 Years 5 Years
- ------------------------------------------------- ----------- ---------- ----------
<S> <C> <C> <C>
THE ASSET ALLOCATION SERIES
Alliance Conservative Investors ................ 13.60% 34.70% 54.80%
Lipper Flexible Portfolio Average .............. 14.20 55.28 97.15
70% Lehman Treasury/30% S&P 500 ................ 15.59 49.92 87.28
- ------------------------------------------------- ----- ------ ------
Alliance Balanced .............................. 17.82 50.73 65.23
Lipper Balanced Mutual Funds Average ........... 13.48 55.60 91.92
50% S&P 500/50% Lehman Gov't Corp. ............. 19.02 67.24 118.08
- ------------------------------------------------- ----- ------ ------
Alliance Growth Investors ...................... 18.83 55.65 89.66
Lipper Flexible Portfolio Average. ............. 14.20 55.28 97.15
70% S&P 500/30% Lehman Gov't Corp. ............. 22.85 84.68 148.41
- ------------------------------------------------- ----- ------ ------
THE EQUITY SERIES
Alliance Growth and Income ..................... 20.56 82.92 124.66
Lipper Growth & Income Funds Average ........... 15.61 79.05 133.95
75% S&P 500/25% Value Line Convertible ......... 20.10 90.62 160.09
- ------------------------------------------------- ----- ------ ------
Alliance Equity Index .......................... 27.74 106.35 -
Lipper S&P 500 Index Funds Average ............. 28.05 108.12 -
S&P 500 ........................................ 28.58 110.85 -
- ------------------------------------------------- ----- ------ ------
Alliance Common Stock .......................... 29.06 106.61 166.61
Lipper Growth Equity Mutual Funds Average ...... 22.86 84.52 138.97
S&P 500 ........................................ 28.58 110.85 193.91
- ------------------------------------------------- ----- ------ ------
Alliance Global ................................ 21.50 54.77 92.65
Lipper Global Mutual Funds Average ............. 14.34 51.58 77.94
MSCI World ..................................... 24.34 63.34 107.19
- ------------------------------------------------- ----- ------ ------
Alliance International ......................... 10.30 16.95 -
Lipper International Mutual Funds Average ...... 13.02 33.62 -
MSCI EAFE ...................................... 20.00 29.52 -
- ------------------------------------------------- ----- ------ ------
Alliance Aggressive Stock ...................... 0.05 35.19 70.39
Lipper Small Company Growth Funds Average ...... 12.16 58.64 102.73
50% S&P 400/50% Russell 2000 ................... 8.28 63.35 106.12
- ------------------------------------------------- ----- ------ ------
Alliance Small Cap Growth Portfolio ............ (4.44) - -
Lipper Small Company Growth Funds Average ...... (0.33) - -
Russell 2000 ................................... 1.23 - -
- ------------------------------------------------- ----- ------ ------
THE FIXED INCOME SERIES
Alliance Money Market .......................... 5.08 16.12 27.10
Lipper Money Market Mutual Funds Average ....... 4.84 15.34 26.25
3 Month T-Bill ................................. 5.05 16.35 28.27
<CAPTION>
Since
Portfolio/Benchmarks 10 Years 15 Years 20 Years Inception
- ------------------------------------------------- ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
THE ASSET ALLOCATION SERIES
Alliance Conservative Investors ................ - - - 135.73%
Lipper Flexible Portfolio Average .............. - - - 202.48
70% Lehman Treasury/30% S&P 500 ................ - - - 187.40
- ------------------------------------------------- ----------- ----------- ------------- ------------
Alliance Balanced .............................. 217.72% - - 357.44
Lipper Balanced Mutual Funds Average ........... 240.69 - - 351.90
50% S&P 500/50% Lehman Gov't Corp. ............. 311.86 - - 485.45
- ------------------------------------------------- ----------- ----------- ------------- ------------
Alliance Growth Investors ...................... - - - 288.65
Lipper Flexible Portfolio Average. ............. - - - 202.48
70% S&P 500/30% Lehman Gov't Corp. ............. - - - 280.88
- ------------------------------------------------- ----------- ----------- ------------- ------------
THE EQUITY SERIES
Alliance Growth and Income ..................... - - - 123.54
Lipper Growth & Income Funds Average ........... - - - 139.10
75% S&P 500/25% Value Line Convertible ......... - - - 166.00
- ------------------------------------------------- ----------- ----------- ------------- ------------
Alliance Equity Index .......................... - - - 183.45
Lipper S&P 500 Index Funds Average ............. - - - 186.34
S&P 500 ........................................ - - - 192.17
- ------------------------------------------------- ----------- ----------- ------------- ------------
Alliance Common Stock .......................... 440.64 980.15% 2806.54% 3,001.18
Lipper Growth Equity Mutual Funds Average ...... 388.00 727.63 2185.68 3,490.04
S&P 500 ........................................ 479.62 1,081.76 2530.43 2,919.92
- ------------------------------------------------- ----------- ----------- ------------- ------------
Alliance Global ................................ 289.16 - - 272.35
Lipper Global Mutual Funds Average ............. 194.96 - - 188.08
MSCI World ..................................... 175.31 - - 181.57
- ------------------------------------------------- ----------- ----------- ------------- ------------
Alliance International ......................... - - - 29.86
Lipper International Mutual Funds Average ...... - - - 47.74
MSCI EAFE ...................................... - - - 41.40
- ------------------------------------------------- ----------- ----------- ------------- ------------
Alliance Aggressive Stock ...................... 453.12 - - 710.24
Lipper Small Company Growth Funds Average ...... 334.88 - - 448.32
50% S&P 400/50% Russell 2000 ................... 360.30 - - 494.67
- ------------------------------------------------- ----------- ----------- ------------- ------------
Alliance Small Cap Growth Portfolio ............ - - - 12.06
Lipper Small Company Growth Funds Average ...... - - - 28.98
Russell 2000 ................................... - - - 29.23
- ------------------------------------------------- ----------- ----------- ------------- ------------
THE FIXED INCOME SERIES
Alliance Money Market .......................... 68.00 142.97 - 216.34
Lipper Money Market Mutual Funds Average ....... 66.09 137.69 - 214.68
3 Month T-Bill ................................. 69.88 142.02 - 214.45
- ------------------------------------------------- ----------- ----------- ------------- ------------
</TABLE>
<PAGE>
- -----
B-7
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Since
Portfolio/Benchmarks 1 Year 3 Years 5 Years 10 Years 15 Years 20 Years Inception
- ------------------------------------------------ --------- ---------- ---------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Alliance Intermediate Government Securities ... 7.48 26.74 28.43 - - - 66.92
Lipper Intermediate Government Funds Average .. 7.68 19.84 33.36 - - - 72.35
Lehman Intermediate Government Bond ........... 8.49 21.61 36.71 - - - 76.55
- ------------------------------------------------ --------- ---------- ---------- ----------- ----------- ----------- ----------
Alliance Quality Bond ......................... 8.43 24.10 37.16 - - - 36.12
Lipper Corporate Debt Funds A Rated Average ... 7.47 20.42 37.37 - - - 37.26
Lehman Aggregate Bond ......................... 8.69 23.51 42.06 - - - 42.14
- ------------------------------------------------ --------- ---------- ---------- ----------- ----------- ----------- ----------
Alliance High Yield ........................... (5.38) 37.15 59.15 181.68 - - 222.11
Lipper High Current Yield Bond Funds Average .. (0.44) 26.80 43.00 145.62 - - 182.21
ML Master ..................................... 3.66 29.90 53.96 186.01 - - 239.69
- ------------------------------------------------ --------- ---------- ---------- ----------- ----------- ----------- ----------
</TABLE>
---------------------- The Hudson River Trust
<PAGE>
- -----
B-8
- --------------------------------------------------------------------------------
TABLE III
ANNUAL RATES OF RETURN
Like the bar charts on pages 5-18, this table represents the specific returns
for each year individually, but extends further into the past for Portfolios
that have been in operation for more than ten years. The figures represent the
performance of each Portfolio's Class IB shares since the inception of that
class. For periods prior to the inception of Class IB, the figures are based on
the performance of the relevant Portfolio's Class IA shares, adjusted to
reflect the expenses and fees of Class IB.
<TABLE>
<CAPTION>
Alliance Alliance Alliance Alliance Alliance
Year Ending Common Money Aggressive Alliance High Alliance Conserv.
December 31 Stock Market Stock Balanced Yield Global Investors
- --------------- ----------- ----------- ------------ ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
1976 ......... 9.2%*
1977 ......... -9.5
1978 ......... 8.0
1979 ......... 29.6
1980 ......... 49.8
1981 ......... -6.1 6.2%*
1982 ......... 17.3 12.8
1983 ......... 25.8 8.7
1984 ......... -2.2 10.6
1985 ......... 33.2 7.9
1986 ......... 17.1 6.4 35.6%* 28.8%*
1987 ......... 7.2 6.4 7.1 -1.1 4.4%* -13.5%*
1988 ......... 22.2 7.1 0.9 13.0 9.5 10.6
1989 ......... 25.3 8.9 43.2 25.6 4.9 26.5 2.8%*
1990 ......... -8.4 8.0 7.9 0.0 -1.4 -6.3 6.2
1991 ......... 37.6 5.9 86.6 41.0 24.2 30.2 19.6
1992 ......... 3.0 3.3 -3.4 -3.1 12.1 -0.7 5.5
1993 ......... 24.6 2.7 16.5 12.0 22.9 31.9 10.5
1994 ......... -2.4 3.8 -4.1 -8.3 -3.0 5.0 -4.4
1995 ......... 32.2 5.5 31.4 19.5 19.7 18.6 20.2
1996 ......... 24.0 5.1 22.1 11.4 22.6 14.4 5.0
1997 ......... 29.1 5.2 10.7 14.8 18.2 11.4 13.0
1998 ......... 29.1 5.1 0.1 17.8 -5.4 21.5 13.6
<CAPTION>
Alliance
Alliance Alliance Alliance Growth Alliance Alliance
Year Ending Growth Intermediate Quality and Equity Alliance Small Cap
December 31 Investors Govt. Securities Bond Income Index International Growth
- --------------- ----------- ------------------ ----------- ------------ ----------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
1976 .........
1977 .........
1978 .........
1979 .........
1980 .........
1981 .........
1982 .........
1983 .........
1984 .........
1985 .........
1986 .........
1987 .........
1988 .........
1989 ......... 3.7%*
1990 ......... 10.4
1991 ......... 48.7 11.8%*
1992 ......... 4.7 5.4
1993 ......... 15.0 10.3 -0.8%* -0.5%*
1994 ......... -3.4 -4.6 -5.4 -0.8 0.8%*
1995 ......... 26.1 13.1 16.8 23.8 36.2 11.0%*
1996 ......... 12.4 3.5 5.1 19.8 22.1 9.6
1997 ......... 16.6 7.0 8.9 26.6 32.3 -3.2
1998 ......... 18.8 7.5 8.4 20.6 27.7 10.3 -4.4%
</TABLE>
* Unannualized from the inception date described in this Prospectus at pages
B-2 and B-3 through the end of the calendar year indicated.
>
<PAGE>
- ----------
B-9
- --------------------------------------------------------------------------------
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 fifteen full calendar years during which
Alliance has managed the Historical Portfolios. As of December 31, 1998, the
assets in the Historical Portfolios totaled approximately $1,291.5 million and
the average size of a Historical Portfolio was $53.8 million. Each Historical
Portfolio has a nearly identical composition of individual investment holdings
and related percentage weightings.
The performance data is net of all fees (including brokerage commissions)
charged to those accounts. The performance data is computed in accordance with
standards formulated by the Association of Investment Management and Research
and has not been adjusted to reflect any fees that will be payable by Alliance
Small Cap Growth Portfolio, which are higher than the fees imposed on the
Historical Portfolios and will result in a higher expense ratio and lower
returns for Alliance Small Cap Growth Portfolio. Expenses associated with the
distribution of Class IB shares of Alliance Small Cap Growth Portfolio in
accordance with the plan adopted by the Trustees pursuant to Rule 12b-1 under
the 1940 Act ("distribution fees") are also excluded. The performance data has
also not been adjusted for corporate or individual taxes, if any, payable by
the account owners.
Alliance has calculated the investment performance of the Historical
Portfolios on a trade-date basis. Dividends have been accrued on a daily basis
and cash flows weighted daily. Composite investment performance for all
portfolios has been determined on an asset weighted basis. New accounts are
included in the composite investment performance computations at the beginning
of the quarter following the initial contribution. The total returns set forth
below are calculated using a method that links the monthly return amounts for
the disclosed periods, resulting in a time-weighted rate of return.
As reflected below, the Historical Portfolios have over time performed
favorably when compared with the performance of recognized performance
indices. The Russell 2000 universe of securities is complied by Frank Russell
Company and consists of the 2000 smallest of the 3000 largest capitalization
U.S. companies. The Russell 2000 Index is segmented into two style indices,
based on the capitalization-weighted median book-to-price ratio of each of the
securities. At each reconstitution, the Russell 2000 constituents are ranked
by their book-to-price ratio. Once so ranked, the breakpoint for the two
styles is determined by the median market capitalization of the Russell 2000.
Thus, those securities falling within the top fifty percent of the cumulative
market capitalization (as ranked by descending book-to-price) become members
of the Russell 2000 Growth Index. The Russell 2000 Growth Index is,
accordingly, designed to include those Russell 2000 securities with a
greater-than-average growth orientation. In contrast with the securities in
the Russell 2000 Index, companies in the Growth Index tend to exhibit higher
price-to-book and price-earnings ratios, lower dividend yield and higher
forecasted growth values.
---------------------------------------------- The Hudson River Trust
>
<PAGE>
- ----------
B-10
- --------------------------------------------------------------------------------
To the extent 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 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 Alliance Small
Cap Growth Portfolio were to purchase a portfolio of securities substantially
identical to the securities comprising the Russell Indices, Alliance Small Cap
Growth Portfolio's performance relative to the index would be reduced by
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 Alliance
Small Cap Growth Portfolio's shareholders of sales charges and income taxes.
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 small company 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 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.
>
<PAGE>
- -----
B-11
- --------------------------------------------------------------------------------
SCHEDULE OF COMPOSITE INVESTMENT PERFORMANCE-HISTORICAL PORTFOLIOS*
<TABLE>
<CAPTION>
Lipper
Russell Russell Small Co.
Historical 2000 2000 Growth
Portfolios Index Growth Index Fund Index
Total Return** Total Return Total Return Total Return
---------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Year ended December 31:
1998 .................. ( 3.65)% ( 2.55)% 1.23% ( 0.85)%
1997 .................. 21.95 22.37 12.94 15.05
1996 .................. 36.65 16.50 11.26 14.37
1995 .................. 54.14 28.45 31.04 31.62
1994 .................. ( 3.54) ( 1.82) ( 2.43) ( 0.48)
1993 .................. 14.11 18.88 13.36 16.93
1992 .................. 2.99 18.41 7.77 11.18
1991 .................. 37.34 46.04 51.19 48.53
1990 .................. (22.69) (19.48) (17.41) (13.78)
1989 .................. 27.78 16.26 20.17 21.06
1988 .................. 27.45 25.02 20.37 20.34
1987 .................. ( 7.72) ( 8.80) (10.48) ( 5.48)
1986 .................. 15.08 5.68 3.58 6.04
1985 .................. 42.06 31.05 30.97 27.27
1984 .................. (11.74) ( 7.30) (15.83) ( 9.18)
1983 .................. 32.78 29.13 20.13 29.80
</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, 1998 and, for more than one year, assume a
steady compounded rate of return and are not year-by-year results, which
fluctuated over the periods as shown.
AVERAGE ANNUAL TOTAL RETURNS
<TABLE>
<CAPTION>
Lipper
Small Co.
Historical Russell 2000 Russell 2000 Growth
Portfolios Index Growth Index Fund Index
-------------- ---------------- ---------------- -------------
<S> <C> <C> <C> <C>
One year ...................... (3.65)% (2.55)% 1.23% (0.85)%
Three years ................... 17.10 11.58 8.35 9.26
Five years .................... 19.01 11.86 10.22 11.30
Ten years ..................... 14.30 12.92 11.54 13.16
Since January 1, 1983 ......... 14.34 12.27 9.71 12.11
</TABLE>
---------------------- The Hudson River Trust
>
<PAGE>
- --------------------------------------------------------------------------------
The Trust's statement of additional information ("SAI") dated May 1, 1999
contains additional information about the Portfolios. It is incorporated by
reference into this prospectus, which means that it is part of this prospectus
for legal purposes. You may obtain free copies of the SAI and the Trust's annual
and semi-annual reports, request other information about the Trust, or make
shareholder inquiries by writing to the Trust at the address below or by
telephoning 1-800-221-5672.
The SAI has been filed with the Commission. You may review and copy information
about the Trust, including the SAI, at the Commission's Public Reference Room
in Washington, D.C. You may call the Commission at 1-800-SEC-0330 for
information about the operation of the Public Reference Room. The Commission
maintains a World Wide Web site at http://www.sec.gov, which contains reports
and other information about the Trust. You may also obtain copies of these
materials, upon payment of a duplicating fee, by writing the Public Reference
Section of the Commission, Washington, D.C. 20549-6009.
Address correspondence to:
The Hudson River Trust
1345 Avenue of the Americas
New York, New York 10105
1-800-221-5672
Shareholder Services
1-800-221-5672
Investment Company Act File No. 811-4185
<PAGE>
THE HUDSON RIVER TRUST
1345 Avenue of the Americas -- New York, New York 10105
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1999
This Statement of Additional Information is not a prospectus. It should be
read in conjunction with The Hudson River Trust ("Trust") Prospectus dated
May 1, 1999 relating to Class IA shares and retained for future reference.
This Statement of Additional Information relates to the Trust's Class IA
shares. A separate Statement of Additional Information relates to the Trust's
Class IB shares.
A copy of the Prospectus to which this Statement of Additional Information
relates is available at no charge by writing the Trust at the above address.
Certain disclosure has been incorporated by reference to the Trust's Annual
Report. For a free copy of the Trust's Annual Report, call 1-800-221-5672.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
General Information and History......................................... 2
Investment Restrictions of the Portfolios............................... 4
Description of Certain Securities in Which the Portfolios May Invest ... 7
Management of the Trust................................................. 21
Investment Advisory and Other Services.................................. 26
Brokerage Allocation.................................................... 28
Trust Expenses and Other Charges........................................ 30
Purchase and Pricing of Securities...................................... 31
Certain Tax Considerations.............................................. 33
Portfolio Performance................................................... 34
Other Services.......................................................... 36
Financial Statements ................................................... 38
Appendix A--Description of Commercial Paper Ratings..................... A-1
</TABLE>
- -----------------------------------------------------------------------------
HRT-SAI (2/99)
Copyright 1998. The Hudson River Trust. All rights reserved.
Catalog No. 127665
<PAGE>
GENERAL INFORMATION AND HISTORY
THE TRUST
The Hudson River Trust is an open-end management investment company--a type
of company commonly known as a "mutual fund." It is registered as such under
the Investment Company Act of 1940, as amended ("Investment Company Act").
Originally organized as a Maryland corporation, the Trust's operations
commenced on March 22, 1985. On July 10, 1987, the Trust was reorganized as a
Massachusetts business trust. Shares of each Portfolio are divided into two
classes: Class IA shares and Class IB shares. Class IA shares are offered at
net asset value pursuant to this Statement of Additional Information and a
related prospectus and are not subject to fees imposed under any distribution
plan. Class IB shares are offered at net asset value pursuant to a separate
Statement of Additional Information and related prospectus and are subject to
distribution fees imposed under a distribution plan (the "Distribution Plan")
adopted pursuant to Rule 12b-1 under the Investment Company Act. Prior to
October 1, 1996, the Trust offered only Class IA shares.
The two classes of shares are offered under the Trust's multiple class
distribution system approved by the Trust's Board of Trustees on June 7, 1996
and are designed to allow promotion of insurance products that invest in the
Trust through alternative distribution channels. Under the Trust's
multi-class system, shares of each class of a Portfolio represent an equal
pro rata interest in the assets of that Portfolio and, generally, have
identical voting, dividend, liquidation, and other rights, other than with
respect to the payment of distribution fees under the Distribution Plan.
The Trust continuously offers its shares exclusively to separate accounts of
insurance companies in connection with variable life insurance contracts and
variable annuity certificates and contracts (collectively, "Contracts").
Currently, the Trust's shareholders of Class IA shares are separate accounts
of The Equitable Life Assurance Society of the United States (the
"Equitable") and The Equitable Life Insurance Company of Colorado, a separate
account of Integrity Life Insurance Company, a separate account of American
Franklin Life Insurance Company, a separate account of Transamerica
Occidental Life Insurance Company, and a separate account of SAFECO Life
Insurance Company, each of which, except the Equitable and its Colorado
subsidiary, is an insurance company unaffiliated with the Equitable. The
Trust may offer its shares to separate accounts of other insurance companies,
regardless of whether they are affiliated with Equitable. As of March 31,
1999, Equitable owned approximately 99.0% of the Trust's outstanding Class IA
shares and all of the Trust's outstanding Class IB shares and, as a result,
may be deemed to control the Trust.
As a "series" investment company, the Trust issues separate series of shares
of beneficial interest, each of which represents a separate portfolio
("Portfolio") of investments. Each Portfolio resembles a separate fund
issuing a separate class of stock. The Alliance Common Stock and Alliance
Money Market Portfolios are the successors to Separate Accounts I and II of
Equitable Variable Life Insurance Company, formerly a wholly owned subsidiary
of Equitable that was merged into Equitable as of January 1, 1997 ("Equitable
Variable"). (See "Description of Reorganization and Other Matters".) The
Alliance Balanced and Alliance Aggressive Stock Portfolios received their
initial funding on January 27, 1986 from Equitable Variable. The Alliance
High Yield Portfolio received its initial funding on January 2, 1987. The
Alliance Global Portfolio received its initial funding on August 27, 1987.
The Alliance Conservative Investors and Alliance Growth Investors Portfolios
received their initial funding on October 2, 1989. The Alliance Intermediate
Government Securities Portfolio received its initial funding on April 1,
1991. The Alliance Quality Bond and Alliance Growth and Income Portfolios
received their initial funding on October 1, 1993. The Alliance Equity Index
Portfolio received its initial funding on March 1, 1994. The Alliance
International Portfolio received its initial funding on April 3, 1995. The
Alliance Small Cap Growth Portfolio received its initial funding on May 1,
1997.
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.
2
<PAGE>
Because of current Federal securities law requirements, the Trust expects
that its shareholders will offer to owners of the Contracts
("Contractowners") the opportunity to instruct them as to how shares
allocable to their Contracts will be voted with respect to certain matters,
such as approval of investment advisory agreements. As of March 31, 1999, to
the Trust's knowledge, no Contractowners other than those set forth below
owned Contracts entitling such persons to give voting instructions regarding
more than 5% of either class of the outstanding shares of a Portfolio.
<TABLE>
<CAPTION>
ALLIANCE INTERMEDIATE
ALLIANCE QUALITY ALLIANCE EQUITY GOVERNMENT SECURITIES ALLIANCE MONEY-
BOND PORTFOLIO INDEX PORTFOLIO PORTFOLIO MARKET PORTFOLIO
------------------------- ------------------------ ------------------------ -------------------------
UNITS % OF UNITS % OF UNITS % OF UNITS % OF
OWNED PORTFOLIO OWNED PORTFOLIO OWNED PORTFOLIO OWNED PORTFOLIO
------------ ----------- ----------- ----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Boston Safe Deposit
and Trust Co.* ....... 15,636,504 46.3 5,263,894 6.3
Equitable ............ 17,279,770 15.5
PNC Bank, N.A.** ...... 1,123,760 5.4
</TABLE>
- ------------
* Boston Safe Deposit and Trust Co., successor Trustee under Master Trust
Agreement for SBC Communications, Inc.'s Deferred Compensation Plans and
other Executive Benefit Plans.
** PNC Bank, N.A. under Ashland Inc. Executive and Director Retirement
Benefit Security Trust.
The principal addresses of Boston Safe Deposit and Trust Co., Equitable and
PNC Bank, N.A. are 175 East Houston Street, San Antonio, Texas, 1290 Avenue
of the Americas, New York, New York, and 1000 Ashland Drive, Ashland,
Kentucky, respectively.
Were such a substantial Contractowner's funds withdrawn from the Trust or
transferred to a different Portfolio at the Contractowner's request, the
Trust could be forced to sell portfolio securities at disadvantageous prices.
LEGAL CONSIDERATIONS
Under Massachusetts law, annual election of Trustees is not required, and, in
the normal course, the Trust does not expect to hold annual meetings of
shareholders. There will normally be no meetings of shareholders for the
purpose of electing Trustees unless and until such time as less than a
majority of the Trustees holding office have been elected by shareholders, at
which time the Trustees then in office will call a shareholders' meeting for
the election of Trustees. The Trust has agreed to be bound by the procedures
set forth in Section 16(c) of the Investment Company Act, and accordingly,
shareholders of record of not less than two-thirds of the outstanding shares
of the Trust may remove a Trustee by a vote cast in person or by proxy at a
meeting called for that purpose.
Except as set forth above, the Trustees shall continue to hold office and may
appoint successor Trustees. Voting rights are not cumulative, so that the
holders of more than 50% of the shares voting in the election of Trustees
can, if they choose to do so, elect all the Trustees of the Trust, in which
event the holders of the remaining shares will be unable to elect any person
as a Trustee. Amendments to the Declaration of Trust of the Trust generally
require the affirmative vote of a majority of the outstanding shares of the
Trust.
The shares of each Portfolio, when issued, will be fully paid and
non-assessable by the Trust and will have no preference, preemptive,
conversion, exchange or similar rights.
Under Massachusetts law, in certain circumstances shareholders may be held
personally liable as partners for the obligations of a business trust such as
the Trust. The shareholders of the Trust are the insurance companies whose
separate accounts invest in it. The Trust's Declaration of Trust contains
provisions designed to protect shareholders from such liability to the extent
of the Trust's assets. As a result, the risk of personal liability for the
insurance company shareholders is remote.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he or
she would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct
of his or her office. The Declaration of Trust permits the Trust to purchase
and maintain on behalf of the Trustees insurance against certain liabilities.
3
<PAGE>
DESCRIPTION OF REORGANIZATION AND OTHER MATTERS
The following transactions, referred to as the Reorganization, were effected
simultaneously on March 22, 1985, pursuant to an Agreement and Plan of
Reorganization dated November 20, 1984, entered into by Equitable Variable,
Separate Accounts I and II, and The Hudson River Fund, Inc. (the "Fund"), the
predecessor of the Trust.
Equitable Variable divided Separate Account I into two divisions, a Common
Stock Division and a Money Market Division. Separate Account II was combined
with Separate Account I (the "Continuing Separate Account"). Rather than
investing directly, the Common Stock Division and the Money Market Division
of the Continuing Separate Account invested in shares of the Fund, which, in
turn, invested in diversified portfolios of common stock or money market
investments.
In order for the Fund to commence operations, all the investment assets of
Separate Accounts I and II (together with any related liabilities) were
transferred to the Common Stock and Money Market Portfolios of the Fund,
respectively, in exchange for shares in those Portfolios having an equivalent
aggregate net asset value.
On September 30, 1987, all of the Fund's assets and liabilities were
transferred to the Trust, pursuant to an Agreement and Plan of Reorganization
(the "Plan") between the Fund and the Trust. The Plan was proposed to
shareholders in order to permit greater operating flexibility and
efficiencies. The Plan provided for changes of domicile (from Maryland to
Massachusetts) and of form of organization (from a corporation to a business
trust). However, in all other material respects the Trust was identical to
the Fund immediately prior to the execution of the Plan.
At a meeting held on April 9, 1997, the shareholders of the Trust approved
the amendment and restatement of the Trust's Agreement and Declaration of
Trust. On April 16, 1997 the Agreement and Declaration of Trust was amended
and restated, and filed with the office of the Secretary of the Commonwealth
of Massachusetts.
INVESTMENT RESTRICTIONS OF THE PORTFOLIOS
FUNDAMENTAL RESTRICTIONS
The following restrictions apply to all of the Portfolios and are
fundamental. Unless permitted by law, they will not be changed for any
Portfolio without a vote of that Portfolio's shareholders.
None of the Portfolios will:
o underwrite securities issued by other persons except to the extent that,
in connection with the disposition of its portfolio investments, it may
be deemed to be an underwriter under certain Federal securities laws;
o make short sales of securities, except when it has, by reason of
ownership of other securities, the right to obtain securities of
equivalent kind and amount that will be held so long as it is in a short
position;
o issue senior securities;
o invest in commodities other than financial futures contracts and options
thereon;
o purchase real estate or mortgages; however, the Portfolios may, as
appropriate and consistent with their investment policies and other
investment restrictions, buy securities of issuers which engage in real
estate operations and securities which are secured by interests in real
estate (including partnership interests and shares of real estate
investment trusts), and may hold and sell real estate acquired as a
result of ownership of such securities;
o purchase any security on margin or borrow money, except that this
restriction shall not apply to borrowing from banks for temporary
purposes, to the pledging of assets to banks in order to transfer funds
for various purposes as required without interfering with the orderly
liquidation of securities in a Portfolio (but not for leveraging
purposes), to margin payments or pledges in
4
<PAGE>
connection with options, futures contracts, options on futures
contracts, forward contracts or options on foreign currencies or, with
respect to the Alliance Quality Bond Portfolio, to transactions in
interest rate swaps, caps and floors; or
o make loans (including lending cash or securities), except that this
restriction shall not apply to the Alliance High Yield and Alliance
Intermediate Government Securities Portfolios. Additionally, each of the
other Portfolios may make loans of portfolio securities not exceeding
50% of the value of that Portfolio's total assets. This restriction does
not prevent a Portfolio from purchasing debt obligations in which a
Portfolio may invest consistent with its investment policies, or from
buying government obligations, short-term commercial paper, or
publicly-traded debt, including bonds, notes, debentures, certificates
of deposit, and equipment trust certificates, nor does this restriction
apply to loans made under insurance policies or through entry into
repurchase agreements to the extent they may be viewed as loans.
Each Portfolio, except as noted below, elects not to "concentrate"
investments in an industry, as that concept is defined under applicable
Federal securities laws. In general, this means that no Portfolio will make
an investment in an industry if that investment would make the Portfolio's
holdings in that industry exceed 25% of the Portfolio's assets. However, this
restriction does not apply to investments by the 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.
Each Portfolio intends to be "diversified," as that term is defined under the
Investment Company Act. In general, this means that no Portfolio will make an
investment unless, when considering all its other investments, 75% of the
value of the Portfolio's assets would consist of cash, cash items, U.S.
Government securities, securities of other investment companies and other
securities. For the purposes of this restriction, "other securities" are
limited for any one issuer to not more than 5% of the value of the
Portfolio's total assets and to not more than 10% of the issuer's outstanding
voting securities. As a matter of operating policy, each Portfolio will not
consider repurchase agreements to be subject to the above-stated 5%
limitation if the collateral underlying the repurchase agreements consists
exclusively of U.S. Government securities and such repurchase agreements are
fully collateralized.
Further, as a matter of operating policy, the Alliance Money Market Portfolio
will invest no more than 5% of the value of its total assets in securities of
any one issuer, other than U.S. Government securities, except that the
Alliance Money Market Portfolio may invest up to 25% of its total assets in
First Tier Securities (as defined in Rule 2a-7 under the Investment Company
Act) of a single issuer for a period of up to three business days after the
purchase of such security. Further, as a matter of operating policy, the
Alliance Money Market Portfolio will not invest more than (i) the greater of
1% of its total assets or $1,000,000 in Second Tier Securities (as defined in
Rule 2a-7 under the Investment Company Act) of a single issuer and (ii) 5% of
its total assets, at the time a Second Tier Security is acquired, in Second
Tier Securities.
These policies of the Portfolios with respect to concentration and
diversification will not be changed for any Portfolio without a vote of that
Portfolio's shareholders, unless permitted by law.
NON-FUNDAMENTAL RESTRICTIONS
The following investment restrictions apply to all of the Portfolios, but are
not fundamental. They may be changed for any Portfolio without a vote of that
Portfolio's shareholders.
None of the Portfolios will:
o invest more than 15% of its net assets in securities restricted as to
disposition under Federal securities laws, or securities otherwise
considered illiquid or not readily marketable, including repurchase
agreements having a maturity of more than seven days; however, this
restriction will not apply to securities sold pursuant to Rule 144A
under the Securities Act of 1933, so long as such securities meet
liquidity guidelines to be established by the Trust's Board of Trustees;
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o trade in foreign exchange (except transactions incidental to the
settlement of purchases or sales of securities for a Portfolio);
however, the Alliance Global and Alliance International Portfolios may
trade in foreign exchange without limitation in connection with their
foreign currency hedging strategies; and the Alliance High Yield,
Alliance Quality Bond, Alliance Growth and Income, Alliance Conservative
Investors, Alliance Balanced, Alliance Common Stock, Alliance Aggressive
Stock, Alliance Growth Investors and Alliance Small Cap Growth
Portfolios may trade in foreign exchange in connection with their
foreign currency hedging strategies, provided the amount of foreign
exchange underlying such a Portfolio's currency hedging transactions
does not exceed 10% of such Portfolio's assets;
o acquire securities of any company that is a securities broker or dealer,
a securities underwriter, an investment adviser of an investment
company, or an investment adviser registered under the Investment
Advisers Act of 1940 (other than any such company that derives no more
than 15% of its gross revenues from securities related activities),
except that the Portfolios (other than the Alliance Money Market
Portfolio) may purchase bank, trust company, and bank holding company
stock, and except that each of the Portfolios may invest, in accordance
with Rule 12d3-1 under the Investment Company Act, up to 5% of its total
assets in any such company provided that it owns no more than 5% of the
outstanding equity securities of any class plus 10% of the outstanding
debt securities of such company; or
o make an investment in order to exercise control or management over a
company.
In addition, none of the Portfolios will invest more than 5% of its assets in
the securities of any one investment company, own more than 3% of any one
investment company's outstanding voting securities, or have total holdings of
investment company securities in excess of 10% of the value of the
Portfolio's assets.
ADDITIONAL INVESTMENT RESTRICTION APPLICABLE TO THE ALLIANCE COMMON STOCK,
ALLIANCE BALANCED, ALLIANCE AGGRESSIVE STOCK AND ALLIANCE CONSERVATIVE INVESTORS
PORTFOLIOS
The Alliance Common Stock, Alliance Balanced, Alliance Aggressive Stock and
Alliance Conservative Investors Portfolios will operate under the general
investment restrictions described above. In addition, they will not:
o acquire securities of investment companies not registered under the
Investment Company Act.
ADDITIONAL INVESTMENT RESTRICTIONS APPLICABLE TO THE ALLIANCE MONEY MARKET
PORTFOLIO
The Alliance Money Market Portfolio will operate under the general investment
restrictions described above. In addition, it will not:
o invest more than 10% of its assets in securities restricted as to
disposition under Federal securities laws, or securities otherwise
considered illiquid or not readily marketable, including repurchase
agreements having a maturity of more than seven days; however, this
restriction will not apply to securities sold pursuant to Rule 144A
under the Securities Act of 1933, so long as such securities meet
liquidity guidelines to be established by the Trust's Board of Trustees;
o purchase oil and gas interests;
o purchase or write puts or calls (options); or
o purchase equity securities, voting securities other than securities of
registered investment companies with investment policies not
substantially broader than those of the Portfolio (subject to the above
percentage limitations) or local or state government securities.
The Alliance Money Market Portfolio will invest only in funds whose
investment policies are similar to or narrower than those of the Portfolio.
It is expected that such investments would be made in funds designed for
institutional investors such as the Portfolio and would be used for amounts
which might otherwise be left uninvested because they do not meet the
minimums necessary for other permitted investments or to take advantage of
higher yields available at that time in such funds.
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ADDITIONAL INVESTMENT RESTRICTION APPLICABLE TO THE ALLIANCE HIGH YIELD AND
ALLIANCE GROWTH INVESTORS PORTFOLIOS
The Alliance High Yield and Alliance Growth Investors Portfolios will operate
under the general investment restrictions described above. In addition, each
will not:
o invest more than 10% of its total assets in (i) fixed income securities
which are rated lower than B3 by Moody's Investors Service, Inc.
("Moody's") or B-by Standard & Poor's ("S&P") or are unrated, and (ii)
money market instruments of any entity which has an outstanding issue of
unsecured debt that is rated lower than B3 by Moody's or B-by S&P, or is
unrated; however this restriction will not apply to (A) fixed income
securities which, in the opinion of the Trust's investment adviser, have
similar characteristics to securities which are rated B3 or higher by
Moody's or B-or higher by S&P, or (B) money market instruments of any
entity that has an unsecured issue of outstanding debt which, in the
opinion of the Trust's investment adviser, has similar characteristics
to securities which are so rated.
DESCRIPTION OF CERTAIN SECURITIES IN WHICH THE PORTFOLIOS MAY INVEST
REPURCHASE AGREEMENTS
All of the Portfolios, except the Alliance Equity Index Portfolio, may enter
into repurchase agreements. Under a repurchase agreement, underlying debt
instruments are acquired for a relatively short period (usually not more than
one week and never more than a year) subject to an obligation of the seller
to repurchase and the Portfolio to resell the debt instruments at a fixed
price and time, thereby determining the yield during the Portfolio's holding
period.
Repurchase agreements may exhibit the characteristics of loans by the
Portfolio. During the term of the repurchase agreement, the Portfolio retains
the security subject to the repurchase agreement as collateral securing the
seller's repurchase obligation, continually monitors on a daily basis the
market value of the security subject to the agreement and requires the seller
to deposit with the Portfolio collateral equal to any amount by which the
market value of the security subject to the repurchase agreement falls below
the resale amount provided under the repurchase agreement. A Portfolio enters
into repurchase agreements with respect to U.S. Government obligations,
certificates of deposit, or bankers' acceptances with registered
broker-dealers, U.S. Government securities dealers or domestic banks whose
creditworthiness is determined to be satisfactory by the Trust's investment
adviser, Alliance Capital Management L.P. ("Alliance"), pursuant to
guidelines adopted by the Board of Trustees. Generally, a Portfolio does not
invest in repurchase agreements maturing in more than seven days. The staff
of the Securities and Exchange Commission ("SEC") currently takes the
position that repurchase agreements maturing in more than seven days are
illiquid securities. No Portfolio will enter into a repurchase agreement
maturing in more than seven days if as a result more than 15% (10%, in the
case of the Alliance Money Market Portfolio) of the Portfolio's net assets
would be invested in "illiquid securities."
If a seller under a repurchase agreement were to default on the agreement and
be unable to repurchase the security subject to the agreement, the Portfolio
would look to the collateral underlying the seller's repurchase agreement,
including the security subject to the repurchase agreement, for satisfaction
of the seller's obligation to the Portfolio. In the event a repurchase
agreement is considered a loan and the seller defaults, the Portfolio might
incur a loss if the value of the collateral declines and may incur
disposition costs in liquidating the collateral. In addition, if bankruptcy
proceedings are commenced with respect to the seller, realization on the
collateral may be delayed or limited and a loss may be incurred.
FORWARD COMMITMENTS AND WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Portfolios may enter into forward commitments for the purchase or sale of
securities and may purchase or sell securities on a "when-issued" or "delayed
delivery" basis. Forward commitments and when-issued or delayed delivery
transactions arise when securities are purchased by a Portfolio with payment
and delivery taking place in the future in order to secure what Alliance
considers to be an advantageous price or yield to the Portfolio at the time
of entering into the transaction. However, the
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price of or yield on a comparable security available when delivery takes
place may vary from the price of or yield on the security at the time that
the forward commitment or when-issued or delayed delivery transaction was
entered into. Agreements for such purchases might be entered into, for
example, when a Portfolio anticipates a decline in interest rates and is able
to obtain a more advantageous price or yield by committing currently to
purchase securities to be issued later. When a Portfolio purchases securities
on a forward commitment, when-issued or delayed delivery basis, it does not
pay for the securities until they are received, and the Portfolio is required
to create a segregated account with the Trust's custodian and to maintain in
that account liquid assets in an amount equal to or greater than, on a daily
basis, the amount of the Portfolio's forward commitments, when-issued or
delayed delivery commitments.
A Portfolio will only enter into forward commitments and make commitments to
purchase securities on a when-issued or delayed delivery basis with the
intention of actually acquiring the securities. However, the Portfolio may
sell these securities before the settlement date if it is deemed advisable as
a matter of investment strategy. Forward commitments and when-issued and
delayed delivery transactions are generally expected to settle within three
months from the date the transactions are entered into, although a Portfolio
may close out its position prior to the settlement date by entering into a
matching sale transaction.
Although none of the Portfolios intends to make such purchases for
speculative purposes, purchases of securities on such bases may involve more
risk than other types of purchases. For example, by committing to purchase
securities in the future, a Portfolio subjects itself to a risk of loss on
such commitments as well as on its portfolio securities. Also, a Portfolio
may have to sell assets that have been set aside in order to meet
redemptions. In addition, if a Portfolio determines it is advisable as a
matter of investment strategy to sell the forward commitment or when-issued
or delayed delivery securities before delivery, that Portfolio may incur a
gain or loss because of market fluctuations since the time the commitment to
purchase such securities was made. Any such gain or loss would be treated as
a capital gain or loss and would be treated for tax purposes as such. When
the time comes to pay for the securities to be purchased under a forward
commitment or on a when-issued or delayed delivery basis, a Portfolio will
meet its obligations from the then available cash flow or the sale of
securities, or, although it would not normally expect to do so, from the sale
of the forward commitment or when-issued or delayed delivery securities
themselves (which may have a value greater or less than a Portfolio's payment
obligation).
WARRANTS
All the Portfolios, except the Alliance Money Market Portfolio, may purchase
warrants and similar rights, which are rights to purchase securities at
specific prices valid for a specific period of time. Their prices do not
necessarily move in parallel with the prices of the underlying securities,
and warrantholders receive no dividends and have no voting rights or rights
with respect to the assets of an issuer. Warrants cease to have value if not
exercised prior to the expiration date.
FOREIGN SECURITIES
Each Portfolio, except the Alliance Intermediate Government Securities and
Alliance Equity Index Portfolios, may invest in foreign securities. Each of
the Alliance Common Stock, Alliance Balanced, Alliance Quality Bond, Alliance
Aggressive Stock and Alliance Small Cap Growth Portfolios has the discretion
to invest a portion of its assets in foreign securities. Generally, this
amount will not exceed 20% of each Portfolio's total assets. The Alliance
Money Market Portfolio may invest up to 20% of its assets in foreign money
market instruments denominated in U.S. dollars. The Alliance Conservative
Investors Portfolio may invest up to 15% of its assets in foreign securities,
the Alliance Growth Investors Portfolio may invest up to 30% of its assets in
foreign securities, and the Alliance Growth and Income Portfolio may invest
up to 25% of its assets in foreign securities. The Alliance High Yield
Portfolio may purchase foreign securities, provided the value of issues
denominated in foreign currencies shall not exceed 20% of the Portfolio's
total assets and the value of issues denominated in U.S. dollars shall not
exceed 25% of the Portfolio's total assets.
No percentage limitation applies to investments in foreign securities by the
Alliance Global Portfolio or the Alliance International Portfolio.
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Foreign securities involve currency risks. The value of a foreign security
denominated in a foreign currency changes with fluctuations in exchange
rates. Fluctuations in exchange rates may also affect the earning power and
asset value of the foreign entity issuing a security, even one denominated in
U.S. dollars. Dividend and interest payments will be repatriated based on the
exchange rate at the time of disbursement, and restrictions on capital flows
may be imposed.
Foreign securities may be subject to foreign government taxes which reduce
their attractiveness. Other risks of investing in such securities include
political or economic instability in the country involved, the difficulty of
predicting international trade patterns and the possibility of imposition of
exchange controls. The prices of such securities may be more volatile than
those of domestic securities. In addition, there may be less publicly
available information about a foreign issuer than about a domestic issuer.
Foreign issuers generally are not subject to uniform accounting, auditing and
financial reporting standards comparable to those applicable to domestic
issuers. There is generally less regulation of stock exchanges, brokers,
banks and listed companies abroad than in the United States, and settlements
may be slower and may be subject to failure. With respect to certain foreign
countries, there is a possibility of expropriation of assets or
nationalization, imposition of withholding taxes on dividend or interest
payments, difficulty in obtaining and enforcing judgments against foreign
entities or diplomatic developments which could affect investment in these
countries. Losses and other expenses may be incurred in converting between
various currencies in connection with purchases and sales of foreign
securities.
For many foreign securities, there are U.S. dollar-denominated American
Depository Receipts (ADRs) which are traded in the United States on exchanges
or over-the-counter, are issued by domestic banks or trust companies and for
which market quotations are readily available. ADRs do not lessen the foreign
exchange risk inherent in investing in the securities of foreign issuers.
However, by investing in ADRs rather than directly in stock of foreign
issuers, the Portfolios will avoid currency risks which might occur during
the settlement period for either purchases or sales. A Portfolio may purchase
foreign securities directly, as well as through ADRs.
MORTGAGE-BACKED SECURITIES
Government National Mortgage Association ("GNMA") certificates are
mortgage-backed securities representing part ownership of a pool of mortgage
loans. These loans, issued by lenders such as mortgage bankers, commercial
banks and savings and loan associations, are either insured by the Federal
Housing Administration or the Farmer's Home Administration or guaranteed by
the Veterans Administration. A "pool" or group of such mortgages is assembled
and after being approved by GNMA, is offered to investors through securities
dealers. Once approved by GNMA, the timely payment of interest and principal
on each mortgage is guaranteed by GNMA and backed by the full faith and
credit of the U.S. Treasury. GNMA certificates differ from bonds in that
principal is paid back monthly by the borrower over the term of the loan
rather than returned in a lump sum at maturity. GNMA certificates are called
"pass-through" securities because both interest and principal payments
(including prepayments) are passed through to the holder of the certificate.
In addition to GNMA certificates, a Portfolio (other than the Alliance Equity
Index Portfolio) may invest in mortgage-backed securities issued by the
Federal National Mortgage Association ("FNMA") and by the Federal Home Loan
Mortgage Corporation ("FHLMC"). FNMA, a federally chartered and
privately-owned corporation, issues mortgage-backed pass-through securities
which are guaranteed as to timely payment of principal and interest by FNMA.
FHLMC, a corporate instrumentality of the United States whose stock is owned
by the Federal Home Loan Banks, issues participation certificates which
represent an interest in mortgages from FHLMC's portfolio. FHLMC guarantees
the timely payment of interest and the ultimate collection of principal.
Securities guaranteed by FNMA and FHLMC are not backed by the full faith and
credit of the United States. If other fixed or variable rate pass-through
mortgage-backed securities issued by the U.S. Government or its agencies or
instrumentalities are developed in the future, the Portfolios reserve the
right to invest in them.
The Portfolios (other than the Alliance Equity Index Portfolio) may also
invest in other types of mortgage-backed securities issued by governmental or
non-governmental entities, such as banks and other mortgage lenders. These
other instruments include collateralized mortgage obligations ("CMOs"),
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mortgage pass-through bonds and mortgage-backed bonds. Non-governmental
securities may offer a higher yield but may also be subject to greater price
fluctuation and risk than governmental securities.
CMOs are obligations fully collateralized directly or indirectly by a pool of
mortgages on which payments of principal and interest are passed through to
the holders of the CMOs on the same schedule as they are received, although
not necessarily on a pro rata basis. In reliance on an SEC interpretation,
investments in certain qualifying CMOs, including CMOs that have elected to
be treated as Real Estate Mortgage Investment Conduits ("REMICs"), are not
subject to the Investment Company Act's limitation on acquiring interests in
other investment companies. In order to be able to rely on the SEC's
interpretation, the CMOs and REMICs must be unmanaged, fixed-asset issuers
that (i) invest primarily in mortgage-backed securities, (ii) do not issue
redeemable securities, (iii) operate under general exemptive orders exempting
them from all provisions of the Investment Company Act, and (iv) are not
registered or regulated under the Investment Company Act as investment
companies. To the extent that a Portfolio selects CMOs or REMICs that do not
meet the above requirements, the Portfolio may not invest more than 10% of
its assets in all such entities and may not acquire more than 3% of the
voting securities of any single such entity. Mortgage-backed bonds are
general obligations of the issuer fully collateralized directly or indirectly
by a pool of mortgages. The mortgages serve as collateral for the issuer's
payment obligations on the mortgage-backed bonds but interest and principal
payments on the mortgages are not passed through directly (as with GNMA, FNMA
and FHLMC pass-through securities) or on a modified basis (as with CMOs).
Accordingly, a change in the rate of prepayments on the pool of mortgages
could change the effective maturity of a CMO but not the effective maturity
of a mortgage-backed bond (although, like many bonds, mortgage-backed bonds
may be callable by the issuer prior to maturity). It is expected that
governmental, government-related, or private entities may create mortgage
loan pools and other mortgage-backed securities offering mortgage
pass-through and mortgage-collateralized investments in addition to those
described above.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers, and other secondary market issuers also create
pass-through pools of conventional residential mortgage loans. In addition,
such issuers may be the originators and/or servicers of the underlying
mortgage loans as well as the guarantors of the mortgage-backed securities.
Pools created by non-governmental issuers generally offer a higher rate of
interest than government and government-related pools because of the absence
of direct or indirect government or agency guarantors. Timely payment of
interest and principal with respect to these pools may be supported by
various forms of insurance or guarantees, including individual loan, title,
pool and hazard insurance, and letters of credit. The insurance, guarantees,
and creditworthiness of the issuers thereof will be considered in determining
whether a mortgage-backed security meets a Portfolio's investment quality
standards. There is no assurance that the private insurers or guarantors can
meet their obligations under the insurance policies or guarantee
arrangements.
Each Portfolio (other than the Alliance Equity Index Portfolio) may buy
mortgage-backed securities without insurance or guarantees, if the investment
adviser determines that the securities meet the Portfolio's quality
standards. Alliance will, consistent with each Portfolio's investment
objectives, policies, and quality standards, consider making investments in
new types of mortgage-backed securities as such securities are developed and
offered to investors.
Prepayment of mortgages underlying mortgage-backed securities may reduce
their current yield and total return. During periods of declining interest
rates, such prepayments can be expected to accelerate and the Portfolios
would be required to reinvest the proceeds at the lower interest rates then
available. In addition, prepayments of mortgages which underlie securities
purchased at a premium could result in capital losses because the premium may
not have been fully amortized at the time the obligation is repaid. The
Portfolios do not intend to invest in these securities unless the Trust's
adviser believes that the potential benefits outweigh the risks.
ASSET-BACKED SECURITIES
The Portfolios (other than the Alliance Equity Index Portfolio) may purchase
asset-backed securities (unrelated to first mortgage loans) that represent
fractional interests in pools of retail installment loans,
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both secured (such as Certificates for Automobile Receivables) and unsecured,
leases or revolving credit receivables, both secured and unsecured (such as
Credit Card Receivable Securities). These assets are generally held by a
special purpose trust and payments of principal and interest or interest only
are passed through or paid through monthly or quarterly to certificate
holders and may be guaranteed up to certain amounts by letters of credit
issued by a financial institution affiliated or unaffiliated with the trustee
or originator of the trust.
Underlying retail installment loans, leases or revolving credit receivables
are subject to prepayment, which may reduce the overall return to certificate
holders. Certificate holders may also experience delays in payment on the
certificates if the full amounts due on underlying retail installment loans,
leases or revolving credit receivables are not realized by the Trust because
of unanticipated legal or administrative costs of enforcing the contracts,
retail installment loans, leases or revolving credit receivables, or because
of depreciation or damage to the collateral (usually automobiles) securing
certain contracts, retail installment loans, leases or revolving credit
receivables, or other factors. If consistent with its investment objective
and policies, a Portfolio may invest in other asset-backed securities that
may be developed in the future.
SECURITIES ISSUED OR GUARANTEED BY THE U.S. GOVERNMENT OR ITS AGENCIES OR
INSTRUMENTALITIES
These securities include issues of the U.S. Treasury, such as bills,
certificates of indebtedness, notes and bonds, and issues of agencies and
instrumentalities established under the authority of an act of Congress.
Such agencies and instrumentalities include, but are not limited to, the
National Bank for Cooperatives, each of the Federal Financing Banks, FHLMC,
the Farm Credit Banks, Federal Land Banks, FNMA, Tennessee Valley Authority,
Farm Credit System, Farm Credit System Financial Assistance Corporation,
Inter-American Development Bank, Maritime Administration, Resolution Trust
Corporation, Federal Agricultural Mortgage Corporation, Small Business
Administration, U.S. Postal Service and Washington Metropolitan Transit
Authority.
Issues of the U.S. Treasury are direct obligations of the U.S. Government and
are backed by the full faith and credit of the United States. Issues of
agencies, such as GNMA, are guaranteed by the U.S. Treasury, and issues of
other agencies and instrumentalities, such as FNMA, are supported by the
issuing agency's or instrumentality's right to borrow from the U.S. Treasury,
at the discretion of the U.S. Treasury, or are supported by the issuing
agency's or instrumentality's own credit.
CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES AND BANK TIME DEPOSITS
Certificates of deposit are receipts issued by a bank in exchange for the
deposit of funds. The issuer agrees to pay the amount deposited plus interest
to the bearer of the receipt on the date specified on the certificate. The
certificate usually can be traded in the secondary market prior to maturity.
Bankers' acceptances typically arise from short-term credit arrangements
designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for
specific merchandise. The draft is then "accepted" by a bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturities for acceptances can be
as long as 270 days, most maturities are six months or less.
Bank time deposits are funds kept on deposit with a bank for a stated period
of time in an interest bearing account. At present, bank time deposits
maturing in more than seven days are not considered by management of the
Trust to be readily marketable and therefore are subject to the 15% limit on
illiquid securities.
COMMERCIAL PAPER, MASTER DEMAND NOTES AND FLOATING RATE NOTES
Commercial paper consists of short-term (usually from 1 to 270 days)
unsecured promissory notes issued by corporations in order to finance their
current operations.
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Variable amount master demand notes are obligations that permit the
investment of fluctuating amounts by a Portfolio at varying rates of interest
pursuant to direct arrangements between the Portfolio, as lender, and the
borrower. These notes permit daily changes in the amounts borrowed. The
Portfolio has the right to increase the amount under the note at any time up
to the full amount provided by the note agreement, or to decrease the amount,
and the borrower may repay up to the full amount of the note without penalty.
Because variable amount master notes are direct lending arrangements between
the lender and borrower, and not generally backed by bank letters of credit,
it is not generally contemplated that such instruments will be traded, and
there is no secondary market for these notes, although they are redeemable
(and thus immediately repayable by the borrower) at face value, plus accrued
interest, at any time. Therefore, the Portfolio's right to redeem depends on
the ability of the borrower to pay principal and interest on demand. Variable
amount master demand notes are valued at their face amount (par) because of
their one-day demand feature. In connection with master demand note
arrangements, the Portfolio considers earning power, cash flow, and other
liquidity ratios of the issuer. Master demand notes, as such, are not
typically rated by credit rating agencies.
Floating or variable rate notes are generally medium-to long-term debt
securities, but may include short-term debt securities, issued by entities
such as commercial banks, corporations or sovereign borrowers. They are
interest bearing securities on which the coupon is adjusted periodically to
reflect money market conditions. The period at the end of which the
adjustment occurs is often called the interest reset period. The Portfolios
will buy only notes with an interest reset period of six months or less.
There is an active secondary market for floating or variable rate notes.
EURODOLLAR SECURITIES
Negotiable certificates of deposit and time deposits of foreign branches of
U.S. or foreign banks payable in U.S. dollars are known as Eurodollar
deposits. Eurodollar securities also include bonds underwritten by an
international syndicate and sold "at issue" to non-U.S. investors. Such
securities are not registered with the SEC or issued domestically and are
primarily traded in foreign markets. Certain risks applicable to foreign
securities apply to Eurodollar instruments. Investment risks from these
securities include future political and economic developments, possible
foreign withholding taxes on interest, possible seizure of foreign deposits,
or the possible establishment of exchange controls affecting payment on these
securities. See "Foreign Securities," above, for additional information about
foreign securities. In addition to those risks, foreign branches of U.S. and
foreign banks are subject to extensive government regulation which may limit
both the amount and type of loans and interest rates. In addition, the
banking industry's profitability is closely linked to prevailing money market
conditions for financing lending operations. Both general economic conditions
and credit risks play an important part in the operations of the industry.
U.S. banks are required to maintain reserves, are limited in how much they
can loan a single borrower and are subject to other regulations to promote
financial soundness. Not all of these laws and regulations apply to foreign
branches of U.S. and foreign banks. In addition, foreign countries have
accounting and reporting principles that differ from those in the United
States.
HIGH YIELD DEBT SECURITIES
The Alliance High Yield Portfolio, as described in the Prospectus, intends to
invest primarily in debt securities offering high current income. The
Alliance Growth Investors Portfolio may invest up to 15% of its total assets
in such high yield debt securities, and the Alliance Growth and Income
Portfolio may invest up to 30% of its total assets in high yield convertible
securities. High yield securities may be medium and lower quality securities
rated, for example, BB or B by one of the nationally recognized statistical
rating organizations ("NRSROs") or may be unrated but of similar investment
quality as determined by Alliance. These securities are also known as "junk
bonds." The market values of such high yield securities tend to reflect
individual corporate developments to a greater extent than higher rated
securities, which react primarily to fluctuations in the general level of
interest rates. Such medium and lower rated securities also tend to be more
sensitive to real or perceived adverse economic conditions than higher rated
securities.
Companies that issue high yield securities are often highly leveraged and may
not have available to them more traditional methods of financing. Therefore,
the risks associated with acquiring the securities of such
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issuers generally are greater than is the case with higher rated securities.
For example, during an economic downturn or a sustained period of rising
interest rates, highly leveraged issuers of high yield securities may
experience "financial stress" and may not have sufficient revenues to meet
their payment obligations. Such an issuer's ability to service its
obligations may also be adversely affected by specific corporate
developments, the issuer's inability to meet specific projected business
forecasts, or the unavailability of additional financing. Risk of loss due to
default by the issuer is also significantly greater for the holders of high
yield securities because such securities are generally unsecured and are
generally subordinated to the debts of other creditors of the issuer.
The Alliance High Yield, Alliance Growth and Income and Alliance Growth
Investors Portfolios may have difficulty disposing of certain high yield
securities, particularly those perceived to have a high credit risk, because
there may be a thin trading market for such securities. Because not all
dealers maintain markets in all high yield securities, there is no
established retail secondary market for certain of these securities, and the
Portfolios anticipate that such securities could be sold only to a limited
number of dealers or institutional investors. Moreover, to the extent a
secondary trading market for high yield securities exists, it may be less
liquid than the secondary market for higher rated securities. The lack of a
highly liquid secondary market for certain high yield securities may have an
adverse impact on the market price for such securities and each Portfolio's
ability to dispose of particular issues when necessary to meet the
Portfolio's liquidity needs or in response to a specific economic event such
as a deterioration in the creditworthiness of the issuer. Adverse publicity
and investor perceptions, whether or not based on fundamental analysis, may
decrease the values and liquidity of high yield securities, especially in a
thinly traded market. The lack of a liquid secondary market for certain
securities may also make it more difficult for the Portfolios to obtain
accurate market quotations for purposes of valuing certain of its high yield
portfolio securities. Market quotations are generally available on many high
yield issues only from a limited number of dealers and may not necessarily
represent firm bids of such dealers or prices for actual sales.
In addition, the market for high yield securities, at its current size, has
not weathered a major economic recession, and one cannot be certain what
effect such a recession might have on such securities. It is possible that a
recession could severely disrupt the market for such medium and lower quality
securities and may have an adverse impact on the value of such securities. In
addition, it is possible that an economic downturn could adversely affect the
ability of the issuers of such securities to repay principal and pay interest
on such securities.
From time to time, proposals have been discussed regarding new legislation
designed to limit the use of certain high yield securities by issuers in
connection with leveraged buy-outs, mergers and acquisitions, or to limit the
deductibility of interest payments on such securities. Such proposals if
enacted into law could: (i) reduce the market for such securities generally;
(ii) negatively affect the financial condition of issuers of high yield
securities by removing or reducing a source of future financing; and (iii)
negatively affect the value of specific high yield securities and the high
yield market in general.
Factors adversely impacting the market value of high yield securities may
adversely impact each Portfolio's net asset value. In addition, each
Portfolio may incur additional expenses to the extent it is required to seek
recovery upon a default in the payment of principal or interest on its
portfolio securities. The Portfolios will not rely primarily on ratings of
NRSROs, but rather will rely on judgment, analysis and experience in
evaluating the creditworthiness of an issuer. In evaluating such securities,
Alliance will take into consideration, among other things, the issuer's
financial resources and quality of management, its sensitivity to economic
conditions and trends, its operating history and regulatory matters.
TRANSACTIONS IN OPTIONS, FUTURES AND FORWARD CONTRACTS
To the extent provided below, the Portfolios may enter into transactions in
options, futures and forward contracts on a variety of instruments and
indexes, in order to protect against declines in the value of portfolio
securities and increases in the cost of securities to be acquired and, in the
case of options written on securities or indexes of securities, to increase a
Portfolio's return. All the Portfolios, except the Alliance Money Market
Portfolio, are authorized to engage in futures transactions. In general, the
Portfolios will limit their use of futures contracts and options on futures
contracts so that either (i) the
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contracts or options thereon are for "bona fide hedging" purposes as defined
under regulations of the Commodity Futures Trading Commission ("CFTC") or (2)
if for other purposes, no more than 5% of the liquidation value of each
Portfolio's total assets will be used for initial margin or option premiums
required to establish non-hedging positions. These instruments will be used
for hedging purposes and not for speculation or to leverage the Portfolios.
OPTIONS ON SECURITIES
Writing Call Options. Each Portfolio, other than the Alliance Money Market
and Alliance Equity Index Portfolios, may write (sell) covered call options
on its portfolio securities in an attempt to enhance investment performance.
A call option is a contract which gives the purchaser of the option (in
return for a premium paid) the right to buy, and the writer of the option (in
return for a premium received) the obligation to sell, the underlying
security at the exercise price at any time prior to the expiration of the
option, regardless of the market price of the security during the option
period. A covered call option is, for example, a call option written on a
security that is owned by the writer (or on a security convertible into such
a security without additional consideration) throughout the option period.
A Portfolio will write covered call options both to reduce the risks
associated with certain of its investments and to increase total investment
return through the receipt of premiums. In return for the premium income, the
Portfolio will give up the opportunity to profit from an increase in the
market price of the underlying security above the exercise price so long as
its obligations under the contract continue, except insofar as the premium
represents a profit. Moreover, in writing the call option, the Portfolio will
retain the risk of loss should the price of the security decline. The premium
is intended to offset that loss in whole or in part. Unlike the situation in
which the Portfolio owns securities not subject to a call option, the
Portfolio, in writing call options, must assume that the call may be
exercised at any time prior to the expiration of its obligation as a writer,
and that in such circumstances the net proceeds realized from the sale of the
underlying securities pursuant to the call may be substantially below the
prevailing market price.
A Portfolio may terminate its obligation under an option it has written by
buying an identical option. Such a transaction is called a "closing purchase
transaction." The Portfolio will realize a gain or loss from a closing
purchase transaction if the amount paid to purchase a call option is less or
more than the amount received from the sale of the corresponding call option.
When an underlying security is sold from the Portfolio's securities
portfolio, the Portfolio will effect a closing purchase transaction so as to
close out any existing covered call option on that underlying security. A
closing purchase transaction for exchange-traded options may be made only on
a national securities exchange (exchange). There is no assurance that a
liquid secondary market on an exchange will exist for any particular option,
or at any particular time, and for some options, such as over-the-counter
options, no secondary market on an exchange may exist. If the Portfolio is
unable to effect a closing purchase transaction, the Portfolio will not sell
the underlying security until the option expires or the Portfolio delivers
the underlying security upon exercise.
Writing Put Options. The writer of a put option becomes obligated to purchase
the underlying security at a specified price during the option period if the
buyer elects to exercise the option before its expiration date. A Portfolio
which writes a put option will be required to "cover" it, for example, by
depositing and maintaining in a segregated account with its custodian liquid
securities having a value equal to or greater than the exercise price of the
option.
The Portfolios, except the Alliance Money Market and Alliance Equity Index
Portfolios, may write put options either to earn additional income in the
form of option premiums (anticipating that the price of the underlying
security will remain stable or rise during the option period and the option
will therefore not be exercised) or to acquire the underlying security at a
net cost below the current value (e.g., the option is exercised because of a
decline in the price of the underlying security, but the amount paid by the
Portfolio, offset by the option premium, is less than the current price). The
risk of either strategy is that the price of the underlying security may
decline by an amount greater than the premium received. The premium which a
Portfolio receives from writing a put option will reflect, among other
things, the current market price of the underlying security, the relationship
of the exercise price to that market price, the historical price volatility
of the underlying security, the option period, supply and demand and interest
rates.
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A Portfolio may effect a closing purchase transaction to realize a profit on
an outstanding put option or to prevent an outstanding put option from being
exercised. If a Portfolio is able to enter into a closing purchase
transaction, the Portfolio will realize a profit (or loss) from that
transaction if the cost of the transaction is less (or more) than the premium
received from the writing of the option. After writing a put option, a
Portfolio may incur a loss equal to the difference between the exercise price
of the option and the sum of the market value of the underlying security plus
the premiums received from the sale of the option.
Purchasing Options. The Portfolios, except the Alliance Money Market and
Alliance Equity Index Portfolios, may purchase put options and call options.
The Portfolios may purchase put options on securities to protect their
holdings against a substantial decline in market value. The Portfolio will
continue to receive interest or dividend income on the security. The
Portfolios may also purchase call options on securities to protect against
substantial increases in prices of securities the Portfolios intend to
purchase pending their ability to invest in an orderly manner in those
securities. The Portfolios may sell put or call options they have previously
purchased, which could result in a net gain or loss depending on whether the
amount received on the sale is more or less than the premium and other
transaction costs paid on the put or call option which was purchased.
SECURITIES INDEX OPTIONS
The Portfolios, except the Alliance Money Market and Alliance Equity Index
Portfolios, may write covered put and call options and purchase call and put
options on securities indexes for the purpose of hedging against the risk of
unfavorable price movements adversely affecting the value of a Portfolio's
securities or securities it intends to purchase. Each Portfolio writes only
"covered" options. A call option on a securities index is considered covered,
for example, if, so long as the Portfolio is obligated as the writer of the
call, it holds securities the price changes of which are, in the opinion of
Alliance, expected to replicate substantially the movement of the index or
indexes upon which the options written by the Portfolio are based. A put on a
securities index written by a Portfolio will be considered covered if, so
long as it is obligated as the writer of the put, the Portfolio segregates
with its custodian liquid assets having a value equal to or greater than the
exercise price of the option. Unlike a stock option, which gives the holder
the right to purchase or sell a specified stock at a specified price, an
option on a securities index gives the holder the right to receive a cash
"exercise settlement amount" equal to (i) the difference between the exercise
price of the option and the value of the underlying stock index on the
exercise date, multiplied by (ii) a fixed "index multiplier."
A securities index fluctuates with changes in the market values of the
securities included in the index. For example, some securities index options
are based on a broad market index such as the S&P 500 or the New York Stock
Exchange ("NYSE") Composite Index, or a narrower market index such as the S&P
100. Indexes may also be based on an industry or market segment such as the
AMEX Oil and Gas Index or the Computer and Business Equipment Index. Options
on stock indexes are currently traded on the following exchanges among
others: The Chicago Board Options Exchange; NYSE; and American Stock
Exchange.
The effectiveness of hedging through the purchase of securities index options
will depend upon the extent to which price movements in the portion of the
securities portfolio being hedged correlate with price movements in the
selected securities index. Perfect correlation is not possible because the
securities held or to be acquired by a Portfolio will not exactly match the
composition of the securities indexes on which options are written. The
principal risk of purchasing securities index options is that the premium and
transaction costs paid by a Portfolio in purchasing an option will be lost if
the changes (increase in the case of a call, decrease in the case of a put)
in the level of the index do not exceed the cost of the option.
The principal risk of writing securities index options is that price changes
in the hedged securities will not correlate with price changes in the
options, and thus the Portfolio could bear a loss on the options that would
be only partially offset (or not offset at all) by the increased value or
reduced cost of the hedged securities. Moreover, in the event the Portfolio
were unable to close an option it had written, it might be unable to sell the
securities used as cover.
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OVER-THE-COUNTER OPTIONS
Options traded in the over-the-counter market may not be as actively traded
as those traded on an exchange. Accordingly, it may be more difficult to
value such options. In addition, it may be difficult to enter into closing
transactions with respect to options traded over-the-counter. The Portfolios
will engage in such transactions only with firms of sufficient credit, in the
opinion of Alliance, so as to minimize these risks. Such options and the
securities used as "cover" for such options may be considered illiquid
securities.
The Portfolios may enter into contracts (or amend existing contracts) with
primary dealer(s) with whom they write over-the-counter options. The
contracts will provide that each Portfolio has the absolute right to
repurchase an option it writes at any time at a repurchase price which
represents the fair market value, as determined in good faith through
negotiation between the parties, but which in no event will exceed a price
determined pursuant to a formula contained in the contract. Although the
specific details of the formula may vary between contracts with different
primary dealers, the formula will generally be based on a multiple of the
premium received by each Portfolio for writing the option, plus the amount,
if any, of the option's intrinsic value (i.e., the amount the option is
"in-the-money"). The formula will also include a factor to account for the
difference between the price of the security and the strike price of the
option if the option is written "out-of-the-money." Although the Portfolios
have established standards of creditworthiness for these primary dealers, the
Portfolios may still be subject to the risk that firms participating in such
transactions will fail to meet their obligations. With respect to agreements
concerning the over-the-counter options a Portfolio has written, the
Portfolio will treat as illiquid only securities equal in amount to the
formula price described above less the amount by which the option is
"in-the-money," i.e., the amount by which the price of the option exceeds the
exercise price.
FUTURES TRANSACTIONS
All the Portfolios, except the Alliance Money Market Portfolio, may trade in
certain futures contracts. A futures contract is a bilateral agreement to buy
or sell a security (or deliver a cash settlement price, in the case of a
contract relating to an index or otherwise not calling for physical delivery
at the end of trading in the contracts) for a set price in the future. No
purchase price is paid or received when the contract is entered into.
Instead, a good faith deposit known as initial margin is made with the broker
and subsequent daily payments known as variation margin are made to and by
the broker reflecting changes in the value of the security or level of the
index. Futures contracts are designated by boards of trade which have been
designated "contracts markets" by the CFTC.
Purchases or sales of securities index futures contracts may be used to
attempt to protect a Portfolio's current or intended investments from broad
fluctuations in securities prices, and interest rate and foreign currency
futures contracts may be purchased or sold to attempt to hedge against the
effects of interest or exchange rate changes on a Portfolio's current or
intended investments in fixed income or foreign securities. All the
Portfolios, except the Alliance Money Market, Alliance Equity Index and
Alliance Intermediate Government Securities Portfolios, may trade in foreign
currency futures contracts. In the event that an anticipated decrease in the
value of portfolio securities occurs as a result of a general stock market
decline, a general increase in interest rates or a decline in the dollar
value of foreign currencies in which portfolio securities are denominated,
the adverse effects of such changes may be offset, in whole or in part, by
gains on the sale of futures contracts. In addition, the increased cost of
portfolio securities to be acquired, caused by a general rise in the dollar
value of foreign currencies or by a rise in stock prices or a decline in
interest rates, may be offset, in whole or in part, by gains on futures
contracts purchased by a Portfolio. In order to achieve desired asset mix
parameters, the Alliance Conservative Investors and Alliance Growth Investors
Portfolios may use futures contracts and related options transactions to
establish a position in an asset class as a temporary substitute for
purchasing individual securities, which may be subsequently purchased in
orderly fashion. Similarly, these transactions may enable the Alliance
Conservative Investors and Alliance Growth Investors Portfolios to reduce a
position in an asset class as a temporary substitute for selling individual
securities, in order to effect an orderly sale. In the case of the Alliance
Equity Index Portfolio, futures contracts and related options on the S&P 500
Index may be purchased in order to reduce brokerage costs, maintain liquidity
to meet shareholder redemptions or
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minimize tracking error. A Portfolio will incur brokerage fees when it
purchases and sells futures contracts, and it will be required to maintain
margin deposits. (See "Risks of Transactions in Options, Futures Contracts
and Forward Currency Contracts," below.) Positions taken in the futures
markets are not normally held until delivery or cash settlement is required,
but are instead liquidated through offsetting transactions which may result
in a gain or a loss. While futures positions taken by a Portfolio will
usually be liquidated in this manner, the Portfolio may instead make or take
delivery of underlying securities whenever it appears economically
advantageous to the Portfolio to do so. A clearing organization associated
with the exchange on which futures are traded assumes responsibility for
closing out transactions and guarantees that, as between the clearing members
of an exchange, the sale and purchase obligations will be performed with
regard to all positions that remain open at the termination of the contract.
SECURITIES INDEX FUTURES CONTRACTS
A securities index futures contract does not require the physical delivery of
securities, but merely provides for profits and losses resulting from changes
in the market value of the contract to be credited or debited at the close of
each trading day to the respective accounts of the parties to the contract.
On the contract's expiration date a final cash settlement occurs and the
futures positions are simply closed out. Changes in the market value of a
particular index futures contract reflect changes in the specified index of
securities on which the futures contract is based.
By establishing an appropriate "short" position in index futures, a Portfolio
may seek to protect the value of its portfolio against an overall decline in
the market for such securities. Alternatively, in anticipation of a generally
rising market, a Portfolio can seek to avoid losing the benefit of apparently
low current prices by establishing a "long" position in securities index
futures and later liquidating that position as particular securities are
acquired. To the extent that these hedging strategies are successful, the
Portfolio will be affected to a lesser degree by adverse overall market price
movements than would otherwise be the case.
OPTIONS ON FUTURES CONTRACTS
Each of the Portfolios, other than the Alliance Money Market Portfolio, may
also purchase and write exchange-traded call and put options on futures
contracts it is authorized to enter into. These options are traded on
exchanges that are licensed and regulated by the CFTC for the purpose of
options trading. A call option on a futures contract gives the purchaser the
right, in return for the premium paid, to purchase a futures contract (assume
a "long" position) at a specified exercise price at any time before the
option expires. A put option gives the purchaser the right, in return for the
premium paid, to sell a futures contract (assume a "short" position), for a
specified exercise price, at any time before the option expires. The
Portfolios will write only options on futures contracts which are "covered."
A Portfolio will be considered "covered" with respect to a put option it has
written if, so long as it is obligated as a writer of the put, the Portfolio
segregates with its custodian liquid assets at all times equal to or greater
than the aggregate exercise price of the puts it has written (less any
related margin deposited with the futures broker). A Portfolio will be
considered "covered" with respect to a call option it has written on a debt
security future if, so long as it is obligated as a writer of the call, the
Portfolio owns the security deliverable under the futures contract. A
Portfolio will be considered "covered" with respect to a call it has written
on a securities index future if so long as the Portfolio is obligated as the
writer of the call, the Portfolio owns a portfolio of securities the price
changes of which are, in the opinion of Alliance, expected to replicate
substantially the movement of the index upon which the futures contract is
based.
Upon the exercise of a call, the writer of the option is obligated to sell
the futures contract (to deliver a "long" position to the option holder) at
the option exercise price, which will presumably be lower than the current
market price of the contract in the futures market. Upon exercise of a put,
the writer of the option is obligated to purchase the futures contract
(deliver a "short" position to the option holder) at the option exercise
price which will presumably be higher than the current market price of the
contract in the futures market. When the holder of an option exercises it and
assumes a long futures position, in the case of a call, or a short futures
position, in the case of a put, its gain will be credited to its futures
margin
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account, while the loss suffered by the writer of the option will be debited
to its futures margin account and must be immediately paid by the writer.
However, as with the trading of futures, most participants in the options
markets do not seek to realize their gains or losses by exercise of their
option rights. Instead, the holder of an option will usually realize a gain
or loss by buying or selling an offsetting option at a market price that will
reflect an increase or a decrease from the premium originally paid.
Options on futures contracts can be used by a Portfolio to hedge
substantially the same risks as might be addressed by the direct purchase or
sale of the underlying futures contracts. If the Portfolio purchases an
option on a futures contract, it may obtain benefits similar to those that
would result if it held the futures position itself. Purchases of options on
futures contracts may present less risk in hedging than the purchase and sale
of the underlying futures contracts since the potential loss is limited to
the amount of the premium plus related transaction costs.
The purchase of put options on futures contracts is a means of hedging a
portfolio of securities against a general decline in market prices. The
purchase of a call option on a futures contract represents a means of hedging
against a market advance when a Portfolio is not fully invested.
If a Portfolio writes options on futures contracts, the Portfolio will
receive a premium but will assume a risk of adverse movement in the price of
the underlying futures contract comparable to that involved in holding a
futures position. If the option is not exercised, the Portfolio will realize
a gain in the amount of the premium, which may partially offset unfavorable
changes in the value of securities held in or to be acquired for the
Portfolio. If the option is exercised, the Portfolio will incur a loss in the
option transaction, which will be reduced by the amount of the premium it has
received, but which will offset any favorable changes in the value of its
portfolio securities or, in the case of a put, lower prices of securities it
intends to acquire.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the underlying securities. If the futures
price at expiration is below the exercise price, the Portfolio will retain
the full amount of the option premium, which provides a partial hedge against
any decline that may have occurred in the value of the Portfolio's holdings
of securities. The writing of a put option on a futures contract is analogous
to the purchase of a futures contract in that it hedges against an increase
in the price of securities the Portfolio intends to acquire. However, the
hedge is limited to the amount of premium received for writing the put.
While the holder or writer of an option on a futures contract may normally
terminate its position by selling or purchasing an offsetting option of the
same series, a Portfolio's ability to establish and close out options
positions at fairly established prices will be subject to the existence of a
liquid market. The Portfolios will not purchase or write options on futures
contracts unless, in Alliance's opinion, the market for such options has
sufficient liquidity that the risks associated with such options transactions
are not at unacceptable levels.
LIMITATIONS ON PURCHASE AND SALE OF FUTURES CONTRACTS AND OPTIONS ON FUTURES
CONTRACTS
The Portfolios will not engage in transactions in futures contracts and
related options for speculation. All the Portfolios, except the Alliance
Money Market Portfolio, may enter into futures contracts and buy and sell
related options as described above. The Portfolios will not purchase or sell
futures contracts or related options unless either (1) the futures contracts
or options thereon are purchased for "bona fide hedging" purposes (as that
term is defined under the CFTC regulations) or (2) if purchased for other
purposes, the sum of the amounts of initial margin deposits on a Portfolio's
existing futures and premiums required to establish non-hedging positions
would not exceed 5% of the liquidation value of the Portfolio's total assets.
In instances involving the purchase of futures contracts or the writing of
put options thereon by a Portfolio, an amount of liquid assets equal to the
cost of such futures contracts or options written (less any related margin
deposits) will be deposited in a segregated account with its custodian,
thereby insuring that the use of such futures contracts and options is
unleveraged. In instances involving the sale of futures contracts or the
writing of call options thereon by a Portfolio, the securities underlying
such futures
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contracts or options will at all times be maintained by the Portfolio or, in
the case of index futures and related options, the Portfolio will own
securities the price changes of which are, in the opinion of Alliance,
expected to replicate substantially the movement of the index upon which the
futures contract or option is based.
Positions in futures contracts may be closed out only on an exchange or a
board of trade which provides the market for such futures. Although the
Portfolios intend to purchase or sell futures only on exchanges or boards of
trade where there appears to be an active market, there is no guarantee that
such will exist for any particular contract or at any particular time. If
there is not a liquid market at a particular time, it may not be possible to
close a futures position at such time, and, in the event of adverse price
movements, a Portfolio would continue to be required to make daily cash
payments of maintenance margin. However, in the event futures positions are
used to hedge portfolio securities, the securities will not be sold until the
futures positions can be liquidated. In such circumstances, an increase in
the price of securities, if any, may partially or completely offset losses on
the futures contracts.
FOREIGN CURRENCY OPTIONS, FOREIGN CURRENCY FUTURES CONTRACTS AND OPTIONS ON
FUTURES
The Portfolios, other than the Alliance Money Market, Alliance Intermediate
Government Securities and Alliance Equity Index Portfolios, may purchase or
sell exchange-traded or over-the-counter foreign currency options, foreign
currency futures contracts and related options on foreign currency futures
contracts as a hedge against possible variations in foreign exchange rates.
The Portfolios will write options on foreign currencies or on foreign
currency futures contracts only if they are "covered." A put option on a
foreign currency or on a foreign currency futures contract written by a
Portfolio will be considered "covered" if, so long as the Portfolio is
obligated as the writer of the put, it segregates with the Portfolio's
custodian liquid assets equal at all times to the aggregate exercise price of
the put. A call option on a foreign currency or on a foreign currency futures
contract written by the Portfolio will be considered "covered" only if the
Portfolio owns short term debt securities with a value equal to the face
amount of the option contract and denominated in the currency upon which the
call is written. Option transactions may be effected to hedge the currency
risk on non-U.S. dollar-denominated securities owned by a Portfolio, sold by
a Portfolio but not yet delivered, or anticipated to be purchased by a
Portfolio. As an illustration, a Portfolio may use such techniques to hedge
the stated value in U.S. dollars of an investment in a Japanese
yen-denominated security. In these circumstances, a Portfolio may purchase a
foreign currency put option enabling it to sell a specified amount of yen for
dollars at a specified price by a future date. To the extent the hedge is
successful, a loss in the value of the dollar relative to the yen will tend
to be offset by an increase in the value of the put option. As in the case of
other types of options, however, the writing of an option on foreign currency
will constitute only a partial hedge, up to the amount of the premium
received, and the Portfolio could be required to purchase or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses.
Although the purchase of an option on foreign currency may constitute an
effective hedge against fluctuations in exchange rates in the event of
exchange rate movements adverse to the Portfolio's position it may forfeit
the entire amount of the premium plus related transaction costs.
Certain differences exist between foreign currency hedging instruments.
Foreign currency options provide the holder the right to buy or to sell a
currency at a fixed price on or before a future date. Listed options are
third-party contracts (performance is guaranteed by an exchange or clearing
corporation) which are issued by a clearing corporation, traded on an
exchange and have standardized prices and expiration dates. Over-the-counter
options are two-party contracts and have negotiated prices and expiration
dates. See "Over-the-Counter Options," above. A futures contract on a foreign
currency is an agreement between two parties to buy and sell a specified
amount of the currency for a set price on a future date. Futures contracts
and listed options on futures contracts are traded on boards of trade or
futures exchanges. Options traded in the over-the-counter market may not be
as actively traded as those on an exchange, thus it may be more difficult to
value such options. In addition, it may be difficult to enter into closing
transactions with respect to options traded over-the-counter.
A Portfolio will not speculate in foreign currency options, futures or
related options. Accordingly, a Portfolio will not hedge a currency
substantially in excess of the market value of the securities denominated in
that currency which it owns or the expected acquisition price of securities
which it anticipates purchasing.
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Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. These hedging transactions also preclude
the opportunity for gain if the value of the hedged currency should rise.
Whether a currency hedge benefits a Portfolio will depend on Alliance's
ability to predict future foreign currency exchange rates.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
When a Portfolio invests in foreign securities, the securities are usually
denominated in a foreign currency, and the Portfolio may temporarily hold
foreign currency in connection with such investments. As a result, the value
of the Portfolio's assets will be subject to fluctuations based on changes in
the relative value of the foreign currency and the U.S. dollar. To control
the effects of this exchange risk, all of the Portfolios, except the Alliance
Money Market, Alliance Equity Index and Alliance Intermediate Government
Securities Portfolios, may enter into forward foreign currency exchange
contracts ("forward currency contracts"), which are agreements to purchase or
sell foreign currencies at a specified future date and price. Forward
currency contracts are usually used to fix the U.S. dollar value of
securities a Portfolio has agreed to buy or sell ("transaction hedging"). The
Portfolios may also use forward currency contracts to hedge the U.S. dollar
value of securities it already owns ("position hedging"). The Portfolios will
not speculate in forward currency contracts.
In general, forward currency contracts are not regulated by any governmental
authority guaranteed by a third party or traded on an exchange. Accordingly,
each party to a forward currency contract is dependent upon the
creditworthiness and good faith of the other. The Portfolios will only enter
forward currency contracts with counterparties that, in the opinion of
Alliance, do not present undue credit risk.
RISKS OF TRANSACTIONS IN OPTIONS, FUTURES CONTRACTS AND FORWARD CURRENCY
CONTRACTS
Although the Portfolios will enter into transactions in futures contracts,
options on securities and securities indexes, options on futures contracts,
forward currency contracts and certain currency options as described above
for hedging purposes, and transactions in options on securities and
securities indexes to generate option premium income, their use involves
certain risks. A lack of correlation between the index or instrument
underlying an option or futures contract and the assets or liabilities being
hedged, or unexpected adverse price movements, could render a Portfolio's
hedging strategy unsuccessful and could result in losses. Moreover, when an
option has been written, in the event of a decline, the underlying position
is only hedged to the extent of the amount of premium received.
Over-the-counter transactions in options on foreign currencies and options on
securities and securities indexes also involve a lack of an organized
exchange trading environment, making them less liquid and making it more
difficult to value than if they were exchange traded.
In addition, there can be no assurance that a liquid secondary market will
exist for any futures contract or option purchased or sold. Accordingly a
Portfolio may be required to maintain a position until exercise or
expiration, which could result in losses. If in the event of an adverse
movement the Portfolio could not close a futures position, it would be
required to continue to make daily cash payments of variation margin. If a
Portfolio could not close an option position, an option holder would be able
to realize profits or limit losses only by exercising the option, and an
option writer would remain obligated until exercise or expiration. Finally,
if a broker or clearing member of an options or futures clearing corporation
were to become insolvent, the Portfolios could experience delays and might
not be able to trade or exercise options or futures purchased through that
broker. In addition, the Portfolios could have some or all of their positions
closed out without their consent. If substantial and widespread, these
insolvencies could ultimately impair the ability of the clearing corporations
themselves. While the principal purpose of hedging is to limit or offset the
effects of adverse market movements, the attendant expense may cause the
Portfolios' returns to be less than if hedging had not taken place. The
overall effectiveness of hedging therefore depends on Alliance's accuracy in
predicting future changes in interest rate levels and/or securities price
movements, as well as on the expense of hedging.
20
<PAGE>
MANAGEMENT OF THE TRUST
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.
As of March 31, 1999, the Trustees and officers of the Trust owned Contracts
entitling them to provide voting instructions in the aggregate with respect
to less than one percent of the Trust's shares of beneficial interest.
THE TRUSTEES
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE PRINCIPAL OCCUPATION DURING LAST FIVE YEARS
- ------------------------------------ ----------------------------------------------------------------
<S> <C>
*John D. Carifa (54)................ President, Chief Operating Officer and a Director of Alliance
Alliance Capital Management L.P. Capital Management Corporation ("ACMC"); Chairman and Chief
1345 Avenue of the Americas Executive Officer of Alliance's Mutual Fund Division. Currently
New York, NY 10105 a Director and Trustee of all other registered investment
companies (the "Alliance Mutual Funds") sponsored by Alliance,
and Director of Frontier Trust Company, a subsidiary of
Equitable.
John H. Dobkin (56)................ President of Historic Hudson Valley (historic preservation)
150 White Plains Road since prior to 1994. Previously, he was Director of the National
Tarrytown, New York 10591 Academy of Design.
William H. Foulk, Jr. (66) ........ Investment adviser and independent consultant. Former Senior
Room 100, Manager of Barrett Associates, Inc. (investment adviser), from
2 Greenwich Plaza May 1986 to November 1994.
Greenwich, CT 06830
Brenton W. Harries (71)............ Director of Enhance Reinsurance Co. since December 1986. Mr.
14 Point Road Harries was also President and Chief Executive Officer, Global
Wilton Point, Electronic Markets Company from August 1985 to October 1986.
South Norwalk, CT 06854
Howard E. Hassler (Chairman) (69)... Currently a consultant specializing in retailing, finance and
P.O. Box 967 real estate. Former Chairman and Chief Executive Officer of
New York, NY 10150 Brooks Fashion Stores, Inc. (specialty clothing stores); Former
Chairman, President and Chief Operating Officer of Allied Stores
Corporation (department and specialty stores), 1987; Executive
Vice President and Director, Allied Stores Corporation from June
1984 to June 1987.
21
<PAGE>
NAME, ADDRESS AND AGE PRINCIPAL OCCUPATION DURING LAST FIVE YEARS
- ------------------------------------ ----------------------------------------------------------------
Michael Hegarty (54) ............... President, Chief Operating Officer and Director of The Equitable
The Equitable Life Assurance Society Life Assurance Society of the United States and Vice Chairman,
of the United States Chief Operating Officer and a Director of The Equitable
787 Seventh Avenue Companies since January 1998. Former Vice Chairman of The Chase
New York, NY 10019 Manhattan Corporation and The Chase Manhattan Bank from 1996 to
1998. Senior Executive Vice President of Chemical Bank 1991 to
1996. Mr. Hegarty is also a Director of the New York Cash
Exchange, Consumer Bankers Association and Chairman of the
Federal Reserve's Small Value Payments Committee. He is also a
Director of Ronald McDonald House, HeartShare Inc. and Historic
Hudson Valley, and is Treasurer of The Fifth Avenue Association,
Chairman of the executive Committee of the Community
Preservation Corporation and a Trustee of Iona College.
William L. Mannion (68)............. Retired. Former Group Senior Vice President of Operations of
45 Bonnie Way American Ultramar Limited until December 1986; President and
Allendale, NJ 07401 Chief Executive Officer of Tittston Petroleum, Inc., from
January 1978 to July 1985; Director of the East Jersey Railroad
and the Bayonne Terminal Warehouse from July 1978 to May 1983.
Clifford L. Michel (59)............. Partner of the law firm of Cahill Gordon & Reindel since January
St. Bernard's Road 1972. President, Chief Executive Officer and Director of Wenonah
Gladstone, NJ 07934 Development Company (investment holding company) since 1976.
Director since 1987 and Member of the Human Resources,
Environmental and Safety, and Executive Committees since 1987 of
Placer Dome Inc. (mining). Director, Faber-Castell Corporation
from 1988-1994 (writing instruments). President of Board of
Trustees of St. Mark's School from 1988 to 1993. Chairman of the
Board of Trustees of Morristown Memorial Hospital (and Memorial
Health Foundation) from 1991 to 1996. Director, Vice Chairman
and Treasurer of Atlantic Health Systems, Inc. and Atlantic
Hospital since 1996.
*Peter D. Noris (43)................. Executive Vice President (since May 1995) and Chief Investment
The Equitable Life Assurance Officer of Equitable (since July 1995); Executive Vice
Society of the United States President, The Equitable Companies Incorporated ("Equitable
787 Seventh Avenue Companies")(since May 1995); Director of ACMC, the general
New York, NY 10019 partner of Alliance, since July 1995. Prior thereto, Vice
President of Salomon Brothers Inc., from 1992 to 1995. Principal
of Morgan Stanley & Co. Inc., from 1984 to 1992.
Donald J. Robinson (64)............. Senior Partner of the law firm of Orrick, Herrington & Sutcliffe
666 Fifth Avenue from July 1987 to December 1994; Member of the Executive
New York, NY 10022 Committee of the firm from January to December 1994; Senior
Counsel of the firm since January 1995. Trustee of the Museum of
the City of New York from 1977 to 1995.
</TABLE>
*Trustees Carifa Hegarty and Noris are "interested persons" (as defined in
the Investment Company Act) of the Trust. Mr. Carifa is deemed an "interested
person" of the Trust by virtue of his positions as a
22
<PAGE>
director and officer and director of ACMC and Alliance, respectively. Mr.
Noris is deemed an "interested person" of the Trust by virtue of his
positions as an officer of Equitable and a director of ACMC. Mr. Hegarty is
deemed an "interested person" of the Trust by virtue of his position as an
officer and Director of Equitable.
Trustees Harries and Robinson are trustees (but not "interested persons") of
The Alliance Portfolios, a mutual fund advised by Alliance. Trustee Robinson
is also a director or trustee (but not an "interested person") of 40 other
mutual funds advised by Alliance. Trustee Dobkin is also a director or
trustee (but not "an interested person") of 40 other mutual funds advised by
Alliance. Trustee Foulk is also a director or trustee of 44 other mutual
funds advised by Alliance. Trustee Michel is a director or trustee (but not
an "interested person") of 37 other mutual funds advised by Alliance. Trustee
Hassler is a director (but not an "interested person") of Alliance Real
Estate Investment Fund, Inc, a mutual fund advised by Alliance.
COMMITTEES OF THE BOARD
The Trust has a standing audit committee consisting of Trustees Mannion,
Dobkin, Foulk, Harries, Hassler, Michel and Robinson. The audit committee's
function is to recommend to the Board of Trustees a firm of independent
auditors to conduct the annual audit of the Trust's financial statements;
review with such firm the outline, scope and results of this annual audit;
and review the performance and fees charged by the independent auditors for
professional services. In addition, the committee meets with the independent
auditors and representatives of management to review accounting activities
and areas of financial reporting and control.
The Trust has a nominating committee consisting of Trustees Hassler, Harries
and Robinson. This committee considers individuals for nomination as Trustees
of the Trust.
The Trust has a valuation committee consisting of Trustees Harries, Mannion
and Noris. This committee determines the value of any of the Trust's
securities and assets for which market quotations are not readily available
or for which valuation cannot otherwise be provided.
The Trust has a compensation committee consisting of Trustees Robinson,
Hassler and Mannion. The compensation committee's function is to review the
Trustees' compensation arrangements.
The Trust has a conflicts committee consisting of Trustees Hassler, Michel
and Robinson. The conflicts committee's function is to take any action
necessary to resolve conflicts among shareholders.
23
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
- ------------------------ -------------- ---------------- ---------------- ---------------------
PENSION OR TOTAL
RETIREMENT COMPENSATION
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL FROM FUND AND
COMPENSATION AS PART OF FUND BENEFITS UPON FUND COMPLEX
NAME OF PERSON, POSITION FROM FUND EXPENSES RETIREMENT PAID TO DIRECTORS(1)
- ------------------------ -------------- ---------------- ---------------- ---------------------
<S> <C> <C> <C> <C>
John D. Carifa
Trustee $ -0- $-0- $-0- $ -0-
- ------------------------ -------------- ---------------- ---------------- ------------------
John H. Dobkin(2)
Trustee $ -0- $-0- $-0- $126,500.00
- ------------------------ -------------- ---------------- ---------------- ------------------
Michael Hegarty
Trustee $ -0- $-0- $-0- $ -0-
- ------------------------ -------------- ---------------- ---------------- ------------------
William H. Foulk, Jr.
Trustee $25,850.00 $-0- $-0- $149,145.00
- ------------------------ -------------- ---------------- ---------------- ------------------
Brenton W. Harries
Trustee $65,000.00 $-0- $-0- $102,000.00
- ------------------------ -------------- ---------------- ---------------- ------------------
Howard E. Hassler
Trustee $82,000.00 $-0- $-0- $ 94,500.00
- ------------------------ -------------- ---------------- ---------------- ------------------
Michael Hegarty
Trustee $ -0- $-0- $-0- $ -0-
- ------------------------ -------------- ---------------- ---------------- ------------------
William L. Mannion
Trustee $69,000.00(3) $-0- $-0- $ 69,000.00
- ------------------------ -------------- ---------------- ---------------- ------------------
Clifford L. Michel
Trustee $25,850.00 $-0- $-0- $194,500.00
- ------------------------ -------------- ---------------- ---------------- ------------------
Peter D. Noris
Trustee $ -0- $-0- $-0- $ -0-
- ------------------------ -------------- ---------------- ---------------- ------------------
Donald J. Robinson
Trustee $21,450.00(3) $-0- $-0- $217,358.00
- ------------------------ -------------- ---------------- ---------------- ------------------
</TABLE>
- ------------
(1) As of December 31, 1998 there were 118 investment companies in the
Alliance Fund Complex.
(2) Appointed as Trustee on December 11, 1998.
(3) Completely deferred. The total amounts of deferred compensation
(including interest) payable by the Trust to Messrs. Mannion and
Robinson as of December 31, 1998 were $416,820 and $298,293,
respectively.
COMPENSATION OF TRUSTEES
Each Trustee, other than those who are "interested persons" of the Trust (as
defined in the Investment Company Act), receives from the Trust an annual fee
of $29,000, plus an additional fee of $4,000 per board meeting and $2,000 per
committee meeting attended. The meeting fee paid to the Trustee acting as
chairman of the meeting is increased by 50%. The Chairman of the Board
receives an additional annual retainer of $7,000. Trustees receive $1,000 for
each day spent performing special services requested by the Chairman or the
President of the Trust, and reimbursement for expenses in connection with the
performance of regular and special services.
During the year ended December 31, 1998, the Trust paid total retainer and
meeting fees of $351,250 (including deferrals of $153,450).
A deferred compensation plan for the benefit of the Trustees has been adopted
by the Trust. Under the plan each Trustee may defer payment of all or part of
the fees payable for such Trustee's services. Each Trustee may defer payment
of such fees until his retirement as a Trustee or until the earlier
attainment of a specified age. Fees deferred under the plan, together with
accrued interest thereon, will be disbursed to a participating Trustee in
monthly installments over a five-to twenty-year period elected by such
Trustee.
24
<PAGE>
THE TRUST'S OFFICERS
No officer of the Trust receives any compensation paid by the Trust. Each
officer of the Trust is an employee of Alliance or Equitable. The Trust's
principal executive officers are:
<TABLE>
<CAPTION>
NAME AND AGE POSITION WITH TRUST PRINCIPAL OCCUPATION DURING LAST FIVE YEARS
- ----------------------------- --------------------------------- ----------------------------------------------
<S> <C> <C>
John D. Carifa (54) President and Chief Executive President, Chief Operating Officer and a
Officer Director of ACMC, with which he has been
associated since prior to 1993.
Mark D. Gersten (48) Treasurer and Chief Financial Senior Vice President, Alliance Fund Services,
Officer Inc. ("AFS"), with which he has been
associated since prior to 1992.
Thomas R. Manley (46) Controller and Chief Vice President, ACMC (May 1996 to present);
Accounting Officer Assistant Vice President, ACMC (July 1993 to
May 1996); Assistant Vice President, Equitable
Capital Management Corporation ("ECMC")(March
1991 to July 1993).
Bruce W. Calvert (52) Vice President Vice Chairman and Chief Investment Officer of
ACMC, with which he has been associated since
prior to 1992.
Kathleen A. Corbet (39) Vice President Executive Vice President, ACMC (February 1997
to present); Senior Vice President, ACMC (July
1993 to February 1997); Executive Vice
President, ECMC (June 1992 to July 1993).
Jerome S. Golden (53) Vice President Executive Vice President of Equitable (January
1998 to present); rejoined Equitable in 1994
as President of the Income Management Group;
previously President of Golden Financial
Group, which he founded in 1987.
Nelson R. Jantzen (53) Vice President Senior Vice President, ACMC (July 1993 to
present); Executive Vice President, ECMC (June
1992 to July 1993).
Wayne D. Lyski (57) Vice President Executive Vice President, ACMC, with which he
has been associated since prior to 1992.
Robin K. Murray (42) Vice President Vice President, Equitable (April 1994 to
present); associated with Equitable since
prior to 1992.
Alden M. Stewart (52) Vice President Executive Vice President, ACMC (July 1993 to
present); associated with ECMC since prior to
1992.
25
<PAGE>
NAME AND AGE POSITION WITH TRUST PRINCIPAL OCCUPATION DURING LAST FIVE YEARS
- ----------------------------- --------------------------------- ----------------------------------------------
Edmund P. Bergan, Jr. (48) Secretary Senior Vice President and General Counsel,
Alliance Fund Distributors, Inc. ("AFD"), with
which he has been associated since prior to
1992.
</TABLE>
INVESTMENT ADVISORY AND OTHER SERVICES
GENERAL INFORMATION
Alliance Capital Management L.P., a Delaware limited partnership with
principal offices at 1345 Avenue of the Americas, New York, New York 10105,
has been retained under an investment advisory agreement (the "Investment
Advisory Contract") to provide investment advice and, in general, to conduct
the management and investment program of the Trust under the supervision of
the Trust's Board of Trustees (see "Management of the Fund" in the
Prospectus).
The Adviser is a leading international investment manager supervising client
accounts with assets as of December 31, 1998, totaling more than $268 billion
(of which more than $118 billion represented the assets of investment
companies). The Adviser's clients are primarily major corporate employee
benefit funds, public employee retirement systems, investment companies,
foundations and endowment funds. The 54 registered investment companies
managed by the Adviser, comprising 118 separate investment portfolios,
currently have more than 3.6 million shareholders. As of December 31, 1998,
the Adviser and its subsidiaries employed more than 2,000 employees who
operate out of domestic offices and the offices of subsidiaries in Bahrain,
Bangalore, Cairo, Chennai, Hong Kong, Istanbul, Johannesburg, London,
Luxembourg, Madrid, Moscow, Mumbai, New Delhi, Paris, Pune, Sao Paolo, Seoul,
Singapore, Sydney, Tokyo, Toronto, Vienna and Warsaw. As of December 31,
1998, the Adviser was retained as an investment manager for employee benefit
plan assets of 35 of the FORTUNE 100 companies.
Alliance Capital Management Corporation ("ACMC"), the sole general partner
of, and the owner of a 1% general partnership interest in the Adviser, is an
indirect wholly owned subsidiary of the Equitable Life Assurance Society of
the United States ("Equitable"), one of the largest life insurance companies
in the United States and a wholly owned subsidiary of the Equitable Companies
Incorporated ("ECI"). ECI is a holding company controlled by AXA a French
insurance holding company which at March 1, 1998, beneficially owned
approximately 59% of the outstanding voting shares of ECI. As of June 30,
1998, ACMC and Equitable Capital Management Corporation, each a wholly owned
direct or indirect subsidiary of Equitable, together with Equitable, owned in
the aggregate approximately 57% of the issued and outstanding units
representing assignments of beneficial ownership of limited partnership
interests in the Adviser.
AXA is a holding company for an international group of insurance and related
financial services companies. AXA's insurance operations include activities
in life insurance, property and casualty insurance and reinsurance. The
insurance operations are diverse geographically, with activities principally
in Western Europe, North America and the Asia/Pacific area. AXA is also
engaged in asset management, investment banking, securities trading,
brokerage, real estate and other financial services activities principally in
the United States, as well as in Western Europe and the Asia/Pacific area.
Based on information privided by AXA, as of March 31, 1998, more than 30% of
the voting power of AXA was controlled directly and indirectly by FINAXA, a
French holding Company. As of March 31, 1998 approximately 74% of the voting
power of FINAXA was controlled directly and indirectly by four French mutual
insurance companies (the "Mutuelles AXA"), one of which, AXA Assurances
I.A.R.D. Mutuelle itself controlled directly and indirectly more than 42% of
the voting power of FINAXA. Acting as a group, the Mutuelles AXA control both
AXA and FINAXA. Mutuelle, itself controlled directly and indirectly more than
42% of the voting power of FINAXA. Acting as a group, the Mutuelles AXA
control both AXA and FINAXA.
ADVISORY AGREEMENT
The Investment Advisory Agreement terminates automatically in the event of
its assignment or, with respect to any Portfolio, upon 60 days' notice given
by the Trust's Board of Trustees, by Alliance or by
26
<PAGE>
majority vote (as defined in the Investment Company Act and the rules
thereunder) of the Portfolio's shares. Otherwise, the term of the Investment
Advisory Agreement on behalf of each Portfolio is two years, but the
Agreement will remain in effect from year to year with respect to any
Portfolio so long as its continuance is approved at least annually by a
majority of the non-interested members of the Board of Trustees, and by (i) a
majority vote (as defined in the Investment Company Act and the rules
thereunder) of the Portfolio's shareholders or (ii) the Board of Trustees.
The advisory fee payable by the Trust is at the following annual percentages
of the value of each Portfolio's daily average net assets:
<TABLE>
<CAPTION>
DAILY AVERAGE NET ASSETS
-------------------------------------------------------------------------
FIRST NEXT NEXT NEXT
$750 MILLION $750 MILLION $1 BILLION $2.5 BILLION THEREAFTER
-------------- -------------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
Alliance Conservative Investors .475% .425% .375% .350% .325%
Alliance Balanced ............... .450% .400% .350% .325% .300%
Alliance Growth Investors ...... .550% .500% .450% .425% .400%
Alliance Common Stock ........... .475% .425% .375% .355% .345%*
Alliance Global ................. .675% .600% .550% .530% .520%
Alliance Aggressive Stock ...... .625% .575% .525% .500% .475%
Alliance Small Cap Growth ...... .900% .850% .825% .800% .775%
Alliance Money Market ........... .350% .325% .300% .280% .270%
Alliance Intermediate Government
Securities ..................... .500% .475% .450% .430% .420%
Alliance High Yield ............. .600% .575% .550% .530% .520%
Alliance Growth and Income ..... .550% .525% .500% .480% .470%
Alliance Quality Bond ........... .525% .500% .475% .455% .445%
Alliance Equity Index ........... .325% .300% .275% .255% .245%
Alliance International .......... .900% .825% .800% .780% .770%
</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.
Because of undertakings made by Equitable Variable in connection with the
Reorganization, Equitable reimburses the Alliance Common Stock and Alliance
Money Market Divisions of its Continuing Separate Account to offset
completely the effect on such divisions of the portion of the Trust's
advisory fees applicable to such divisions which exceed a .25% effective
annual rate. In addition, Equitable reimburses the Alliance High Yield,
Alliance Aggressive Stock and Alliance Balanced Divisions of its Separate
Account I for the portion of the Trust's advisory fees applicable to those
divisions which exceeds a .25% effective annual rate. Because of expense
limits in the variable annuity contracts funded by its Separate Account A,
Equitable reimburses the Alliance Common Stock, Alliance Money Market and
Alliance Balanced Division of that separate account for the portion of the
Trust's advisory fees applicable to those divisions which exceeds a .26%
effective rate, and the Alliance Aggressive Stock Division for the portion
that exceeds a .41% effective rate. Policies sold by insurers other than
Equitable and newer policy designs of Equitable bear the advisory fees
without adjustment. For a discussion of the Reorganization, see "General
Information," above.
In 1998, the Trust paid advisory fees of $110,227,632 to Alliance. In 1997,
the Trust paid advisory fees of $83,421,824 to Alliance. In 1996, the Trust
paid advisory fees of $59,901,466 to Alliance.
SPECIFIC SERVICES PERFORMED
Alliance performs the following services for or on behalf of the Trust
pursuant to the Investment Advisory Agreement.
27
<PAGE>
Subject to the approval and supervision of the Board of Trustees, Alliance
exercises overall responsibility for the investment and reinvestment of the
Trust's assets. Alliance manages each Portfolio and is responsible for the
investment operations of the Trust and the composition of each Portfolio,
including the purchase, retention and disposition of the investments,
securities and cash contained therein, in accordance with each Portfolio's
investment objectives and policies as stated in the Trust's Agreement and
Declaration of Trust, By-laws, Prospectus and Statement of Additional
Information as from time to time in effect. In connection therewith, Alliance
provides investment research and supervision of the Trust's investments and
conducts a continuous program of investment evaluation and, if appropriate,
sales and reinvestment of the Trust's assets. Alliance furnishes to the Trust
such statistical information, with respect to the investments which the Trust
may hold or contemplate purchasing, as the Trust may reasonably request. On
Alliance's own initiative, it apprises the Trust of important developments
materially affecting each Portfolio and furnishes the Trust from time to time
such information as it may believe appropriate for this purpose. In addition,
Alliance furnishes to the Board of Trustees such periodic and special reports
as the Board may reasonably request. Alliance also implements all purchases
and sales of investments for each Portfolio in a manner consistent with such
investment policies, as from time to time amended.
Alliance, on behalf of the Trust, arranges for the placement of orders and
other execution of transactions for each Portfolio.
At the Trust's request, Alliance provides, without charge, personnel, who may
be the Trust's officers, to render such clerical, administrative and other
services, other than investor services or accounting services, to the Trust
and also furnishes to the Trust, without charge, such office facilities,
which may be Alliance's own offices, as may be required to perform its
investment advisory and portfolio management services. The Trust may also
hire its own employees and contract for services to be performed by third
parties.
Pursuant to the terms of the Investment Advisory Agreement, Alliance has
contracted with Equitable for the provision of certain administrative
services to the Trust.
Alliance also performs investment advisory services for certain of
Equitable's separate and advisory accounts and for other clients, including
mutual funds registered as investment companies under the Investment Company
Act, some of which fund Contracts issued by Equitable and certain other
unaffiliated insurance companies. There are occasions on which transactions
for the Trust may be executed as part of concurrent authorizations to
purchase or sell the same security for Equitable's general account or for
other accounts or investment companies managed by Equitable or Alliance.
These concurrent authorizations potentially can be either advantageous or
disadvantageous to the Trust. When these concurrent authorizations occur, the
objective is to allocate the executions and related brokerage charges among
the accounts or mutual funds in an equitable manner.
ACCOUNTING SERVICES
Under an Accounting Services Agreement dated as of June 30, 1997, Alliance
has agreed to provide, or arrange for the provision of, certain investment
accounting services, including calculation of net asset values, preparation
of financial statements for each Portfolio, and such other accounting
services as the Trust may from time to time reasonably request, in exchange
for reimbursement by the Trust of costs and expenses incurred in providing,
or arranging for the provision of, such services. For 1998, Alliance was
reimbursed for $706,110 of costs and expenses incurred in arranging for the
provision of accounting services. Because it entered into the Accounting
Services Agreement on June 30, 1997, the first full year for which Alliance
was reimbursed for such services was 1998.
BROKERAGE ALLOCATION
SELECTION OF BROKERS
Pursuant to the Investment Advisory Agreement, Alliance, on behalf of the
Trust, arranges for the placement of orders and other transactions for each
Portfolio.
28
<PAGE>
BROKERAGE COMMISSIONS
The Portfolios are charged for securities brokers' commissions, transfer
taxes and similar fees relating to securities transactions. Alliance seeks to
obtain the best price and execution on all orders placed for the Portfolios,
considering all the circumstances except to the extent it may be permitted to
pay higher commissions as described below.
It is expected that securities will ordinarily be purchased in the primary
markets, whether over-the-counter or listed, and that listed securities may
be purchased in the over-the-counter market if that market is deemed the
primary market.
Transactions on stock exchanges involve the payment of brokerage commissions.
In transactions on stock exchanges in the United States, these commissions
are negotiated, whereas on many foreign stock exchanges these commissions are
fixed. However, brokerage commission rates in certain countries in which the
Portfolios may invest may be discounted for certain large domestic and
foreign investors such as the Portfolios. A number of foreign banks and
brokers will be used for execution of each Portfolio's portfolio
transactions. In the case of securities traded in the foreign and domestic
over-the-counter markets, there is generally no stated commission, but the
price usually includes an undisclosed com mission or mark-up. In underwritten
offerings, the price generally includes a disclosed fixed commission or
discount.
Alliance may, in the allocation of brokerage business, take into
consideration research and other brokerage services provided by brokers and
dealers to Equitable or Alliance. The research services include economic,
market, industry and company research material. Based upon an assessment of
the value of research and other brokerage services provided, proposed
allocations of brokerage for commission transactions are periodically
prepared internally. In limited cases, certain brokers have been advised
informally that, although the Trust is under no legal obligation, an attempt
will be made to meet the internally proposed level of allocated brokerage
business to the broker for brokerage and research services over a period of
time.
Commissions charged by brokers which provide research services may be
somewhat higher than commissions charged by brokers which do not provide
them. As permitted by Section 28(e) of the Securities Exchange Act of 1934
and by policies adopted by the Trustees, Alliance may cause the Trust to pay
a broker-dealer which provides brokerage and research services to Alliance an
amount of commission for effecting a securities transaction for the Trust in
excess of the commission another broker-dealer would have charged for
effecting that transaction.
Alliance does not engage brokers whose commissions it believes to be
unreasonable in relation to services provided. The overall reasonableness of
commissions paid will be evaluated by rating brokers on such general factors
as execution capabilities, quality of research (that is, quantity and quality
of information provided, diversity of sources utilized, nature and frequency
of communication, professional experience, analytical ability and
professional stature of the broker) and financial standing, as well as the
net results of specific transactions, taking into account such factors as
price, promptness, size of order and difficulty of execution. The research
services obtained will, in general, be used by Alliance for the benefit of
all accounts for which it makes investment decisions. The receipt of research
services from brokers will tend to reduce Alliance's expenses in managing the
Portfolios other than the Alliance Money Market Portfolio. This has been
taken into account when setting the amount paid for managing those
Portfolios. Although orders may be given by the Alliance Money Market
Portfolio to brokers or dealers which provide research services to Alliance,
the fact that the investment adviser may benefit from such research has not
been considered when setting the amount paid for managing that Portfolio.
This is because Alliance Money Market Portfolio transactions will generally
be with issuers or market makers where no commissions are charged. In 1996
the Trust paid an aggregate of $27,895,553 in brokerage commissions of which
$25,576,822 was paid to brokers relating to transactions aggregating
$12,956,909,742 which were directed to them in part for research services
provided by them. In 1997 the Trust paid an aggregate of $30,333,516 in
brokerage commissions of which $14,164,169 was paid to brokers relating to
transactions aggregating $15,241,230,017 which were directed to them in part
for research services provided by them. In 1998 the Trust paid an aggregate
of $32,234,714 in brokerage commissions of which $16,107,361 was paid to
brokers relating to transactions aggregating $19,844,316,122 which were
directed to them in part for research services provided by them.
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BROKERAGE TRANSACTIONS WITH AFFILIATES
To the extent permitted by law, the Trust may engage in brokerage
transactions with its affiliate, Donaldson, Lufkin & Jenrette, Inc. ("DLJ"),
with brokers who are DLJ affiliates, or with unaffiliated brokers who trade
or clear through DLJ. The Investment Company Act generally prohibits the
Trust from engaging in securities transactions with DLJ or its affiliates, as
principal, unless pursuant to an exemptive order from the SEC. The Trust may
apply for such exemptive relief. The Trust has adopted procedures, prescribed
by the Investment Company Act, which are reasonably designed to provide that
any commissions or other remuneration it pays to DLJ or its affiliates do not
exceed the usual and customary broker's commission. In addition, the Trust
will adhere to the requirements under the Securities Exchange Act of 1934
governing floor trading. Also, due to securities law limitations, the Trust
will limit purchases of securities in a public offering, if such securities
are underwritten by DLJ or its affiliates. During the year ended December 31,
1996, the Trust paid $2,500 to Autranet, Inc., an affiliate of DLJ, and
during the fiscal year ended December 31, 1997, the Trust paid $29,805 to
DLJ, and during the year ended December 31, 1998, the Trust paid $25,510 to
DLJ of which $13,940 was paid to DLJ's Pershing Division, in accordance with
the procedures described above. The percentage of the Trust's aggregate
brokerage commissions paid to DLJ for the year ended December 31, 1998 was
0.08%. The percentage of the Trust's aggregate dollar amount of transactions
involving the payment of commissions effected through DLJ during the year
ended December 31, 1998 was 0.09%.
TRUST EXPENSES AND OTHER CHARGES
Pursuant to the Trust's Investment Advisory Agreement, the Trust is obligated
to pay all of its operating expenses not specifically assumed by Alliance. In
addition, as principal underwriter of the Trust's Class IA shares, EQ
Financial Consultants, Inc. ("EQ Financial") will bear the Trust's marketing
expenses. A daily adjustment will be made in the values under certain
Contracts outstanding and offered by Equitable and Equitable Variable when
the management separate accounts of Equitable and Equitable Variable were
reorganized into unit investment trust form to offset completely the impact
of any such expense on values under such Contracts. Contracts sold by
insurers other than Equitable and Equitable Variable and new policy designs
of Equitable bear such expenses without adjustment. Although Equitable does
not expect the Trust to incur any federal income or excise tax liability (see
"Dividends, Distributions and Taxes" in the Prospectus), Equitable reserves
the right to exclude any such taxes from such adjustments.
The expenses borne by the Trust include or could include taxes; brokerage
commissions; interest charges; securities lending fees; fees and expenses of
the registration or qualification of a Portfolio's securities under federal
or state securities laws; fees of the Portfolio's custodian, transfer agent,
independent accountants, and legal counsel; all expenses of shareholders' and
trustees' meetings; all expenses of the preparation, typesetting, printing
and mailing to existing shareholders of prospectuses, prospectus supplements,
statements of additional information, proxy statements, and annual and
semi-annual reports; any proxy solicitor's fees and expenses; costs of
fidelity bonds and Trustees; liability insurance premiums as well as
extraordinary expenses such as indemnification payments or damages awarded in
litigation or settlements made; any membership fees of the Investment Company
Institute and similar organizations; costs of maintaining the Trust's
corporate existence and the compensation of Trustees who are not directors,
officers, or employees of Alliance or its affiliates.
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 has determined that the matter affects only the interest of
shareholders of one or more classes, in which case only the shareholders of
such class or classes shall be entitled to vote thereon. Any matter shall be
deemed to have been effectively acted upon with
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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 of shares shall have a
different designation; (2) each class 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 Plans for Class IB shares.
PURCHASE AND PRICING OF SECURITIES
As stated in the Prospectus, the Trust will offer and sell its shares at each
Portfolio's per share net asset value, which will be determined in the manner
set forth below.
The net asset value of the shares of each Portfolio of the Trust will be
determined once daily, immediately after the declaration of dividends, if
any, at the close of business on each business day. The net asset value per
share of each Portfolio will be computed by dividing the sum of the
investments held by that Portfolio, plus any cash or other assets, minus all
liabilities, by the total number of outstanding shares of that Portfolio at
such time. All expenses borne by the Trust, including the investment advisory
fee payable to Alliance, will be accrued daily.
The net asset value per share of any series (i.e., Portfolio) will be
determined and computed as follows, in accordance with generally accepted
accounting principles, and consistent with the Investment Company Act:
o The assets belonging to each series will include (a) all consideration
received by the Trust for the issue or sale of shares of that
particular series, together with all assets in which such consideration
is invested or reinvested, (b) all income, earnings, profits, and
proceeds thereof, including any proceeds derived from the sale,
exchange or liquidation of such assets, (c) any funds or payments
derived from any reinvestment of such proceeds in whatever form the
same may be and (d) General Items, if any, allocated to that series.
General Items includes any assets, income, earnings, profits, and
proceeds thereof, funds, or payments which are not readily identifiable
as belonging to any particular series. General Items will be allocated
as the Trust's Board of Trustees considers fair and equitable.
o The liabilities belonging to each series will include (a) the
liabilities of the Trust in respect of that series, (b) all expenses,
costs, charges and reserves attributable to that series, and (c) any
general liabilities, expenses, costs, charges or reserves of the Trust
which are not readily identifiable as belonging to any particular
series which have been allocated as the Trust's Board of Trustees
considers fair and equitable.
The value of each Portfolio will be determined at the close of business on
each "business day," i.e., each day in which the degree of trading in the
Portfolio might materially affect the net asset value of such Portfolio.
Normally, this would be each day that the NYSE is open and would include some
Federal holidays. For stocks and options, the close of trading is the 4:00
p.m. and 4:15 p.m. (Eastern time) close respectively of the NYSE and the
Options Price Reporting Authority; for bonds the close of trading is the
close of business in New York City, and for foreign securities it is the
close of business in the applicable foreign country with exchange rates
determined at 2:00 p.m. New York City time.
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Values are determined according to generally accepted accounting practices
and all laws and regulations that apply. The assets of each Portfolio are
valued as follows:
o Stocks listed on national securities exchanges and certain
over-the-counter issues traded on the NASDAQ national market system are
valued at the last sale price, or, if there is no sale, at the latest
available bid price. Other unlisted stocks are valued at their last
sale price or, if there is no reported sale during the day, at a bid
price estimated by a broker.
o Foreign securities not traded directly, or in American Depositary
Receipt or similar form in the United States, are valued at
representative quoted prices in the currency of the country of origin.
Foreign currency is converted into its U.S. dollar equivalent at
current exchange rates.
o U.S. Treasury securities and other obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities, are valued at
representative quoted prices.
o Long-term corporate bonds may be valued on the basis of prices provided
by a pricing service when such prices are believed to reflect the fair
market value of such securities. The prices provided by a pricing
service take into account many factors, including institutional size,
trading in similar groups of securities and any developments related to
specific securities; however, when such prices are not available, such
bonds are valued at a bid price estimated by a broker.
o Short-term debt securities held by the Portfolios other than the Money
Market Portfolio which mature in 60 days or less are valued at
amortized cost, which approximates market value. Short-term debt
securities held by such Portfolios which mature in more than 60 days
are valued at representative quoted prices. Securities held by the
Money Market Portfolio are valued at prices based on equivalent yields
or yield spreads.
o Convertible preferred stocks listed on national securities exchanges
are valued as of their last sale price or, if there is no sale, at the
latest available bid price.
o Convertible bonds, and unlisted convertible preferred stocks, are
valued at bid prices obtained from one or more of the major dealers in
such bonds or stocks. Where there is a discrepancy between dealers,
values may be adjusted based on recent premium spreads to the
underlying common stocks.
o Mortgage backed and asset backed securities are valued at prices
obtained from a bond pricing service where available, or at a bid price
obtained from one or more of the major dealers in such securities. If a
quoted price is unavailable, an equivalent yield or yield spread quotes
will be obtained from a broker and converted to a price.
o Purchased options, including options on futures, are valued at their
last bid price. Written options are valued at their last asked price.
o Futures contracts are valued as of their last sale price or, if there
is no sale, at the latest available bid price.
o Other securities and assets for which market quotations are not readily
available or for which valuation cannot be provided are valued in good
faith by the valuation committee of the Board of Trustees using its
best judgment.
The market value of a put or call option will usually reflect, among other
factors, the market price of the underlying security.
When the Trust writes a call option, an amount equal to the premium received
by the Trust is included in the Trust's financial statements as an asset and
an equivalent liability. The amount of the liability is subsequently
marked-to-market to reflect the current market value of the option written.
When an option expires on its stipulated expiration date or the Trust enters
into a closing purchase or sale transaction, the Trust realizes a gain (or
loss) without regard to any unrealized gain or loss on the underlying
security, and the liability related to such option is extinguished. When an
option is exercised, the Trust realizes a gain or loss from the sale of the
underlying security, and the proceeds of sale are increased by the premium
originally received, or reduced by the price paid for the option.
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Alliance may, from time to time, under the general supervision of the Board
of Trustees or its valuation committee, utilize the services of one or more
pricing services for assistance in valuing the assets of the Trust. Alliance
will continuously monitor the performance of such pricing services.
CERTAIN TAX CONSIDERATIONS
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 that is a shareholder of a Portfolio
will generally not be taxed on distributions from that Portfolio.
Each Portfolio is treated for Federal income tax purposes as a separate
taxpayer. Under present law, as a Massachusetts business trust doing business
in New York, a Portfolio will also not be subject to any excise or income
taxes in Massachusetts or New York on such amounts. A number of technical
rules are prescribed for computing net investment income and net capital
gains. For example, dividends are generally treated as received on the
ex-dividend date. Also, certain foreign currency losses and capital losses
arising after October 31 of a given year may be treated as if they arise on
the first day of the next taxable year.
Portfolios investing in foreign securities or currencies may be subject to
foreign taxes which could reduce the investment performance of such
Portfolios.
To qualify for treatment as a regulated investment company, a Portfolio must,
among other things, derive in each taxable year at least 90% of its gross
income from dividends, interest, payments with respect to securities loans,
gains from the sale or other disposition of stock or securities or foreign
currencies, or other income derived with respect to its business of
investing. For purposes of this test, gross income is determined without
regard to losses from the sale or other disposition of stock or securities.
In addition, the Secretary of the Treasury has regulatory authority to
exclude from qualifying income described above foreign currency gains which
are not "directly related" to a regulated investment company's "principal
business of investing" in stock, securities or related options or futures.
The Secretary of the Treasury has not to date exercised this authority.
A Portfolio, in general, must also (a) diversify its holdings so that, at the
close of each quarter of its taxable year, (i) at least 50% of the market
value of its total assets consists of cash and cash items (including
receivables), U.S. Government securities, securities of other regulated
investment companies, and other securities limited generally with respect to
any one issuer to not more than 5% of the value of its total assets and not
more than 10% of the outstanding voting securities of such issuer, and (ii)
not more than 25% of the value of its total assets is invested in the
securities (other than U.S. Government securities or securities of other
regulated investment companies) of any issuer or two or more issuers which
the Fund controls and which are engaged in the same, similar, or related
trades or businesses; and (b) distribute with respect to each taxable year at
least 90% of the sum of its taxable net investment income, its net tax-exempt
income, and the excess, if any, of net short-term capital gains over net
long-term capital losses for such year.
Generally, in order to avoid a 4% nondeductible excise tax, each Portfolio of
the Trust must distribute to its shareholders during the calendar year the
following amounts:
o 98% of the Portfolio's ordinary income for the calendar year;
o 98% of the Portfolio's capital gain net income (all capital gains, both
long-term and short-term, minus all such capital losses), computed as
if the Portfolio were on a taxable year ending October 31 of the year
in question and beginning the previous November 1; and
o any undistributed ordinary income or capital gain net income for the
prior year.
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The excise tax is inapplicable to any regulated investment company whose sole
shareholders are either tax-exempt pension trusts or separate accounts of
life insurance companies funding variable contracts. Although each Portfolio
believes that it is not subject to the excise tax, the Portfolios intend to
make the distributions required to avoid the imposition of such a tax.
Because the Trust is used to fund non-qualified Contracts, each Portfolio
must meet the diversification requirements imposed by the Code or these
policies will fail to qualify as life insurance and annuities. In general,
for a Portfolio to meet the investment diversification requirements of
Subchapter L of the Code, Treasury regulations require that no more than 55%
of the total value of the assets of the Portfolio may be represented by any
one investment, no more than 70% by two investments, no more than 80% by
three investments and no more than 90% by four investments. Generally, for
purposes of the regulations, all securities of the same issuer are treated as
a single investment. In the context of U.S. Government securities (including
any security that is issued, guaranteed or insured by the United States or an
instrumentality of the United States) each U.S. Government agency or
instrumentality is treated as a separate issuer. Compliance with the
regulations is tested on the last day of each calendar year quarter. There is
a 30-day period after the end of each calendar year quarter in which to cure
any non-compliance.
PORTFOLIO PERFORMANCE
Returns and yields shown do not reflect insurance company charges and fees
applicable to the Contracts.
ALLIANCE MONEY MARKET PORTFOLIO YIELD
The Alliance Money Market Portfolio calculates yield information for
seven-day periods and may illustrate that information in advertisements or
sales materials. The seven-day current yield calculation is based on a
hypothetical shareholder account with one share at the beginning of the
period. To determine the seven-day rate of return, the net change in the
share value is computed by subtracting the share value at the beginning of
the period from the share value (exclusive of capital changes) at the end of
the period. The net change is divided by the share value at the beginning of
the period to obtain the base period rate of return. This seven-day base
period return is then multiplied by 365/7 to produce an annualized current
yield figure carried to the nearest one-hundredth of one percent.
Realized capital gains or losses and unrealized appreciation or depreciation
of the Portfolio are excluded from this calculation. The net change in share
values also reflects all accrued expenses of the Alliance Money Market
Portfolio as well as the value of additional shares purchased with dividends
from the original shares and any additional shares.
The effective yield is obtained by adjusting the current yield to give effect
to the compounding nature of the Alliance Money Market Portfolio's
investments, as follows: The unannualized base period return is compounded by
adding one to the base period return, raising the sum to a power equal to 365
divided by 7, and subtracting one from the result--i.e., effective yield =
[(base period return +1)365/7] -1.
Alliance Money Market Portfolio yields will fluctuate daily. Accordingly,
yields for any given period are not necessarily representative of future
results. Yield is a function of the type and quality of the instruments in
the Alliance Money Market Portfolio, maturities and rates of return on
investments, among other factors. In addition, the value of shares of the
Alliance Money Market Portfolio will fluctuate and not remain constant.
The Alliance Money Market Portfolio yield may be compared with yields of
other investments. However, it should not be compared to the return on fixed
rate investments which guarantee rates of interest for specified periods. The
yield also should not be compared to the yield of money market funds made
available to the general public because their yields usually are calculated
on the basis of a constant $1 price per share and they pay out earnings in
dividends which accrue on a daily basis. Investment income of the Alliance
Money Market Portfolio, including any realized gains as well as accrued
interest, is not paid out in dividends but is reflected in the share value.
The Alliance Money Market Portfolio yield also does not reflect insurance
company charges and fees applicable to Contracts.
The seven-day current yield for Class IA shares of the Money Market Portfolio
was 4.69% for the period ended December 31, 1998. The effective yield for
that period was 4.80%.
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ALLIANCE QUALITY BOND, ALLIANCE INTERMEDIATE GOVERNMENT SECURITIES AND
ALLIANCE HIGH YIELD PORTFOLIO YIELDS
The Alliance Quality Bond, Alliance Intermediate Government Securities and
Alliance High Yield Portfolios each may illustrate its yield in
advertisements or sales materials. Such yields will be computed by
annualizing net investment income, as determined by the SEC's formula,
calculated on a per share basis for a recent 30-day period and dividing that
amount by a Portfolio share's net asset value (reduced by any undeclared
earned income expected to be paid shortly as a dividend) on the last trading
day of that period. Net investment income will reflect amortization of any
market value premium or discount of fixed income securities (except for
obligations backed by mortgages or other assets) over such period and may
include recognition of a pro rata portion of the stated dividend rate of
dividend paying portfolio securities. The Portfolios' yields will vary from
time to time depending upon market conditions, the compostition of each
Portfolio's portfolio and operating expenses of the Trust allocated to each
Portfolio. Yield should also be considered relative to changes in the value
of a Portfolio's shares and to the relative risks associated with the
investment objectives and policies of the Portfolios. These yields do not
reflect insurance company charges and fees applicable to the Contracts.
At any time in the future, yields and total return may be higher or lower
than past yields and there can be no assurance that any historical results
will continue.
The 30-day yields for Class IA shares of the Alliance Quality Bond, Alliance
Intermediate Government Securities and Alliance High Yield Portfolios for the
period ended December 31, 1998 were 5.16%, 4.72% and 14.50%, respectively.
TOTAL RETURN CALCULATIONS
Each Portfolio may provide or advertise average annual total return
information calculated according to a formula prescribed by the SEC.
According to that formula, average annual total return figures represent the
average annual compounded rate of return for the stated period. Average
annual total return quotations reflect the percentage change between the
beginning value of a static account in the Portfolio and the ending value of
that account measured by the then current net asset value of that Portfolio
assuming that all dividends and capital gains distributions during the stated
period were invested in shares of the Portfolio when paid. Total return is
calculated by finding the average annual compounded rates of return of a
hypothetical investment that would equate the initial amount invested to the
ending redeemable value of such investment, according to the following
formula:
T = (ERV/P)1/n -1
where T equals average annual total return; where ERV, the ending redeemable
value, is the value at the end of the applicable period of a hypothetical
$1,000 investment made at the beginning of the applicable period; where P
equals a hypothetical initial investment of $1,000; and where n equals the
number of years. These total returns do not reflect insurance company charges
and fees applicable to the Contracts.
The average annual total returns through December 31, 1998 for Class IA
shares of the Alliance Common Stock Portfolio for one year, five years, and
ten years were 29.39%, 21.95%, and 18.65%, respectively.
The average annual total returns through December 31, 1998 for Class IA
shares of the Alliance Intermediate Government Securities Portfolio for one
year, five years, and since inception (on April 1, 1991) were 7.74%, 5.39%,
and 7.10%, respectively.
The average annual total returns through December 31, 1998 for Class IA
shares of the Alliance High Yield Portfolio for one year, five years, and ten
years were (5.15)%, 9.99%, and 11.17%, respectively.
The average annual total returns through December 31, 1998 for Class IA
shares of the Alliance Balanced Portfolio for one year, five years, and ten
years were 18.11%, 10.82%, and 12.51%, respectively.
The average annual total returns through December 31, 1998 for Class IA
shares of the Alliance Global Portfolio for one year, five years, and ten
years were 21.80%, 14.28%, and 14.81%, respectively.
The average annual total returns through December 31, 1998 for Class IA
shares of the Alliance Aggressive Stock Portfolio for one year, five years,
and ten years were 0.29%, 11.47%, and 18.90%, respectively.
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The average annual total returns through December 31, 1998 for Class IA
shares of the Alliance Conservative Investors Portfolio for one year, five
years, and since inception (on October 2, 1989) were 13.88%, 9.40%, and
9.99%, respectively.
The average annual total returns through December 31, 1998 for Class IA
shares of the Alliance Growth Investors Portfolio for one year, five years,
and since inception (on October 2, 1989) were 19.13%, 13.92%, and 16.09%,
respectively.
The average annual total returns through December 31, 1998 for Class IA
shares of the Alliance Quality Bond Portfolio for one year, five years and
since inception (on October 1, 1993) were 8.69%, 6.78% and 6.34%,
respectively.
The average annual total returns through December 31, 1998 for Class IA
shares of the Alliance Growth and Income Portfolio for one year, five years
and since inception (on October 1, 1993) were 20.86%, 17.84% and 16.86%,
respectively.
The average annual total returns through December 31, 1998 for Class IA
shares of the Alliance Equity Index Portfolio for one year and since
inception (on March 1, 1994) were 28.07% and 24.31%, respectively.
The average annual total returns through December 31, 1998 for Class IA
shares of the Alliance International Portfolio for one year and since
inception (April 3, 1995) were 10.57% and 7.49%, respectively.
The average annual total returns through December 31, 1998 for Class IA
shares of the Alliance Small Cap Growth Portfolio for one year and since
inception (May 1, 1997) were (4.28)% and 12.27%.
Each Portfolio, from time to time, also may advertise its cumulative total
return figures. Cumulative total return is the compound rate of return on a
hypothetical initial investment of $1,000 for a specified period. Cumulative
total return quotations reflect changes in the price of a Portfolio's shares
and assume that all dividends and capital gains distributions during the
period were reinvested in shares of that Portfolio. Cumulative total return
is calculated by finding the compound rates of return of a hypothetical
investment over such period, according to the following formula (cumulative
total return is then expressed as a percentage):
C = (ERV/P) -1
Where:
C = Cumulative Total Return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value; ERV is the value, at the end of the applicable
period, of a hypothetical $1,000 investment made at the beginning of
the applicable period.
The cumulative total returns, since the inception of each Portfolio through
December 31, 1998, for Class IA shares of the Alliance Common Stock, Alliance
Intermediate Government Securities, Alliance High Yield, Alliance Balanced,
Alliance Global, Alliance Aggressive Stock, Alliance Conservative Investors,
Alliance Growth Investors, Alliance Quality Bond, Alliance Growth and Income,
Alliance Equity Index, Alliance International and Alliance Small Cap Growth
Portfolios were 3,163.67%, 70.15%, 231.11%, 371.10%, 282.78%, 732.43%,
141.34%, 297.55%, 38.10%, 126.64%, 186.69%, 31.10%, and 21.32%, respectively.
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.
OTHER SERVICES
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, serves as the Trust's independent accountants.
The financial statements of the Alliance Common Stock, Alliance Money Market,
Alliance Balanced, Alliance Aggressive Stock,
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Alliance High Yield, Alliance Global, Alliance Conservative Investors,
Alliance Growth Investors, Alliance Intermediate Government Securities,
Alliance Quality Bond, Alliance Growth and Income, Alliance Equity Index,
Alliance International and Alliance Small Cap Growth Portfolios for the year
ended December 31, 1998, which are included in this SAI, have been audited by
PricewaterhouseCoopers LLP, the Trust's independent accountants for such
periods, as stated in their report appearing herein, and have been so
included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
CUSTODIAN
The Chase Manhattan Bank, whose principal address is One Chase Manhattan
Plaza, New York, New York 10081, has been designated the Custodian of the
Trust's portfolio securities and other assets.
TRANSFER AGENT
Equitable serves as the transfer agent and dividend disbursing agent for the
Trust. For the year ended December 31, 1998, Equitable received no
compensation for providing such services for the Trust.
UNDERWRITER
EQ Financial, a wholly-owned subsidiary of Equitable, serves, without
compensation from the Trust, as the principal underwriter of the Class IA
shares of the Trust, pursuant to an agreement with the Trust. Under the terms
of the agreement, EQ Financial is not obligated to sell any specific number
of shares. It has authority, pursuant to the agreement, to enter into similar
contracts with other insurance companies and with other entities registered
as broker-dealers under the Securities Exchange Act of 1934.
As principal underwriter, EQ Financial bears the Trust's marketing expenses.
However, EQ Financial expects to be reimbursed for the portion of expenses
attributable to the marketing of other insurance companies' products by such
insurance companies. EQ Financial has entered into sales agreements with
Equitable and each unaffiliated insurer under which shares of the Trust are
made available for the investment of net considerations which are received
under variable insurance contracts and are allocated to their respective
separate accounts.
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FINANCIAL STATEMENTS
The Trust's audited financial statements for the fiscal year ended
December 31, 1998 included in the Trust's Annual Reports filed with the
Securities and Exchange Commission on March 10, 1999 pursuant to Section 30(d)
of the Investment Company Act of 1940, as amended, and the rules promulgated
thereunder, are hereby incorporated into this Statement of Additional
Information by reference.
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THE HUDSON RIVER TRUST
1345 Avenue of the Americas -- New York, New York 10105
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1999
This Statement of Additional Information is not a prospectus. It should be
read in conjunction with The Hudson River Trust ("Trust") Prospectus dated
May 1, 1999 relating to Class IB shares and retained for future reference.
This Statement of Additional Information relates to the Trust's Class IB
shares. A separate Statement of Additional Information relates to the Trust's
Class IA shares.
A copy of the Prospectus to which this Statement of Additional Information
relates is available at no charge by writing the Trust at the above address.
Certain disclosure has been incorporated by reference to the Trust's Annual
Report. For a free copy of the Trust's Annual Report, call 1-800-221-5672.
TABLE OF CONTENTS
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PAGE
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<S> <C>
General Information and History......................................... 2
Investment Restrictions of the Portfolios............................... 4
Description of Certain Securities in Which the Portfolios May Invest ... 7
Management of the Trust................................................. 20
Investment Advisory and Other Services.................................. 25
Brokerage Allocation.................................................... 28
Trust Expenses and Other Charges........................................ 29
Purchase and Pricing of Securities...................................... 30
Certain Tax Considerations.............................................. 32
Portfolio Performance................................................... 33
Other Services.......................................................... 36
Financial Statements ................................................... 42
Appendix A--Description of Commercial Paper Ratings..................... A-1
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HRT-SAI (2/99)
Copyright 1998. The Hudson River Trust. All rights reserved.
Catalog No. 127665
<PAGE>
GENERAL INFORMATION AND HISTORY
THE TRUST
The Hudson River Trust is an open-end management investment company--a type
of company commonly known as a "mutual fund." It is registered as such under
the Investment Company Act of 1940, as amended ("Investment Company Act").
Originally organized as a Maryland corporation, the Trust's operations
commenced on March 22, 1985. On July 10, 1987, the Trust was reorganized as a
Massachusetts business trust. Shares of each Portfolio are divided into two
classes: Class IA shares and Class IB shares. Class IA shares are offered at
net asset value pursuant to this Statement of Additional Information and a
related prospectus and are not subject to fees imposed under any distribution
plan. Class IB shares are offered at net asset value pursuant to a separate
Statement of Additional Information and related prospectus and are subject to
distribution fees imposed under a distribution plan (the "Distribution Plan")
adopted pursuant to Rule 12b-1 under the Investment Company Act. Prior to
October 1, 1996, the Trust offered only Class IA shares.
The two classes of shares are offered under the Trust's multiple class
distribution system approved by the Trust's Board of Trustees on June 7, 1996
and are designed to allow promotion of insurance products that invest in the
Trust through alternative distribution channels. Under the Trust's
multi-class system, shares of each class of a Portfolio represent an equal
pro rata interest in the assets of that Portfolio and, generally, have
identical voting, dividend, liquidation, and other rights, other than with
respect to the payment of distribution fees under the Distribution Plan.
The Trust continuously offers its shares exclusively to separate accounts of
insurance companies in connection with variable life insurance contracts and
variable annuity certificates and contracts (collectively, "Contracts").
Currently the Trust's shareholders of Class IB shares are separate accounts
of the Equitable Life Assurance Society of America ("The Equitable"). The
Trust may offer its shares to separate accounts of other insurance companies,
regardless of whether they are affiliated with Equitable. As of March 31,
1999, Equitable owned approximately 99.0% of the Trust's outstanding Class IA
shares and all of the Trust's outstanding Class IB shares and, as a result,
may be deemed to control the Trust.
As a "series" investment company, the Trust issues separate series of shares
of beneficial interest, each of which represents a separate portfolio
("Portfolio") of investments. Each Portfolio resembles a separate fund
issuing a separate class of stock. The Alliance Common Stock and Alliance
Money Market Portfolios are the successors to Separate Accounts I and II of
Equitable Variable Life Insurance Company, formerly a wholly owned subsidiary
of Equitable that was merged into Equitable as of January 1, 1997 ("Equitable
Variable"). (See "Description of Reorganization and Other Matters".) The
Alliance Balanced and Alliance Aggressive Stock Portfolios received their
initial funding on January 27, 1986 from Equitable Variable. The Alliance
High Yield Portfolio received its initial funding on January 2, 1987. The
Alliance Global Portfolio received its initial funding on August 27, 1987.
The Alliance Conservative Investors and Alliance Growth Investors Portfolios
received their initial funding on October 2, 1989. The Alliance Intermediate
Government Securities Portfolio received its initial funding on April 1,
1991. The Alliance Quality Bond and Alliance Growth and Income Portfolios
received their initial funding on October 1, 1993. The Alliance Equity Index
Portfolio received its initial funding on March 1, 1994. The Alliance
International Portfolio received its initial funding on April 3, 1995. The
Alliance Small Cap Growth Portfolio received its initial funding on May 1,
1997.
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.
Because of current Federal securities law requirements, the Trust expects
that its shareholders will offer to owners of the Contracts
("Contractowners") the opportunity to instruct them as to how shares
allocable to their Contracts will be voted with respect to certain matters,
such as approval of investment
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advisory agreements. As of March 31, 1999, to the Trust's knowledge, no
Contractowners other than those set forth below owned Contracts entitling
such persons to give voting instructions regarding more than 5% of either
class of the outstanding shares of a Portfolio.
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ALLIANCE
INTERMEDIATE
GOVERNMENT
ALLIANCE QUALITY ALLIANCE EQUITY SECURITIES ALLIANCE MONEY-MARKET
BOND PORTFOLIO INDEX PORTFOLIO PORTFOLIO PORTFOLIO
------------------------- ------------------------ -------------------- -------------------------
UNITS % OF UNITS % OF UNITS % OF UNITS % OF
OWNED PORTFOLIO OWNED PORTFOLIO OWNED PORTFOLIO OWNED PORTFOLIO
------------ ----------- ----------- ----------- ------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Boston Safe Deposit and
Trust Co.*............ 15,636,504 46.3 5,263,894 6.3
Equitable ............. 17,279,770 15.5
PNC Bank, N.A.**.......
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* Boston Safe Deposit and Trust Co., successor Trustee under Master Trust
Agreement for SBC Communications, Inc.'s Deferred Compensation Plans
and other Executive Benefit Plans.
** PNC Bank, N.A. under Ashland Inc. Executive and Director Retirement
Benefit Security Trust.
The principal addresses of Boston Safe Deposit and Trust Co., Equitable and
PNC Bank, N.A. are 175 East Houston Street, San Antonio, Texas, 1290 Avenue
of Americas, New York, New York, and 1000 Ashland Drive, Ashland, Kentucky,
respectively.
Were such a substantial Contractowner's funds withdrawn from the Trust or
transferred to a different Portfolio at the Contractowner's request, the
Trust could be forced to sell portfolio securities at disadvantageous prices.
LEGAL CONSIDERATIONS
Under Massachusetts law, annual election of Trustees is not required, and, in
the normal course, the Trust does not expect to hold annual meetings of
shareholders. There will normally be no meetings of shareholders for the
purpose of electing Trustees unless and until such time as less than a
majority of the Trustees holding office have been elected by shareholders, at
which time the Trustees then in office will call a shareholders' meeting for
the election of Trustees. The Trust has agreed to be bound by the procedures
set forth in Section 16(c) of the Investment Company Act, and accordingly,
shareholders of record of not less than two-thirds of the outstanding shares
of the Trust may remove a Trustee by a vote cast in person or by proxy at a
meeting called for that purpose.
Except as set forth above, the Trustees shall continue to hold office and may
appoint successor Trustees. Voting rights are not cumulative, so that the
holders of more than 50% of the shares voting in the election of Trustees
can, if they choose to do so, elect all the Trustees of the Trust, in which
event the holders of the remaining shares will be unable to elect any person
as a Trustee. Amendments to the Declaration of Trust of the Trust generally
require the affirmative vote of a majority of the outstanding shares of the
Trust.
The shares of each Portfolio, when issued, will be fully paid and
non-assessable by the Trust and will have no preference, preemptive,
conversion, exchange or similar rights.
Under Massachusetts law, in certain circumstances shareholders may be held
personally liable as partners for the obligations of a business trust such as
the Trust. The shareholders of the Trust are the insurance companies whose
separate accounts invest in it. The Trust's Declaration of Trust contains
provisions designed to protect shareholders from such liability to the extent
of the Trust's assets. As a result, the risk of personal liability for the
insurance company shareholders is remote.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he or
she would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct
of his or her office. The Declaration of Trust permits the Trust to purchase
and maintain on behalf of the Trustees insurance against certain liabilities.
DESCRIPTION OF REORGANIZATION AND OTHER MATTERS
The following transactions, referred to as the Reorganization, were effected
simultaneously on March 22, 1985, pursuant to an Agreement and Plan of
Reorganization dated November 20, 1984, entered into by Equitable Variable,
Separate Accounts I and II, and The Hudson River Fund, Inc. (the "Fund"), the
predecessor of the Trust.
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Equitable Variable divided Separate Account I into two divisions, a Common
Stock Division and a Money Market Division. Separate Account II was combined
with Separate Account I (the "Continuing Separate Account"). Rather than
investing directly, the Common Stock Division and the Money Market Division
of the Continuing Separate Account invested in shares of the Fund, which, in
turn, invested in diversified portfolios of common stock or money market
investments.
In order for the Fund to commence operations, all the investment assets of
Separate Accounts I and II (together with any related liabilities) were
transferred to the Common Stock and Money Market Portfolios of the Fund,
respectively, in exchange for shares in those Portfolios having an equivalent
aggregate net asset value.
On September 30, 1987, all of the Fund's assets and liabilities were
transferred to the Trust, pursuant to an Agreement and Plan of Reorganization
(the "Plan") between the Fund and the Trust. The Plan was proposed to
shareholders in order to permit greater operating flexibility and
efficiencies. The Plan provided for changes of domicile (from Maryland to
Massachusetts) and of form of organization (from a corporation to a business
trust). However, in all other material respects the Trust was identical to
the Fund immediately prior to the execution of the Plan.
At a meeting held on April 9, 1997, the shareholders of the Trust approved
the amendment and restatement of the Trust's Agreement and Declaration of
Trust. On April 16, 1997 the Agreement and Declaration of Trust was amended
and restated, and filed with the office of the Secretary of the Commonwealth
of Massachusetts.
INVESTMENT RESTRICTIONS OF THE PORTFOLIOS
FUNDAMENTAL RESTRICTIONS
The following restrictions apply to all of the Portfolios and are
fundamental. Unless permitted by law, they will not be changed for any
Portfolio without a vote of that Portfolio's shareholders.
None of the Portfolios will:
o underwrite securities issued by other persons except to the extent that,
in connection with the disposition of its portfolio investments, it may
be deemed to be an underwriter under certain Federal securities laws;
o make short sales of securities, except when it has, by reason of
ownership of other securities, the right to obtain securities of
equivalent kind and amount that will be held so long as it is in a short
position;
o issue senior securities;
o invest in commodities other than financed futures contracts and options
thereon;
o purchase real estate or mortgages; however, the Portfolios may, as
appropriate and consistent with their investment policies and other
investment restrictions, buy securities of issuers which engage in real
estate operations and securities which are secured by interests in real
estate (including partnership interests and shares of real estate
investment trusts), and may hold and sell real estate acquired as a
result of ownership of such securities;
o purchase any security on margin or borrow money, except that this
restriction shall not apply to borrowing from banks for temporary
purposes, to the pledging of assets to banks in order to transfer funds
for various purposes as required without interfering with the orderly
liquidation of securities in a Portfolio (but not for leveraging
purposes), to margin payments or pledges in connection with options,
futures contracts, options on futures contracts, forward contracts or
options on foreign currencies or, with respect to the Alliance Quality
Bond Portfolio, to transactions in interest rate swaps, caps and floors;
or
o make loans (including lending cash or securities), except that this
restriction shall not apply to the Alliance High Yield and Alliance
Intermediate Government Securities Portfolios. Additionally, each of the
other Portfolios may make loans of portfolio securities not exceeding
50% of the value
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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 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.
Each Portfolio intends to be "diversified," as that term is defined under the
Investment Company Act. In general, this means that no Portfolio will make an
investment unless, when considering all its other investments, 75% of the
value of the Portfolio's assets would consist of cash, cash items, U.S.
Government securities, securities of other investment companies and other
securities. For the purposes of this restriction, "other securities" are
limited for any one issuer to not more than 5% of the value of the
Portfolio's total assets and to not more than 10% of the issuer's outstanding
voting securities. As a matter of operating policy, each Portfolio will not
consider repurchase agreements to be subject to the above-stated 5%
limitation if the collateral underlying the repurchase agreements consists
exclusively of U.S. Government securities and such repurchase agreements are
fully collateralized.
Further, as a matter of operating policy, the Alliance Money Market Portfolio
will invest no more than 5% of the value of its total assets in securities of
any one issuer, other than U.S. Government securities, except that the
Alliance Money Market Portfolio may invest up to 25% of its total assets in
First Tier Securities (as defined in Rule 2a-7 under the Investment Company
Act) of a single issuer for a period of up to three business days after the
purchase of such security. Further, as a matter of operating policy, the
Alliance Money Market Portfolio will not invest more than (i) the greater of
1% of its total assets or $1,000,000 in Second Tier Securities (as defined in
Rule 2a-7 under the Investment Company Act) of a single issuer and (ii) 5% of
its total assets, at the time a Second Tier Security is acquired, in Second
Tier Securities.
These policies of the Portfolios with respect to concentration and
diversification will not be changed for any Portfolio without a vote of that
Portfolio's shareholders, unless permitted by law.
NON-FUNDAMENTAL RESTRICTIONS
The following investment restrictions apply to all of the Portfolios, but are
not fundamental. They may be changed for any Portfolio without a vote of that
Portfolio's shareholders.
None of the Portfolios will:
o invest more than 15% of its net assets in securities restricted as to
disposition under Federal securities laws, or securities otherwise
considered illiquid or not readily marketable, including repurchase
agreements having a maturity of more than seven days; however, this
restriction will not apply to securities sold pursuant to Rule 144A
under the Securities Act of 1933, so long as such securities meet
liquidity guidelines to be established by the Trust's Board of Trustees;
o trade in foreign exchange (except transactions incidental to the
settlement of purchases or sales of securities for a Portfolio);
however, the Alliance Global and Alliance International Portfolios may
trade in foreign exchange without limitation in connection with their
foreign currency hedging strategies; and the Alliance High Yield,
Alliance Quality Bond, Alliance Growth and Income, Alliance Conservative
Investors, Alliance Balanced, Alliance Common Stock, Alliance Aggressive
5
<PAGE>
Stock, Alliance Growth Investors and Alliance Small Cap Growth
Portfolios may trade in foreign exchange in connection with their
foreign currency hedging strategies, provided the amount of foreign
exchange underlying such a Portfolio's currency hedging transactions
does not exceed 10% of such Portfolio's assets;
o acquire securities of any company that is a securities broker or dealer,
a securities underwriter, an investment adviser of an investment
company, or an investment adviser registered under the Investment
Advisers Act of 1940 (other than any such company that derives no more
than 15% of its gross revenues from securities related activities),
except that the Portfolios (other than the Alliance Money Market
Portfolio) may purchase bank, trust company, and bank holding company
stock, and except that each of the Portfolios may invest, in accordance
with Rule 12d3-1 under the Investment Company Act, up to 5% of its total
assets in any such company provided that it owns no more than 5% of the
outstanding equity securities of any class plus 10% of the outstanding
debt securities of such company; or
o make an investment in order to exercise control or management over a
company.
In addition, none of the Portfolios will invest more than 5% of its assets in
the securities of any one investment company, own more than 3% of any one
investment company's outstanding voting securities, or have total holdings of
investment company securities in excess of 10% of the value of the
Portfolio's assets.
ADDITIONAL INVESTMENT RESTRICTION APPLICABLE TO THE ALLIANCE COMMON STOCK,
ALLIANCE BALANCED, ALLIANCE AGGRESSIVE STOCK AND ALLIANCE CONSERVATIVE INVESTORS
PORTFOLIOS
The Alliance Common Stock, Alliance Balanced, Alliance Aggressive Stock and
Alliance Conservative Investors Portfolios will operate under the general
investment restrictions described above. In addition, they will not:
o acquire securities of investment companies not registered under the
Investment Company Act.
ADDITIONAL INVESTMENT RESTRICTIONS APPLICABLE TO THE ALLIANCE MONEY MARKET
PORTFOLIO
The Alliance Money Market Portfolio will operate under the general investment
restrictions described above. In addition, it will not:
o invest more than 10% of its assets in securities restricted as to
disposition under Federal securities laws, or securities otherwise
considered illiquid or not readily marketable, including repurchase
agreements having a maturity of more than seven days; however, this
restriction will not apply to securities sold pursuant to Rule 144A
under the Securities Act of 1933, so long as such securities meet
liquidity guidelines to be established by the Trust's Board of Trustees;
o purchase oil and gas interests;
o purchase or write puts or calls (options); or
o purchase equity securities, voting securities other than securities of
registered investment companies with investment policies not
substantially broader than those of the Portfolio (subject to the above
percentage limitations) or local or state government securities.
The Alliance Money Market Portfolio will invest only in funds whose
investment policies are similar to or narrower than those of the Portfolio.
It is expected that such investments would be made in funds designed for
institutional investors such as the Portfolio and would be used for amounts
which might otherwise be left uninvested because they do not meet the
minimums necessary for other permitted investments or to take advantage of
higher yields available at that time in such funds.
ADDITIONAL INVESTMENT RESTRICTION APPLICABLE TO THE ALLIANCE HIGH YIELD AND
ALLIANCE GROWTH INVESTORS PORTFOLIOS
The Alliance High Yield and Alliance Growth Investors Portfolios will operate
under the general investment restrictions described above. In addition, each
will not:
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o invest more than 10% of its total assets in (i) fixed income securities
which are rated lower than B3 by Moody's Investors Service, Inc.
("Moody's") or B-by Standard & Poor's ("S&P") or are unrated, and (ii)
money market instruments of any entity which has an outstanding issue of
unsecured debt that is rated lower than B3 by Moody's or B-by S&P, or is
unrated; however this restriction will not apply to (A) fixed income
securities which, in the opinion of the Trust's investment adviser, have
similar characteristics to securities which are rated B3 or higher by
Moody's or B-or higher by S&P, or (B) money market instruments of any
entity that has an unsecured issue of outstanding debt which, in the
opinion of the Trust's investment adviser, has similar characteristics
to securities which are so rated.
DESCRIPTION OF CERTAIN SECURITIES IN WHICH THE PORTFOLIOS MAY INVEST
REPURCHASE AGREEMENTS
All of the Portfolios, except the Alliance Equity Index Portfolio, may enter
into repurchase agreements. Under a repurchase agreement, underlying debt
instruments are acquired for a relatively short period (usually not more than
one week and never more than a year) subject to an obligation of the seller
to repurchase and the Portfolio to resell the debt instruments at a fixed
price and time, thereby determining the yield during the Portfolio's holding
period.
Repurchase agreements may exhibit the characteristics of loans by the
Portfolio. During the term of the repurchase agreement, the Portfolio retains
the security subject to the repurchase agreement as collateral securing the
seller's repurchase obligation, continually monitors on a daily basis the
market value of the security subject to the agreement and requires the seller
to deposit with the Portfolio collateral equal to any amount by which the
market value of the security subject to the repurchase agreement falls below
the resale amount provided under the repurchase agreement. A Portfolio enters
into repurchase agreements with respect to U.S. Government obligations,
certificates of deposit, or bankers' acceptances with registered
broker-dealers, U.S. Government securities dealers or domestic banks whose
creditworthiness is determined to be satisfactory by the Trust's investment
adviser, Alliance Capital Management L.P. ("Alliance"), pursuant to
guidelines adopted by the Board of Trustees. Generally, a Portfolio does not
invest in repurchase agreements maturing in more than seven days. The staff
of the Securities and Exchange Commission ("SEC") currently takes the
position that repurchase agreements maturing in more than seven days are
illiquid securities. No Portfolio will enter into a repurchase agreement
maturing in more than seven days if as a result more than 15% (10%, in the
case of the Alliance Money Market Portfolio) of the Portfolio's net assets
would be invested in "illiquid securities."
If a seller under a repurchase agreement were to default on the agreement and
be unable to repurchase the security subject to the agreement, the Portfolio
would look to the collateral underlying the seller's repurchase agreement,
including the security subject to the repurchase agreement, for satisfaction
of the seller's obligation to the Portfolio. In the event a repurchase
agreement is considered a loan and the seller defaults, the Portfolio might
incur a loss if the value of the collateral declines and may incur
disposition costs in liquidating the collateral. In addition, if bankruptcy
proceedings are commenced with respect to the seller, realization on the
collateral may be delayed or limited and a loss may be incurred.
FORWARD COMMITMENTS AND WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Portfolios may enter into forward commitments for the purchase or sale of
securities and may purchase or sell securities on a "when-issued" or "delayed
delivery" basis. Forward commitments and when-issued or delayed delivery
transactions arise when securities are purchased by a Portfolio with payment
and delivery taking place in the future in order to secure what Alliance
considers to be an advantageous price or yield to the Portfolio at the time
of entering into the transaction. However, the price of or yield on a
comparable security available when delivery takes place may vary from the
price of or yield on the security at the time that the forward commitment or
when-issued or delayed delivery transaction was entered into. Agreements for
such purchases might be entered into, for example, when a Portfolio
anticipates a decline in interest rates and is able to obtain a more
advantageous price or yield by committing currently to purchase securities to
be issued later. When a Portfolio purchases securities on
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a forward commitment, when-issued or delayed delivery basis, it does not pay
for the securities until they are received, and the Portfolio is required to
create a segregated account with the Trust's custodian and to maintain in
that account liquid assets in an amount equal to or greater than, on a daily
basis, the amount of the Portfolio's forward commitments, when-issued or
delayed delivery commitments.
A Portfolio will only enter into forward commitments and make commitments to
purchase securities on a when-issued or delayed delivery basis with the
intention of actually acquiring the securities. However, the Portfolio may
sell these securities before the settlement date if it is deemed advisable as
a matter of investment strategy. Forward commitments and when-issued and
delayed delivery transactions are generally expected to settle within three
months from the date the transactions are entered into, although a Portfolio
may close out its position prior to the settlement date by entering into a
matching sale transaction.
Although none of the Portfolios intends to make such purchases for
speculative purposes, purchases of securities on such bases may involve more
risk than other types of purchases. For example, by committing to purchase
securities in the future, a Portfolio subjects itself to a risk of loss on
such commitments as well as on its portfolio securities. Also, a Portfolio
may have to sell assets that have been set aside in order to meet
redemptions. In addition, if a Portfolio determines it is advisable as a
matter of investment strategy to sell the forward commitment or when-issued
or delayed delivery securities before delivery, that Portfolio may incur a
gain or loss because of market fluctuations since the time the commitment to
purchase such securities was made. Any such gain or loss would be treated as
a capital gain or loss and would be treated for tax purposes as such. When
the time comes to pay for the securities to be purchased under a forward
commitment or on a when-issued or delayed delivery basis, a Portfolio will
meet its obligations from the then available cash flow or the sale of
securities, or, although it would not normally expect to do so, from the sale
of the forward commitment or when-issued or delayed delivery securities
themselves (which may have a value greater or less than a Portfolio's payment
obligation).
WARRANTS
All the Portfolios, except the Alliance Money Market Portfolio, may purchase
warrants and similar rights, which are rights to purchase securities at
specific prices valid for a specific period of time. Their prices do not
necessarily move in parallel with the prices of the underlying securities,
and warrantholders receive no dividends and have no voting rights or rights
with respect to the assets of an issuer. Warrants cease to have value if not
exercised prior to the expiration date.
FOREIGN SECURITIES
Each Portfolio, except the Alliance Intermediate Government Securities and
Alliance Equity Index Portfolios, may invest in foreign securities. Each of
the Alliance Common Stock, Alliance Balanced, Alliance Quality Bond, Alliance
Aggressive Stock and Alliance Small Cap Growth Portfolios has the discretion
to invest a portion of its assets in foreign securities. Generally, this
amount will not exceed 20% of each Portfolio's total assets. The Alliance
Money Market Portfolio may invest up to 20% of its assets in foreign money
market instruments denominated in U.S. dollars. The Alliance Conservative
Investors Portfolio may invest up to 15% of its assets in foreign securities,
the Alliance Growth Investors Portfolio may invest up to 30% of its assets in
foreign securities, and the Alliance Growth and Income Portfolio may invest
up to 25% of its assets in foreign securities. The Alliance High Yield
Portfolio may purchase foreign securities, provided the value of issues
denominated in foreign currencies shall not exceed 20% of the Portfolio's
total assets and the value of issues denominated in U.S. dollars shall not
exceed 25% of the Portfolio's total assets.
No percentage limitation applies to investments in foreign securities by the
Alliance Global Portfolio or the Alliance International Portfolio.
Foreign securities involve currency risks. The value of a foreign security
denominated in a foreign currency changes with fluctuations in exchange
rates. Fluctuations in exchange rates may also affect the earning power and
asset value of the foreign entity issuing a security, even one denominated in
U.S. dollars. Dividend and interest payments will be repatriated based on the
exchange rate at the time of disbursement, and restrictions on capital flows
may be imposed.
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Foreign securities may be subject to foreign government taxes which reduce
their attractiveness. Other risks of investing in such securities include
political or economic instability in the country involved, the difficulty of
predicting international trade patterns and the possibility of imposition of
exchange controls. The prices of such securities may be more volatile than
those of domestic securities. In addition, there may be less publicly
available information about a foreign issuer than about a domestic issuer.
Foreign issuers generally are not subject to uniform accounting, auditing and
financial reporting standards comparable to those applicable to domestic
issuers. There is generally less regulation of stock exchanges, brokers,
banks and listed companies abroad than in the United States, and settlements
may be slower and may be subject to failure. With respect to certain foreign
countries, there is a possibility of expropriation of assets or
nationalization, imposition of withholding taxes on dividend or interest
payments, difficulty in obtaining and enforcing judgments against foreign
entities or diplomatic developments which could affect investment in these
countries. Losses and other expenses may be incurred in converting between
various currencies in connection with purchases and sales of foreign
securities.
For many foreign securities, there are U.S. dollar-denominated American
Depository Receipts (ADRs) which are traded in the United States on exchanges
or over-the-counter, are issued by domestic banks or trust companies and for
which market quotations are readily available. ADRs do not lessen the foreign
exchange risk inherent in investing in the securities of foreign issuers.
However, by investing in ADRs rather than directly in stock of foreign
issuers, the Portfolios will avoid currency risks which might occur during
the settlement period for either purchases or sales. A Portfolio may purchase
foreign securities directly, as well as through ADRs.
MORTGAGE-BACKED SECURITIES
Government National Mortgage Association ("GNMA") certificates are
mortgage-backed securities representing part ownership of a pool of mortgage
loans. These loans, issued by lenders such as mortgage bankers, commercial
banks and savings and loan associations, are either insured by the Federal
Housing Administration or the Farmer's Home Administration or guaranteed by
the Veterans Administration. A "pool" or group of such mortgages is assembled
and after being approved by GNMA, is offered to investors through securities
dealers. Once approved by GNMA, the timely payment of interest and principal
on each mortgage is guaranteed by GNMA and backed by the full faith and
credit of the U.S. Treasury. GNMA certificates differ from bonds in that
principal is paid back monthly by the borrower over the term of the loan
rather than returned in a lump sum at maturity. GNMA certificates are called
"pass-through" securities because both interest and principal payments
(including prepayments) are passed through to the holder of the certificate.
In addition to GNMA certificates, a Portfolio (other than the Alliance Equity
Index Portfolio) may invest in mortgage-backed securities issued by the
Federal National Mortgage Association ("FNMA") and by the Federal Home Loan
Mortgage Corporation ("FHLMC"). FNMA, a federally chartered and
privately-owned corporation, issues mortgage-backed pass-through securities
which are guaranteed as to timely payment of principal and interest by FNMA.
FHLMC, a corporate instrumentality of the United States whose stock is owned
by the Federal Home Loan Banks, issues participation certificates which
represent an interest in mortgages from FHLMC's portfolio. FHLMC guarantees
the timely payment of interest and the ultimate collection of principal.
Securities guaranteed by FNMA and FHLMC are not backed by the full faith and
credit of the United States. If other fixed or variable rate pass-through
mortgage-backed securities issued by the U.S. Government or its agencies or
instrumentalities are developed in the future, the Portfolios reserve the
right to invest in them.
The Portfolios (other than the Alliance Equity Index Portfolio) may also
invest in other types of mortgage-backed securities issued by governmental or
non-governmental entities, such as banks and other mortgage lenders. These
other instruments include collateralized mortgage obligations ("CMOs"),
mortgage pass-through bonds and mortgage-backed bonds. Non-governmental
securities may offer a higher yield but may also be subject to greater price
fluctuation and risk than governmental securities.
CMOs are obligations fully collateralized directly or indirectly by a pool of
mortgages on which payments of principal and interest are passed through to
the holders of the CMOs on the same schedule as they are received, although
not necessarily on a pro rata basis. In reliance on an SEC interpretation,
investments
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in certain qualifying CMOs, including CMOs that have elected to be treated as
Real Estate Mortgage Investment Conduits ("REMICs"), are not subject to the
Investment Company Act's limitation on acquiring interests in other
investment companies. In order to be able to rely on the SEC's
interpretation, the CMOs and REMICs must be unmanaged, fixed-asset issuers
that (i) invest primarily in mortgage-backed securities, (ii) do not issue
redeemable securities, (iii) operate under general exemptive orders exempting
them from all provisions of the Investment Company Act, and (iv) are not
registered or regulated under the Investment Company Act as investment
companies. To the extent that a Portfolio selects CMOs or REMICs that do not
meet the above requirements, the Portfolio may not invest more than 10% of
its assets in all such entities and may not acquire more than 3% of the
voting securities of any single such entity. Mortgage-backed bonds are
general obligations of the issuer fully collateralized directly or indirectly
by a pool of mortgages. The mortgages serve as collateral for the issuer's
payment obligations on the mortgage-backed bonds but interest and principal
payments on the mortgages are not passed through directly (as with GNMA, FNMA
and FHLMC pass-through securities) or on a modified basis (as with CMOs).
Accordingly, a change in the rate of prepayments on the pool of mortgages
could change the effective maturity of a CMO but not the effective maturity
of a mortgage-backed bond (although, like many bonds, mortgage-backed bonds
may be callable by the issuer prior to maturity). It is expected that
governmental, government-related, or private entities may create mortgage
loan pools and other mortgage-backed securities offering mortgage
pass-through and mortgage-collateralized investments in addition to those
described above.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers, and other secondary market issuers also create
pass-through pools of conventional residential mortgage loans. In addition,
such issuers may be the originators and/or servicers of the underlying
mortgage loans as well as the guarantors of the mortgage-backed securities.
Pools created by non-governmental issuers generally offer a higher rate of
interest than government and government-related pools because of the absence
of direct or indirect government or agency guarantors. Timely payment of
interest and principal with respect to these pools may be supported by
various forms of insurance or guarantees, including individual loan, title,
pool and hazard insurance, and letters of credit. The insurance, guarantees,
and creditworthiness of the issuers thereof will be considered in determining
whether a mortgage-backed security meets a Portfolio's investment quality
standards. There is no assurance that the private insurers or guarantors can
meet their obligations under the insurance policies or guarantee
arrangements.
Each Portfolio (other than the Alliance Equity Index Portfolio) may buy
mortgage-backed securities without insurance or guarantees, if the investment
adviser determines that the securities meet the Portfolio's quality
standards. Alliance will, consistent with each Portfolio's investment
objectives, policies, and quality standards, consider making investments in
new types of mortgage-backed securities as such securities are developed and
offered to investors.
Prepayment of mortgages underlying mortgage-backed securities may reduce
their current yield and total return. During periods of declining interest
rates, such prepayments can be expected to accelerate and the Portfolios
would be required to reinvest the proceeds at the lower interest rates then
available. In addition, prepayments of mortgages which underlie securities
purchased at a premium could result in capital losses because the premium may
not have been fully amortized at the time the obligation is repaid. The
Portfolios do not intend to invest in these securities unless the Trust's
adviser believes that the potential benefits outweigh the risks.
ASSET-BACKED SECURITIES
The Portfolios (other than the Alliance Equity Index Portfolio) may purchase
asset-backed securities (unrelated to first mortgage loans) that represent
fractional interests in pools of retail installment loans, both secured (such
as Certificates for Automobile Receivables) and unsecured, leases or
revolving credit receivables, both secured and unsecured (such as Credit Card
Receivable Securities). These assets are generally held by a special purpose
trust and payments of principal and interest or interest only are passed
through or paid through monthly or quarterly to certificate holders and may
be guaranteed up to certain amounts by letters of credit issued by a
financial institution affiliated or unaffiliated with the trustee or
originator of the trust.
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Underlying retail installment loans, leases or revolving credit receivables
are subject to prepayment, which may reduce the overall return to certificate
holders. Certificate holders may also experience delays in payment on the
certificates if the full amounts due on underlying retail installment loans,
leases or revolving credit receivables are not realized by the Trust because
of unanticipated legal or administrative costs of enforcing the contracts,
retail installment loans, leases or revolving credit receivables, or because
of depreciation or damage to the collateral (usually automobiles) securing
certain contracts, retail installment loans, leases or revolving credit
receivables, or other factors. If consistent with its investment objective
and policies, a Portfolio may invest in other asset-backed securities that
may be developed in the future.
SECURITIES ISSUED OR GUARANTEED BY THE U.S. GOVERNMENT OR ITS AGENCIES OR
INSTRUMENTALITIES
These securities include issues of the U.S. Treasury, such as bills,
certificates of indebtedness, notes and bonds, and issues of agencies and
instrumentalities established under the authority of an act of Congress.
Such agencies and instrumentalities include, but are not limited to, the
National Bank for Cooperatives, each of the Federal Financing Banks, FHLMC,
the Farm Credit Banks, Federal Land Banks, FNMA, Tennessee Valley Authority,
Farm Credit System, Farm Credit System Financial Assistance Corporation,
Inter-American Development Bank, Maritime Administration, Resolution Trust
Corporation, Federal Agricultural Mortgage Corporation, Small Business
Administration, U.S. Postal Service and Washington Metropolitan Transit
Authority.
Issues of the U.S. Treasury are direct obligations of the U.S. Government and
are backed by the full faith and credit of the United States. Issues of
agencies, such as GNMA, are guaranteed by the U.S. Treasury, and issues of
other agencies and instrumentalities, such as FNMA, are supported by the
issuing agency's or instrumentality's right to borrow from the U.S. Treasury,
at the discretion of the U.S. Treasury, or are supported by the issuing
agency's or instrumentality's own credit.
CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES AND BANK TIME DEPOSITS
Certificates of deposit are receipts issued by a bank in exchange for the
deposit of funds. The issuer agrees to pay the amount deposited plus interest
to the bearer of the receipt on the date specified on the certificate. The
certificate usually can be traded in the secondary market prior to maturity.
Bankers' acceptances typically arise from short-term credit arrangements
designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for
specific merchandise. The draft is then "accepted" by a bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturities for acceptances can be
as long as 270 days, most maturities are six months or less.
Bank time deposits are funds kept on deposit with a bank for a stated period
of time in an interest bearing account. At present, bank time deposits
maturing in more than seven days are not considered by management of the
Trust to be readily marketable and therefore are subject to the 15% limit on
illiquid securities.
COMMERCIAL PAPER, MASTER DEMAND NOTES AND FLOATING RATE NOTES
Commercial paper consists of short-term (usually from 1 to 270 days)
unsecured promissory notes issued by corporations in order to finance their
current operations.
Variable amount master demand notes are obligations that permit the
investment of fluctuating amounts by a Portfolio at varying rates of interest
pursuant to direct arrangements between the Portfolio, as lender, and the
borrower. These notes permit daily changes in the amounts borrowed. The
Portfolio has the right to increase the amount under the note at any time up
to the full amount provided by the note agreement, or to decrease the amount,
and the borrower may repay up to the full amount of the note without penalty.
Because variable amount master notes are direct lending arrangements between
the lender and borrower,
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and not generally backed by bank letters of credit, it is not generally
contemplated that such instruments will be traded, and there is no secondary
market for these notes, although they are redeemable (and thus immediately
repayable by the borrower) at face value, plus accrued interest, at any time.
Therefore, the Portfolio's right to redeem depends on the ability of the
borrower to pay principal and interest on demand. Variable amount master
demand notes are valued at their face amount (par) because of their one-day
demand feature. In connection with master demand note arrangements, the
Portfolio considers earning power, cash flow, and other liquidity ratios of
the issuer. Master demand notes, as such, are not typically rated by credit
rating agencies.
Floating or variable rate notes are generally medium-to long-term debt
securities, but may include short-term debt securities, issued by entities
such as commercial banks, corporations or sovereign borrowers. They are
interest bearing securities on which the coupon is adjusted periodically to
reflect money market conditions. The period at the end of which the
adjustment occurs is often called the interest reset period. The Portfolios
will buy only notes with an interest reset period of six months or less.
There is an active secondary market for floating or variable rate notes.
EURODOLLAR SECURITIES
Negotiable certificates of deposit and time deposits of foreign branches of
U.S. or foreign banks payable in U.S. dollars are known as Eurodollar
deposits. Eurodollar securities also include bonds underwritten by an
international syndicate and sold "at issue" to non-U.S. investors. Such
securities are not registered with the SEC or issued domestically and are
primarily traded in foreign markets. Certain risks applicable to foreign
securities apply to Eurodollar instruments. Investment risks from these
securities include future political and economic developments, possible
foreign withholding taxes on interest, possible seizure of foreign deposits,
or the possible establishment of exchange controls affecting payment on these
securities. See "Foreign Securities," above, for additional information about
foreign securities. In addition to those risks, foreign branches of U.S. and
foreign banks are subject to extensive government regulation which may limit
both the amount and type of loans and interest rates. In addition, the
banking industry's profitability is closely linked to prevailing money market
conditions for financing lending operations. Both general economic conditions
and credit risks play an important part in the operations of the industry.
U.S. banks are required to maintain reserves, are limited in how much they
can loan a single borrower and are subject to other regulations to promote
financial soundness. Not all of these laws and regulations apply to foreign
branches of U.S. and foreign banks. In addition, foreign countries have
accounting and reporting principles that differ from those in the United
States.
HIGH YIELD DEBT SECURITIES
The Alliance High Yield Portfolio, as described in the Prospectus, intends to
invest primarily in debt securities offering high current income. The
Alliance Growth Investors Portfolio may invest up to 15% of its total assets
in such high yield debt securities, and the Alliance Growth and Income
Portfolio may invest up to 30% of its total assets in high yield convertible
securities. High yield securities may be medium and lower quality securities
rated, for example, BB or B by one of the nationally recognized statistical
rating organizations ("NRSROs") or may be unrated but of similar investment
quality as determined by Alliance. These securities are also known as "junk
bonds." The market values of such high yield securities tend to reflect
individual corporate developments to a greater extent than higher rated
securities, which react primarily to fluctuations in the general level of
interest rates. Such medium and lower rated securities also tend to be more
sensitive to real or perceived adverse economic conditions than higher rated
securities.
Companies that issue high yield securities are often highly leveraged and may
not have available to them more traditional methods of financing. Therefore,
the risks associated with acquiring the securities of such issuers generally
are greater than is the case with higher rated securities. For example,
during an economic downturn or a sustained period of rising interest rates,
highly leveraged issuers of high yield securities may experience "financial
stress" and may not have sufficient revenues to meet their payment
obligations. Such an issuer's ability to service its obligations may also be
adversely affected by specific corporate developments, the issuer's inability
to meet specific projected business forecasts, or the unavailability of
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additional financing. Risk of loss due to default by the issuer is also
significantly greater for the holders of high yield securities because such
securities are generally unsecured and are generally subordinated to the
debts of other creditors of the issuer.
The Alliance High Yield, Alliance Growth and Income and Alliance Growth
Investors Portfolios may have difficulty disposing of certain high yield
securities, particularly those perceived to have a high credit risk, because
there may be a thin trading market for such securities. Because not all
dealers maintain markets in all high yield securities, there is no
established retail secondary market for certain of these securities, and the
Portfolios anticipate that such securities could be sold only to a limited
number of dealers or institutional investors. Moreover, to the extent a
secondary trading market for high yield securities exists, it may be less
liquid than the secondary market for higher rated securities. The lack of a
highly liquid secondary market for certain high yield securities may have an
adverse impact on the market price for such securities and each Portfolio's
ability to dispose of particular issues when necessary to meet the
Portfolio's liquidity needs or in response to a specific economic event such
as a deterioration in the creditworthiness of the issuer. Adverse publicity
and investor perceptions, whether or not based on fundamental analysis, may
decrease the values and liquidity of high yield securities, especially in a
thinly traded market. The lack of a liquid secondary market for certain
securities may also make it more difficult for the Portfolios to obtain
accurate market quotations for purposes of valuing certain of its high yield
portfolio securities. Market quotations are generally available on many high
yield issues only from a limited number of dealers and may not necessarily
represent firm bids of such dealers or prices for actual sales.
In addition, the market for high yield securities, at its current size, has
not weathered a major economic recession, and one cannot be certain what
effect such a recession might have on such securities. It is possible that a
recession could severely disrupt the market for such medium and lower quality
securities and may have an adverse impact on the value of such securities. In
addition, it is possible that an economic downturn could adversely affect the
ability of the issuers of such securities to repay principal and pay interest
on such securities.
From time to time, proposals have been discussed regarding new legislation
designed to limit the use of certain high yield securities by issuers in
connection with leveraged buy-outs, mergers and acquisitions, or to limit the
deductibility of interest payments on such securities. Such proposals if
enacted into law could: (i) reduce the market for such securities generally;
(ii) negatively affect the financial condition of issuers of high yield
securities by removing or reducing a source of future financing; and (iii)
negatively affect the value of specific high yield securities and the high
yield market in general.
Factors adversely impacting the market value of high yield securities may
adversely impact each Portfolio's net asset value. In addition, each
Portfolio may incur additional expenses to the extent it is required to seek
recovery upon a default in the payment of principal or interest on its
portfolio securities. The Portfolios will not rely primarily on ratings of
NRSROs, but rather will rely on judgment, analysis and experience in
evaluating the creditworthiness of an issuer. In evaluating such securities,
Alliance will take into consideration, among other things, the issuer's
financial resources and quality of management, its sensitivity to economic
conditions and trends, its operating history and regulatory matters.
TRANSACTIONS IN OPTIONS, FUTURES AND FORWARD CONTRACTS
To the extent provided below, the Portfolios may enter into transactions in
options, futures and forward contracts on a variety of instruments and
indexes, in order to protect against declines in the value of portfolio
securities and increases in the cost of securities to be acquired and, in the
case of options written on securities or indexes of securities, to increase a
Portfolio's return. All the Portfolios, except the Alliance Money Market
Portfolio, are authorized to engage in futures transactions. In general, the
Portfolios will limit their use of futures contracts and options on futures
contracts so that either (i) the contracts or options thereon are for "bona
fide hedging" purposes as defined under regulations of the Commodity Futures
Trading Commission ("CFTC") or (2) if for other purposes, no more than 5% of
the liquidation value of each Portfolio's total assets will be used for
initial margin or option premiums required to establish non-hedging
positions. These instruments will be used for hedging purposes and not for
speculation or to leverage the Portfolios.
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OPTIONS ON SECURITIES
Writing Call Options. Each Portfolio, other than the Alliance Money Market
and Alliance Equity Index Portfolios, may write (sell) covered call options
on its portfolio securities in an attempt to enhance investment performance.
A call option is a contract which gives the purchaser of the option (in
return for a premium paid) the right to buy, and the writer of the option (in
return for a premium received) the obligation to sell, the underlying
security at the exercise price at any time prior to the expiration of the
option, regardless of the market price of the security during the option
period. A covered call option is, for example, a call option written on a
security that is owned by the writer (or on a security convertible into such
a security without additional consideration) throughout the option period.
A Portfolio will write covered call options both to reduce the risks
associated with certain of its investments and to increase total investment
return through the receipt of premiums. In return for the premium income, the
Portfolio will give up the opportunity to profit from an increase in the
market price of the underlying security above the exercise price so long as
its obligations under the contract continue, except insofar as the premium
represents a profit. Moreover, in writing the call option, the Portfolio will
retain the risk of loss should the price of the security decline. The premium
is intended to offset that loss in whole or in part. Unlike the situation in
which the Portfolio owns securities not subject to a call option, the
Portfolio, in writing call options, must assume that the call may be
exercised at any time prior to the expiration of its obligation as a writer,
and that in such circumstances the net proceeds realized from the sale of the
underlying securities pursuant to the call may be substantially below the
prevailing market price.
A Portfolio may terminate its obligation under an option it has written by
buying an identical option. Such a transaction is called a "closing purchase
transaction." The Portfolio will realize a gain or loss from a closing
purchase transaction if the amount paid to purchase a call option is less or
more than the amount received from the sale of the corresponding call option.
When an underlying security is sold from the Portfolio's securities
portfolio, the Portfolio will effect a closing purchase transaction so as to
close out any existing covered call option on that underlying security. A
closing purchase transaction for exchange-traded options may be made only on
a national securities exchange (exchange). There is no assurance that a
liquid secondary market on an exchange will exist for any particular option,
or at any particular time, and for some options, such as over-the-counter
options, no secondary market on an exchange may exist. If the Portfolio is
unable to effect a closing purchase transaction, the Portfolio will not sell
the underlying security until the option expires or the Portfolio delivers
the underlying security upon exercise.
Writing Put Options. The writer of a put option becomes obligated to purchase
the underlying security at a specified price during the option period if the
buyer elects to exercise the option before its expiration date. A Portfolio
which writes a put option will be required to "cover" it, for example, by
depositing and maintaining in a segregated account with its custodian liquid
securities having a value equal to or greater than the exercise price of the
option.
The Portfolios, except the Alliance Money Market and Alliance Equity Index
Portfolios, may write put options either to earn additional income in the
form of option premiums (anticipating that the price of the underlying
security will remain stable or rise during the option period and the option
will therefore not be exercised) or to acquire the underlying security at a
net cost below the current value (e.g., the option is exercised because of a
decline in the price of the underlying security, but the amount paid by the
Portfolio, offset by the option premium, is less than the current price). The
risk of either strategy is that the price of the underlying security may
decline by an amount greater than the premium received. The premium which a
Portfolio receives from writing a put option will reflect, among other
things, the current market price of the underlying security, the relationship
of the exercise price to that market price, the historical price volatility
of the underlying security, the option period, supply and demand and interest
rates.
A Portfolio may effect a closing purchase transaction to realize a profit on
an outstanding put option or to prevent an outstanding put option from being
exercised. If a Portfolio is able to enter into a closing purchase
transaction, the Portfolio will realize a profit (or loss) from that
transaction if the cost of the
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transaction is less (or more) than the premium received from the writing of
the option. After writing a put option, a Portfolio may incur a loss equal to
the difference between the exercise price of the option and the sum of the
market value of the underlying security plus the premiums received from the
sale of the option.
Purchasing Options. The Portfolios, except the Alliance Money Market and
Alliance Equity Index Portfolios, may purchase put options and call options.
The Portfolios may purchase put options on securities to protect their
holdings against a substantial decline in market value. The Portfolio will
continue to receive interest or dividend income on the security. The
Portfolios may also purchase call options on securities to protect against
substantial increases in prices of securities the Portfolios intend to
purchase pending their ability to invest in an orderly manner in those
securities. The Portfolios may sell put or call options they have previously
purchased, which could result in a net gain or loss depending on whether the
amount received on the sale is more or less than the premium and other
transaction costs paid on the put or call option which was purchased.
SECURITIES INDEX OPTIONS
The Portfolios, except the Alliance Money Market and Alliance Equity Index
Portfolios, may write covered put and call options and purchase call and put
options on securities indexes for the purpose of hedging against the risk of
unfavorable price movements adversely affecting the value of a Portfolio's
securities or securities it intends to purchase. Each Portfolio writes only
"covered" options. A call option on a securities index is considered covered,
for example, if, so long as the Portfolio is obligated as the writer of the
call, it holds securities the price changes of which are, in the opinion of
Alliance, expected to replicate substantially the movement of the index or
indexes upon which the options written by the Portfolio are based. A put on a
securities index written by a Portfolio will be considered covered if, so
long as it is obligated as the writer of the put, the Portfolio segregates
with its custodian liquid assets having a value equal to or greater than the
exercise price of the option. Unlike a stock option, which gives the holder
the right to purchase or sell a specified stock at a specified price, an
option on a securities index gives the holder the right to receive a cash
"exercise settlement amount" equal to (i) the difference between the exercise
price of the option and the value of the underlying stock index on the
exercise date, multiplied by (ii) a fixed "index multiplier."
A securities index fluctuates with changes in the market values of the
securities included in the index. For example, some securities index options
are based on a broad market index such as the S&P 500 or the New York Stock
Exchange ("NYSE") Composite Index, or a narrower market index such as the S&P
100. Indexes may also be based on an industry or market segment such as the
AMEX Oil and Gas Index or the Computer and Business Equipment Index. Options
on stock indexes are currently traded on the following exchanges among
others: The Chicago Board Options Exchange; NYSE; and American Stock
Exchange.
The effectiveness of hedging through the purchase of securities index options
will depend upon the extent to which price movements in the portion of the
securities portfolio being hedged correlate with price movements in the
selected securities index. Perfect correlation is not possible because the
securities held or to be acquired by a Portfolio will not exactly match the
composition of the securities indexes on which options are written. The
principal risk of purchasing securities index options is that the premium and
transaction costs paid by a Portfolio in purchasing an option will be lost if
the changes (increase in the case of a call, decrease in the case of a put)
in the level of the index do not exceed the cost of the option.
The principal risk of writing securities index options is that price changes
in the hedged securities will not correlate with price changes in the
options, and thus the Portfolio could bear a loss on the options that would
be only partially offset (or not offset at all) by the increased value or
reduced cost of the hedged securities. Moreover, in the event the Portfolio
were unable to close an option it had written, it might be unable to sell the
securities used as cover.
OVER-THE-COUNTER OPTIONS
Options traded in the over-the-counter market may not be as actively traded
as those traded on an exchange. Accordingly, it may be more difficult to
value such options. In addition, it may be difficult to
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enter into closing transactions with respect to options traded
over-the-counter. The Portfolios will engage in such transactions only with
firms of sufficient credit, in the opinion of Alliance, so as to minimize
these risks. Such options and the securities used as "cover" for such options
may be considered illiquid securities.
The Portfolios may enter into contracts (or amend existing contracts) with
primary dealer(s) with whom they write over-the-counter options. The
contracts will provide that each Portfolio has the absolute right to
repurchase an option it writes at any time at a repurchase price which
represents the fair market value, as determined in good faith through
negotiation between the parties, but which in no event will exceed a price
determined pursuant to a formula contained in the contract. Although the
specific details of the formula may vary between contracts with different
primary dealers, the formula will generally be based on a multiple of the
premium received by each Portfolio for writing the option, plus the amount,
if any, of the option's intrinsic value (i.e., the amount the option is
"in-the-money"). The formula will also include a factor to account for the
difference between the price of the security and the strike price of the
option if the option is written "out-of-the-money." Although the Portfolios
have established standards of creditworthiness for these primary dealers, the
Portfolios may still be subject to the risk that firms participating in such
transactions will fail to meet their obligations. With respect to agreements
concerning the over-the-counter options a Portfolio has written, the
Portfolio will treat as illiquid only securities equal in amount to the
formula price described above less the amount by which the option is
"in-the-money," i.e., the amount by which the price of the option exceeds the
exercise price.
FUTURES TRANSACTIONS
All the Portfolios, except the Alliance Money Market Portfolio, may trade in
certain futures contracts. A futures contract is a bilateral agreement to buy
or sell a security (or deliver a cash settlement price, in the case of a
contract relating to an index or otherwise not calling for physical delivery
at the end of trading in the contracts) for a set price in the future. No
purchase price is paid or received when the contract is entered into.
Instead, a good faith deposit known as initial margin is made with the broker
and subsequent daily payments known as variation margin are made to and by
the broker reflecting changes in the value of the security or level of the
index. Futures contracts are designated by boards of trade which have been
designated "contracts markets" by the CFTC.
Purchases or sales of securities index futures contracts may be used to
attempt to protect a Portfolio's current or intended investments from broad
fluctuations in securities prices, and interest rate and foreign currency
futures contracts may be purchased or sold to attempt to hedge against the
effects of interest or exchange rate changes on a Portfolio's current or
intended investments in fixed income or foreign securities. All the
Portfolios, except the Alliance Money Market, Alliance Equity Index and
Alliance Intermediate Government Securities Portfolios, may trade in foreign
currency futures contracts. In the event that an anticipated decrease in the
value of portfolio securities occurs as a result of a general stock market
decline, a general increase in interest rates or a decline in the dollar
value of foreign currencies in which portfolio securities are denominated,
the adverse effects of such changes may be offset, in whole or in part, by
gains on the sale of futures contracts. In addition, the increased cost of
portfolio securities to be acquired, caused by a general rise in the dollar
value of foreign currencies or by a rise in stock prices or a decline in
interest rates, may be offset, in whole or in part, by gains on futures
contracts purchased by a Portfolio. In order to achieve desired asset mix
parameters, the Alliance Conservative Investors and Alliance Growth Investors
Portfolios may use futures contracts and related options transactions to
establish a position in an asset class as a temporary substitute for
purchasing individual securities, which may be subsequently purchased in
orderly fashion. Similarly, these transactions may enable the Alliance
Conservative Investors and Alliance Growth Investors Portfolios to reduce a
position in an asset class as a temporary substitute for selling individual
securities, in order to effect an orderly sale. In the case of the Alliance
Equity Index Portfolio, futures contracts and related options on the S&P 500
Index may be purchased in order to reduce brokerage costs, maintain liquidity
to meet shareholder redemptions or minimize tracking error. A Portfolio will
incur brokerage fees when it purchases and sells futures contracts, and it
will be required to maintain margin deposits. (See "Risks of Transactions in
Options, Futures Contracts and Forward Currency Contracts," below.) Positions
taken in the futures markets are not normally held until delivery or cash
settlement is required, but are instead liquidated through
16
<PAGE>
offsetting transactions which may result in a gain or a loss. While futures
positions taken by a Portfolio will usually be liquidated in this manner, the
Portfolio may instead make or take delivery of underlying securities whenever
it appears economically advantageous to the Portfolio to do so. A clearing
organization associated with the exchange on which futures are traded assumes
responsibility for closing out transactions and guarantees that, as between
the clearing members of an exchange, the sale and purchase obligations will
be performed with regard to all positions that remain open at the termination
of the contract.
SECURITIES INDEX FUTURES CONTRACTS
A securities index futures contract does not require the physical delivery of
securities, but merely provides for profits and losses resulting from changes
in the market value of the contract to be credited or debited at the close of
each trading day to the respective accounts of the parties to the contract.
On the contract's expiration date a final cash settlement occurs and the
futures positions are simply closed out. Changes in the market value of a
particular index futures contract reflect changes in the specified index of
securities on which the futures contract is based.
By establishing an appropriate "short" position in index futures, a Portfolio
may seek to protect the value of its portfolio against an overall decline in
the market for such securities. Alternatively, in anticipation of a generally
rising market, a Portfolio can seek to avoid losing the benefit of apparently
low current prices by establishing a "long" position in securities index
futures and later liquidating that position as particular securities are
acquired. To the extent that these hedging strategies are successful, the
Portfolio will be affected to a lesser degree by adverse overall market price
movements than would otherwise be the case.
OPTIONS ON FUTURES CONTRACTS
Each of the Portfolios, other than the Alliance Money Market Portfolio, may
also purchase and write exchange-traded call and put options on futures
contracts it is authorized to enter into. These options are traded on
exchanges that are licensed and regulated by the CFTC for the purpose of
options trading. A call option on a futures contract gives the purchaser the
right, in return for the premium paid, to purchase a futures contract (assume
a "long" position) at a specified exercise price at any time before the
option expires. A put option gives the purchaser the right, in return for the
premium paid, to sell a futures contract (assume a "short" position), for a
specified exercise price, at any time before the option expires. The
Portfolios will write only options on futures contracts which are "covered."
A Portfolio will be considered "covered" with respect to a put option it has
written if, so long as it is obligated as a writer of the put, the Portfolio
segregates with its custodian liquid assets at all times equal to or greater
than the aggregate exercise price of the puts it has written (less any
related margin deposited with the futures broker). A Portfolio will be
considered "covered" with respect to a call option it has written on a debt
security future if, so long as it is obligated as a writer of the call, the
Portfolio owns the security deliverable under the futures contract. A
Portfolio will be considered "covered" with respect to a call it has written
on a securities index future if so long as the Portfolio is obligated as the
writer of the call, the Portfolio owns a portfolio of securities the price
changes of which are, in the opinion of Alliance, expected to replicate
substantially the movement of the index upon which the futures contract is
based.
Upon the exercise of a call, the writer of the option is obligated to sell
the futures contract (to deliver a "long" position to the option holder) at
the option exercise price, which will presumably be lower than the current
market price of the contract in the futures market. Upon exercise of a put,
the writer of the option is obligated to purchase the futures contract
(deliver a "short" position to the option holder) at the option exercise
price which will presumably be higher than the current market price of the
contract in the futures market. When the holder of an option exercises it and
assumes a long futures position, in the case of a call, or a short futures
position, in the case of a put, its gain will be credited to its futures
margin account, while the loss suffered by the writer of the option will be
debited to its futures margin account and must be immediately paid by the
writer. However, as with the trading of futures, most participants in the
options markets do not seek to realize their gains or losses by exercise of
their option rights. Instead, the holder of an option will usually realize a
gain or loss by buying or selling an offsetting option at a market price that
will reflect an increase or a decrease from the premium originally paid.
17
<PAGE>
Options on futures contracts can be used by a Portfolio to hedge
substantially the same risks as might be addressed by the direct purchase or
sale of the underlying futures contracts. If the Portfolio purchases an
option on a futures contract, it may obtain benefits similar to those that
would result if it held the futures position itself. Purchases of options on
futures contracts may present less risk in hedging than the purchase and sale
of the underlying futures contracts since the potential loss is limited to
the amount of the premium plus related transaction costs.
The purchase of put options on futures contracts is a means of hedging a
portfolio of securities against a general decline in market prices. The
purchase of a call option on a futures contract represents a means of hedging
against a market advance when a Portfolio is not fully invested.
If a Portfolio writes options on futures contracts, the Portfolio will
receive a premium but will assume a risk of adverse movement in the price of
the underlying futures contract comparable to that involved in holding a
futures position. If the option is not exercised, the Portfolio will realize
a gain in the amount of the premium, which may partially offset unfavorable
changes in the value of securities held in or to be acquired for the
Portfolio. If the option is exercised, the Portfolio will incur a loss in the
option transaction, which will be reduced by the amount of the premium it has
received, but which will offset any favorable changes in the value of its
portfolio securities or, in the case of a put, lower prices of securities it
intends to acquire.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the underlying securities. If the futures
price at expiration is below the exercise price, the Portfolio will retain
the full amount of the option premium, which provides a partial hedge against
any decline that may have occurred in the value of the Portfolio's holdings
of securities. The writing of a put option on a futures contract is analogous
to the purchase of a futures contract in that it hedges against an increase
in the price of securities the Portfolio intends to acquire. However, the
hedge is limited to the amount of premium received for writing the put.
While the holder or writer of an option on a futures contract may normally
terminate its position by selling or purchasing an offsetting option of the
same series, a Portfolio's ability to establish and close out options
positions at fairly established prices will be subject to the existence of a
liquid market. The Portfolios will not purchase or write options on futures
contracts unless, in Alliance's opinion, the market for such options has
sufficient liquidity that the risks associated with such options transactions
are not at unacceptable levels.
LIMITATIONS ON PURCHASE AND SALE OF FUTURES CONTRACTS AND OPTIONS ON FUTURES
CONTRACTS
The Portfolios will not engage in transactions in futures contracts and
related options for speculation. All the Portfolios, except the Alliance
Money Market Portfolio, may enter into futures contracts and buy and sell
related options as described above. The Portfolios will not purchase or sell
futures contracts or related options unless either (1) the futures contracts
or options thereon are purchased for "bona fide hedging" purposes (as that
term is defined under the CFTC regulations) or (2) if purchased for other
purposes, the sum of the amounts of initial margin deposits on a Portfolio's
existing futures and premiums required to establish non-hedging positions
would not exceed 5% of the liquidation value of the Portfolio's total assets.
In instances involving the purchase of futures contracts or the writing of
put options thereon by a Portfolio, an amount of liquid assets equal to the
cost of such futures contracts or options written (less any related margin
deposits) will be deposited in a segregated account with its custodian,
thereby insuring that the use of such futures contracts and options is
unleveraged. In instances involving the sale of futures contracts or the
writing of call options thereon by a Portfolio, the securities underlying
such futures contracts or options will at all times be maintained by the
Portfolio or, in the case of index futures and related options, the Portfolio
will own securities the price changes of which are, in the opinion of
Alliance, expected to replicate substantially the movement of the index upon
which the futures contract or option is based.
Positions in futures contracts may be closed out only on an exchange or a
board of trade which provides the market for such futures. Although the
Portfolios intend to purchase or sell futures only on exchanges or boards of
trade where there appears to be an active market, there is no guarantee that
such will exist
18
<PAGE>
for any particular contract or at any particular time. If there is not a
liquid market at a particular time, it may not be possible to close a futures
position at such time, and, in the event of adverse price movements, a
Portfolio would continue to be required to make daily cash payments of
maintenance margin. However, in the event futures positions are used to hedge
portfolio securities, the securities will not be sold until the futures
positions can be liquidated. In such circumstances, an increase in the price
of securities, if any, may partially or completely offset losses on the
futures contracts.
FOREIGN CURRENCY OPTIONS, FOREIGN CURRENCY FUTURES CONTRACTS AND OPTIONS ON
FUTURES
The Portfolios, other than the Alliance Money Market, Alliance Intermediate
Government Securities and Alliance Equity Index Portfolios, may purchase or
sell exchange-traded or over-the-counter foreign currency options, foreign
currency futures contracts and related options on foreign currency futures
contracts as a hedge against possible variations in foreign exchange rates.
The Portfolios will write options on foreign currencies or on foreign
currency futures contracts only if they are "covered." A put option on a
foreign currency or on a foreign currency futures contract written by a
Portfolio will be considered "covered" if, so long as the Portfolio is
obligated as the writer of the put, it segregates with the Portfolio's
custodian liquid assets equal at all times to the aggregate exercise price of
the put. A call option on a foreign currency or on a foreign currency futures
contract written by the Portfolio will be considered "covered" only if the
Portfolio owns short term debt securities with a value equal to the face
amount of the option contract and denominated in the currency upon which the
call is written. Option transactions may be effected to hedge the currency
risk on non-U.S. dollar-denominated securities owned by a Portfolio, sold by
a Portfolio but not yet delivered, or anticipated to be purchased by a
Portfolio. As an illustration, a Portfolio may use such techniques to hedge
the stated value in U.S. dollars of an investment in a Japanese
yen-denominated security. In these circumstances, a Portfolio may purchase a
foreign currency put option enabling it to sell a specified amount of yen for
dollars at a specified price by a future date. To the extent the hedge is
successful, a loss in the value of the dollar relative to the yen will tend
to be offset by an increase in the value of the put option. As in the case of
other types of options, however, the writing of an option on foreign currency
will constitute only a partial hedge, up to the amount of the premium
received, and the Portfolio could be required to purchase or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses.
Although the purchase of an option on foreign currency may constitute an
effective hedge against fluctuations in exchange rates in the event of
exchange rate movements adverse to the Portfolio's position it may forfeit
the entire amount of the premium plus related transaction costs.
Certain differences exist between foreign currency hedging instruments.
Foreign currency options provide the holder the right to buy or to sell a
currency at a fixed price on or before a future date. Listed options are
third-party contracts (performance is guaranteed by an exchange or clearing
corporation) which are issued by a clearing corporation, traded on an
exchange and have standardized prices and expiration dates. Over-the-counter
options are two-party contracts and have negotiated prices and expiration
dates. See "Over-the-Counter Options," above. A futures contract on a foreign
currency is an agreement between two parties to buy and sell a specified
amount of the currency for a set price on a future date. Futures contracts
and listed options on futures contracts are traded on boards of trade or
futures exchanges. Options traded in the over-the-counter market may not be
as actively traded as those on an exchange, thus it may be more difficult to
value such options. In addition, it may be difficult to enter into closing
transactions with respect to options traded over-the-counter.
A Portfolio will not speculate in foreign currency options, futures or
related options. Accordingly, a Portfolio will not hedge a currency
substantially in excess of the market value of the securities denominated in
that currency which it owns or the expected acquisition price of securities
which it anticipates purchasing.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. These hedging transactions also preclude
the opportunity for gain if the value of the hedged currency should rise.
Whether a currency hedge benefits a Portfolio will depend on Alliance's
ability to predict future foreign currency exchange rates.
19
<PAGE>
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
When a Portfolio invests in foreign securities, the securities are usually
denominated in a foreign currency, and the Portfolio may temporarily hold
foreign currency in connection with such investments. As a result, the value
of the Portfolio's assets will be subject to fluctuations based on changes in
the relative value of the foreign currency and the U.S. dollar. To control
the effects of this exchange risk, all of the Portfolios, except the Alliance
Money Market, Alliance Equity Index and Alliance Intermediate Government
Securities Portfolios, may enter into forward foreign currency exchange
contracts ("forward currency contracts"), which are agreements to purchase or
sell foreign currencies at a specified future date and price. Forward
currency contracts are usually used to fix the U.S. dollar value of
securities a Portfolio has agreed to buy or sell ("transaction hedging"). The
Portfolios may also use forward currency contracts to hedge the U.S. dollar
value of securities it already owns ("position hedging"). The Portfolios will
not speculate in forward currency contracts.
In general, forward currency contracts are not regulated by any governmental
authority guaranteed by a third party or traded on an exchange. Accordingly,
each party to a forward currency contract is dependent upon the
creditworthiness and good faith of the other. The Portfolios will only enter
forward currency contracts with counterparties that, in the opinion of
Alliance, do not present undue credit risk.
RISKS OF TRANSACTIONS IN OPTIONS, FUTURES CONTRACTS AND FORWARD CURRENCY
CONTRACTS
Although the Portfolios will enter into transactions in futures contracts,
options on securities and securities indexes, options on futures contracts,
forward currency contracts and certain currency options as described above
for hedging purposes, and transactions in options on securities and
securities indexes to generate option premium income, their use involves
certain risks. A lack of correlation between the index or instrument
underlying an option or futures contract and the assets or liabilities being
hedged, or unexpected adverse price movements, could render a Portfolio's
hedging strategy unsuccessful and could result in losses. Moreover, when an
option has been written, in the event of a decline, the underlying position
is only hedged to the extent of the amount of premium received.
Over-the-counter transactions in options on foreign currencies and options on
securities and securities indexes also involve a lack of an organized
exchange trading environment, making them less liquid and making it more
difficult to value than if they were exchange traded.
In addition, there can be no assurance that a liquid secondary market will
exist for any futures contract or option purchased or sold. Accordingly a
Portfolio may be required to maintain a position until exercise or
expiration, which could result in losses. If in the event of an adverse
movement the Portfolio could not close a futures position, it would be
required to continue to make daily cash payments of variation margin. If a
Portfolio could not close an option position, an option holder would be able
to realize profits or limit losses only by exercising the option, and an
option writer would remain obligated until exercise or expiration. Finally,
if a broker or clearing member of an options or futures clearing corporation
were to become insolvent, the Portfolios could experience delays and might
not be able to trade or exercise options or futures purchased through that
broker. In addition, the Portfolios could have some or all of their positions
closed out without their consent. If substantial and widespread, these
insolvencies could ultimately impair the ability of the clearing corporations
themselves. While the principal purpose of hedging is to limit or offset the
effects of adverse market movements, the attendant expense may cause the
Portfolios' returns to be less than if hedging had not taken place. The
overall effectiveness of hedging therefore depends on Alliance's accuracy in
predicting future changes in interest rate levels and/or securities price
movements, as well as on the expense of hedging.
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.
20
<PAGE>
As of March 31, 1999, the Trustees and officers of the Trust owned Contracts
entitling them to provide voting instructions in the aggregate with respect
to less than one percent of the Trust's shares of beneficial interest.
THE TRUSTEES
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE PRINCIPAL OCCUPATION DURING LAST FIVE YEARS
- ------------------------------------- ----------------------------------------------------------------
<S> <C>
*John D. Carifa (54)................. President, Chief Operating Officer and a Director of Alliance
Alliance Capital Management L.P. Capital Management Corporation ("ACMC"); Chairman and Chief
1345 Avenue of the Americas Executive Officer of Alliance's Mutual Fund Division. Currently
New York, NY 10105 a Director and Trustee of all other registered investment
companies (the "Alliance Mutual Funds") sponsored by Alliance,
and Director of Frontier Trust Company, a subsidiary of
Equitable.
John H. Dobkin (56)................. President of Historic Hudson Valley (historic preservation)
150 White Plains Road since prior to 1994. Previously he was Director of the National
Tarrytown, New York 10591 Academy of Design.
William H. Foulk, Jr. (66).......... Investment adviser and independent consultant. Former Senior
Room 100 Manager of Barrett Associates, Inc. (investment adviser), from
2 Greenwich Plaza May 1986 to November 1994.
Greenwich, CT 06830
Brenton W. Harries (71)............. Director of Enhance Reinsurance Co. since December 1986. Mr.
14 Point Road Harries was also President and Chief Executive Officer, Global
Wilton Point, Electronic Markets Company from August 1985 to October 1986.
South Norwalk, CT 06854
Howard E. Hassler (Chairman)(69) ... Currently a consultant specializing in retailing, finance and
P.O. Box 967 real estate. Former Chairman and Chief Executive Officer of
New York, NY 10150 Brooks Fashion Stores, Inc. (specialty clothing stores); Former
Chairman, President and Chief Operating Officer of Allied Stores
Corporation (department and specialty stores), 1987; Executive
Vice President and Director, Allied Stores Corporation from June
1984 to June 1987.
Michael Hegarty (54) ............... President, Chief Operating Officer and Director of The Equitable
The Equitable Life Assurance Society Life Assurance Society of the United States and Vice Chairman,
of the United States Chief Operating Officer and a Director of The Equitable
787 Seventh Avenue Companies since January 1998. Former Vice Chairman of The Chase
New York, NY 10019 Manhattan Corporation and The Chase Manhattan Bank from 1996 to
1998. Senior Executive Vice President of Chemical Bank 1991 to
1996. Mr. Hegarty is also a Director of the New York Cash
Exchange, Consumer Bankers Association and Chairman of the
Federal Reserve's Small Value Payments Committee. He is also a
Director of Ronald McDonald House, HeartShare Inc. and Historic
Hudson Valley, and is Treasurer of The Fifth Avenue Association,
Chairman of the executive committee of the Community
Preservation Corporation and a Trustee of Iona College.
21
<PAGE>
NAME, ADDRESS AND AGE PRINCIPAL OCCUPATION DURING LAST FIVE YEARS
- ------------------------------------- ----------------------------------------------------------------
William L. Mannion (68)................ Retired. Former Group Senior Vice President of Operations of
45 Bonnie Way American Ultramar Limited until December 1986; President and
Allendale, NJ 07401 Chief Executive Officer of Tittston Petroleum, Inc., from
January 1978 to July 1985; Director of the East Jersey Railroad
and the Bayonne Terminal Warehouse from July 1978 to May 1983.
Clifford L. Michel (59)............... Partner of the law firm of Cahill Gordon & Reindel since January
St. Bernard's Road 1972. President, Chief Executive Officer and Director of Wenonah
Gladstone, NJ 07934 Development Company (investment holding company) since 1976.
Director since 1987 and Member of the Human Resources,
Environmental and Safety, and Executive Committees since 1987 of
Placer Dome Inc. (mining). Director, Faber-Castell Corporation
from 1988-1994 (writing instruments). President of Board of
Trustees of St. Mark's School from 1988 to 1993. Chairman of the
Board of Trustees of Morristown Memorial Hospital (and Memorial
Health Foundation) from 1991 to 1996. Director, Vice Chairman
and Treasurer of Atlantic Health Systems, Inc. and Atlantic
Hospital since 1996.
*Peter D. Noris (43)................... Executive Vice President (since May 1995) and Chief Investment
The Equitable Life Assurance Society Officer of Equitable (since July 1995); Executive Vice
of the United States President, The Equitable Companies Incorporated ("Equitable
787 Seventh Avenue Companies")(since May 1995); Director of ACMC, the general
New York, NY 10019 partner of Alliance, since July 1995. Prior thereto, Vice
President of Salomon Brothers Inc., from 1992 to 1995. Principal
of Morgan Stanley & Co. Inc., from 1984 to 1992.
Donald J. Robinson (64)............... Senior Partner of the law firm of Orrick, Herrington & Sutcliffe
666 Fifth Avenue from July 1987 to December 1994; Member of the Executive
New York, NY 10022 Committee of the firm from January to December 1994; Senior
Counsel of the firm since January 1995. Trustee of the Museum of
the City of New York from 1977 to 1995.
</TABLE>
*Trustees Carifa, Hegarty and Noris are "interested persons" (as defined in
the Investment Company Act) of the Trust. Mr. Carifa is deemed an "interested
person" of the Trust by virtue of his positions as a director and officer and
director of ACMC and Alliance, respectively. Mr. Hegarty is deemed an
"interested person" of the Trust by virtue of his position as an officer and
Director of Equitable. Mr. Noris is deemed an "interested person" of the
Trust by virtue of his positions as an officer of Equitable and a director of
ACMC.
Trustees Harries and Robinson are trustees (but not "interested persons") of
The Alliance Portfolios, a mutual fund advised by Alliance. Trustee Robinson
is also a director or trustee (but not an "interested person") of 40 other
mutual funds advised by Alliance. Trustee Dobkin is also a director or
trustee (but not an "interested person") of 40 other mutual funds advised by
Alliance. Trustee Foulk is also a director or trustee (but not an "interested
person") of 44 other mutual funds advised by Alliance. Trustee Michel is a
director or trustee (but not an "interested person") of 37 other mutual funds
advised by Alliance. Trustee Hassler is a director (but not an "interested
person") of Alliance Real Estate Investment Fund, Inc, a mutual fund advised
by Alliance.
22
<PAGE>
COMMITTEES OF THE BOARD
The Trust has a standing audit committee consisting of Trustees Mannion,
Dobkin, Foulk, Harries, Hassler, Michel and Robinson. The audit committee's
function is to recommend to the Board of Trustees a firm of independent
auditors to conduct the annual audit of the Trust's financial statements;
review with such firm the outline, scope and results of this annual audit;
and review the performance and fees charged by the independent auditors for
professional services. In addition, the committee meets with the independent
auditors and representatives of management to review accounting activities
and areas of financial reporting and control.
The Trust has a nominating committee consisting of Trustees Hassler, Harries
and Robinson. This committee considers individuals for nomination as Trustees
of the Trust.
The Trust has a valuation committee consisting of Trustees Harries, Mannion
and Noris. This committee determines the value of any of the Trust's
securities and assets for which market quotations are not readily available
or for which valuation cannot otherwise be provided.
The Trust has a compensation committee consisting of Trustees Robinson,
Hassler and Mannion. The compensation committee's function is to review the
Trustees' compensation arrangements.
The Trust has a conflicts committee consisting of Trustees Hassler, Michel
and Robinson. The conflicts committee's function is to take any action
necessary to resolve conflicts among shareholders.
COMPENSATION TABLE
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
- ------------------------ -------------- ---------------- ---------------- ------------------
PENSION OR TOTAL
RETIREMENT COMPENSATION
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL FROM FUND AND
COMPENSATION AS PART OF FUND BENEFITS UPON FUND COMPLEX
NAME OF PERSON, POSITION FROM FUND EXPENSES RETIREMENT PAID TO DIRECTORS1
- ------------------------ -------------- ---------------- ---------------- ------------------
<S> <C> <C> <C> <C>
John D. Carifa
Trustee $ -0- $-0- $-0- $ -0-
- ------------------------ -------------- ---------------- ---------------- ------------------
John H. Dobkin(2)
Trustee $ -0- $-0- $-0- $126,500.00
- ------------------------ -------------- ---------------- ---------------- ------------------
Michael Hegarty
Trustee $ -0- $-0- $-0- $ -0-
- ------------------------ -------------- ---------------- ---------------- ------------------
William H. Foulk, Jr.
Trustee $25,850.00 $-0- $-0- $149,145.00
- ------------------------ -------------- ---------------- ---------------- ------------------
Brenton W. Harries
Trustee $65,000.00 $-0- $-0- $102,000.00
- ------------------------ -------------- ---------------- ---------------- ------------------
Howard E. Hassler
Trustee $82,000.00 $-0- $-0- $ 94,500.00
- ------------------------ -------------- ---------------- ---------------- ------------------
Michael Hegarty
Trustee $ -0- $-0- $-0- $ -0-
- ------------------------ -------------- ---------------- ---------------- ------------------
William L. Mannion
Trustee $69,000.00(3) $-0- $-0- $ 69,000.00
- ------------------------ -------------- ---------------- ---------------- ------------------
Clifford L. Michel
Trustee $25,850.00 $-0- $-0- $194,500.00
- ------------------------ -------------- ---------------- ---------------- ------------------
Peter D. Noris
Trustee $ -0- $-0- $-0- $ -0-
- ------------------------ -------------- ---------------- ---------------- ------------------
Donald J. Robinson
Trustee $21,450.00(3) $-0- $-0- $217,358.00
- ------------------------ -------------- ---------------- ---------------- ------------------
</TABLE>
- ------------
(1) As of December 31, 1998 there were 118 investment companies in the
Alliance Fund Complex.
(2) Appointed as Trustee on December 11, 1998.
(3) Completely deferred. The total amounts of deferred compensation
(including interest) payable by the Trust to Messrs. Mannion and
Robinson as of December 31, 1998 were $416,820 and $298,293,
respectively.
23
<PAGE>
COMPENSATION OF TRUSTEES
Each Trustee, other than those who are "interested persons" of the Trust (as
defined in the Investment Company Act), receives from the Trust an annual fee
of $29,000, plus an additional fee of $4,000 per board meeting and $2,000 per
committee meeting attended. The meeting fee paid to the Trustee acting as
chairman of the meeting is increased by 50%. The Chairman of the Board
receives an additional annual retainer of $7,000. Trustees receive $1,000 for
each day spent performing special services requested by the Chairman or the
President of the Trust, and reimbursement for expenses in connection with the
performance of regular and special services.
During the year ended December 31, 1998, the Trust paid total retainer and
meeting fees of $351,250 (including deferrals of $153,450).
A deferred compensation plan for the benefit of the Trustees has been adopted
by the Trust. Under the plan each Trustee may defer payment of all or part of
the fees payable for such Trustee's services. Each Trustee may defer payment
of such fees until his retirement as a Trustee or until the earlier
attainment of a specified age. Fees deferred under the plan, together with
accrued interest thereon, will be disbursed to a participating Trustee in
monthly installments over a five-to twenty-year period elected by such
Trustee.
THE TRUST'S OFFICERS
No officer of the Trust receives any compensation paid by the Trust. Each
officer of the Trust is an employee of Alliance or Equitable. The Trust's
principal executive officers are:
<TABLE>
<CAPTION>
NAME AND AGE POSITION WITH TRUST PRINCIPAL OCCUPATION DURING LAST FIVE YEARS
- ------------------------------ --------------------------------- -----------------------------------------------
<S> <C> <C>
John D. Carifa (54) President and Chief Executive President, Chief Operating Officer and a
Officer Director of ACMC, with which he has been
associated since prior to 1993.
Mark D. Gersten (48) Treasurer and Chief Financial Senior Vice President, Alliance Fund Services,
Officer Inc. ("AFS"), with which he has been associated
since prior to 1992.
Thomas R. Manley (46) Controller and Chief Vice President, ACMC (May 1996 to present);
Accounting Officer Assistant Vice President, ACMC (July 1993 to
May 1996); Assistant Vice President, Equitable
Capital Management Corporation ("ECMC")(March
1991 to July 1993).
Bruce W. Calvert (52) Vice President Vice Chairman and Chief Investment Officer of
ACMC, with which he has been associated since
prior to 1992.
Kathleen A. Corbet (39) Vice President Executive Vice President, ACMC (February 1997
to present); Senior Vice President, ACMC (July
1993 to February 1997); Executive Vice
President, ECMC (June 1992 to July 1993).
24
<PAGE>
NAME AND AGE POSITION WITH TRUST PRINCIPAL OCCUPATION DURING LAST FIVE YEARS
- ------------------------------ --------------------------------- -----------------------------------------------
Jerome S. Golden (53) Vice President Executive Vice President of Equitable (January
1998 to present); rejoined Equitable in 1994 as
President of the Income Management Group;
previously President of Golden Financial Group,
which he founded in 1987.
Nelson R. Jantzen (53) Vice President Senior Vice President, ACMC (July 1993 to
present); Executive Vice President, ECMC (June
1992 to July 1993).
Wayne D. Lyski (57) Vice President Executive Vice President, ACMC, with which he
has been associated since prior to 1992.
Robin K. Murray (42) Vice President Vice President, Equitable (April 1994 to
present); associated with Equitable since prior
to 1992.
Alden M. Stewart (52) Vice President Executive Vice President, ACMC (July 1993 to
present); associated with ECMC since prior to
1992.
Edmund P. Bergan, Jr. (48) Secretary Senior Vice President and General Counsel,
Alliance Fund Distributors, Inc. ("AFD"), with
which he has been associated since prior to
1992.
</TABLE>
INVESTMENT ADVISORY AND OTHER SERVICES
GENERAL INFORMATION
Alliance Capital Management L.P., a Delaware limited partnership with
principal offices at 1345 Avenue of the Americas, New York, New York 10105,
has been retained under an investment advisory agreement (the "Investment
Advisory Contract") to provide investment advice and, in general, to conduct
the management and investment program of the Trust under the supervision of
the Trust's Board of Trustees (see "Management of the Fund" in the
Prospectus).
The Adviser is a leading international investment manager supervising client
accounts with assets as of December 31, 1998, totaling more than $268 billion
(of which more than $118 billion represented the assets of investment
companies). The Adviser's clients are primarily major corporate employee
benefit funds, public employee retirement systems, investment companies,
foundations and endowment funds. The 54 registered investment companies
managed by the Adviser, comprising 118 separate investment portfolios,
currently have more than 3.6 million shareholders. As of December 31, 1998,
the Adviser and its subsidiaries employed more than 2,000 employees who
operate out of domestic offices and the offices of subsidiaries in Bahrain,
Bangalore, Cairo, Chennai, Hong Kong, Istanbul, Johannesburg, London,
Luxembourg, Madrid, Moscow, Mumbai, New Delhi, Paris, Pune, Sao Paolo, Seoul,
Singapore, Sydney, Tokyo, Toronto, Vienna and Warsaw. As of December 31,
1998, the Adviser was retained as an investment manager for employee benefit
plan assets of 35 of the FORTUNE 100 companies.
Alliance Capital Management Corporation ("ACMC"), the sole general partner
of, and the owner of a 1% general partnership interest in the Adviser, is an
indirect wholly owned subsidiary of the Equitable Life Assurance Society of
the United States ("Equitable"), one of the largest life insurance companies
in the United States and a wholly owned subsidiary of the Equitable Companies
Incorporated ("ECI"). ECI is a holding company controlled by AXA a French
insurance holding company which at March 1, 1998, beneficially owned
approximately 59% of the outstanding voting shares of ECI. As of June 30,
1998,
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ACMC and Equitable Capital Management Corporation, each a wholly owned direct
or indirect subsidiary of Equitable, together with Equitable, owned in the
aggregate approximately 57% of the issued and outstanding units representing
assignments of beneficial ownership of limited partnership interests in the
Adviser.
AXA is a holding company for an international group of insurance and related
financial services companies. AXA's insurance operations include activities
in life insurance, property and casualty insurance and reinsurance. The
insurance operations are diverse geographically, with activities principally
in Western Europe, North America and the Asia/Pacific area. AXA is also
engaged in asset management, investment banking, securities trading,
brokerage, real estate and other financial services activities principally in
the United States, as well as in Western Europe and the Asia/Pacific area.
Based on information privided by AXA, as of March 31, 1998, more than 30% of
the voting power of AXA was controlled directly and indirectly by FINAXA, a
French holding Company. As of March 31, 1998 approximately 74% of the voting
power of FINAXA was controlled directly and indirectly by four French mutual
insurance companies (the "Mutuelles AXA"), one of which, AXA Assurances
I.A.R.D. Mutuelle itself controlled directly and indirectly more than 42% of
the voting power of FINAXA. Acting as a group, the Mutuelles AXA control both
AXA and FINAXA. Mutuelle, itself controlled directly and indirectly more than
42% of the voting power of FINAXA. Acting as a group, the Mutuelles AXA
control both AXA and FINAXA.
ADVISORY AGREEMENT
The Investment Advisory Agreement terminates automatically in the event of
its assignment or, with respect to any Portfolio, upon 60 days' notice given
by the Trust's Board of Trustees, by Alliance or by majority vote (as defined
in the Investment Company Act and the rules thereunder) of the Portfolio's
shares. Otherwise, the term of the Investment Advisory Agreement on behalf of
each Portfolio is two years, but the Agreement will remain in effect from
year to year with respect to any Portfolio so long as its continuance is
approved at least annually by a majority of the non-interested members of the
Board of Trustees, and by (i) a majority vote (as defined in the Investment
Company Act and the rules thereunder) of the Portfolio's shareholders or (ii)
the Board of Trustees.
The advisory fee payable by the Trust is at the following annual percentages
of the value of each Portfolio's daily average net assets:
<TABLE>
<CAPTION>
DAILY AVERAGE NET ASSETS
-------------------------------------------------------------------------
FIRST NEXT NEXT NEXT
$750 MILLION $750 MILLION $1 BILLION $2.5 BILLION THEREAFTER
-------------- -------------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
Alliance Conservative Investors .475% .425% .375% .350% .325%
Alliance Balanced ............... .450% .400% .350% .325% .300%
Alliance Growth Investors ...... .550% .500% .450% .425% .400%
Alliance Common Stock ........... .475% .425% .375% .355% .345%*
Alliance Global ................. .675% .600% .550% .530% .520%
Alliance Aggressive Stock ...... .625% .575% .525% .500% .475%
Alliance Small Cap Growth ...... .900% .850% .825% .800% .775%
Alliance Money Market ........... .350% .325% .300% .280% .270%
Alliance Intermediate Government
Securities ..................... .500% .475% .450% .430% .420%
Alliance High Yield ............. .600% .575% .550% .530% .520%
Alliance Growth and Income ..... .550% .525% .500% .480% .470%
Alliance Quality Bond ........... .525% .500% .475% .455% .445%
Alliance Equity Index ........... .325% .300% .275% .255% .245%
Alliance International .......... .900% .825% .800% .780% .770%
</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.
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Because of undertakings made by Equitable Variable in connection with the
Reorganization, Equitable reimburses the Alliance Common Stock and Alliance
Money Market Divisions of its Continuing Separate Account to offset
completely the effect on such divisions of the portion of the Trust's
advisory fees applicable to such divisions which exceed a .25% effective
annual rate. In addition, Equitable reimburses the Alliance High Yield,
Alliance Aggressive Stock and Alliance Balanced Divisions of its Separate
Account I for the portion of the Trust's advisory fees applicable to those
divisions which exceeds a .25% effective annual rate. Because of expense
limits in the variable annuity contracts funded by its Separate Account A,
Equitable reimburses the Alliance Common Stock, Alliance Money Market and
Alliance Balanced Division of that separate account for the portion of the
Trust's advisory fees applicable to those divisions which exceeds a .26%
effective rate, and the Alliance Aggressive Stock Division for the portion
that exceeds a .41% effective rate. Policies sold by insurers other than
Equitable and newer policy designs of Equitable bear the advisory fees
without adjustment. For a discussion of the Reorganization, see "General
Information," above.
In 1998, the Trust paid advisory fees of $110,227,632 to Alliance. In 1997,
the Trust paid advisory fees of $83,421,824 to Alliance. In 1996, the Trust
paid advisory fees of $59,901,466 to Alliance.
SPECIFIC SERVICES PERFORMED
Alliance performs the following services for or on behalf of the Trust
pursuant to the Investment Advisory Agreement.
Subject to the approval and supervision of the Board of Trustees, Alliance
exercises overall responsibility for the investment and reinvestment of the
Trust's assets. Alliance manages each Portfolio and is responsible for the
investment operations of the Trust and the composition of each Portfolio,
including the purchase, retention and disposition of the investments,
securities and cash contained therein, in accordance with each Portfolio's
investment objectives and policies as stated in the Trust's Agreement and
Declaration of Trust, By-laws, Prospectus and Statement of Additional
Information as from time to time in effect. In connection therewith, Alliance
provides investment research and supervision of the Trust's investments and
conducts a continuous program of investment evaluation and, if appropriate,
sales and reinvestment of the Trust's assets. Alliance furnishes to the Trust
such statistical information, with respect to the investments which the Trust
may hold or contemplate purchasing, as the Trust may reasonably request. On
Alliance's own initiative, it apprises the Trust of important developments
materially affecting each Portfolio and furnishes the Trust from time to time
such information as it may believe appropriate for this purpose. In addition,
Alliance furnishes to the Board of Trustees such periodic and special reports
as the Board may reasonably request. Alliance also implements all purchases
and sales of investments for each Portfolio in a manner consistent with such
investment policies, as from time to time amended.
Alliance, on behalf of the Trust, arranges for the placement of orders and
other execution of transactions for each Portfolio.
At the Trust's request, Alliance provides, without charge, personnel, who may
be the Trust's officers, to render such clerical, administrative and other
services, other than investor services or accounting services, to the Trust
and also furnishes to the Trust, without charge, such office facilities,
which may be Alliance's own offices, as may be required to perform its
investment advisory and portfolio management services. The Trust may also
hire its own employees and contract for services to be performed by third
parties.
Pursuant to the terms of the Investment Advisory Agreement, Alliance has
contracted with Equitable for the provision of certain administrative
services to the Trust.
Alliance also performs investment advisory services for certain of
Equitable's separate and advisory accounts and for other clients, including
mutual funds registered as investment companies under the Investment Company
Act, some of which fund Contracts issued by Equitable and certain other
unaffiliated insurance companies. There are occasions on which transactions
for the Trust may be executed as part of concurrent authorizations to
purchase or sell the same security for Equitable's general account or for
other accounts or investment companies managed by Equitable or Alliance.
These concurrent authorizations potentially can be either advantageous or
disadvantageous to the Trust. When
27
<PAGE>
these concurrent authorizations occur, the objective is to allocate the
executions and related brokerage charges among the accounts or mutual funds
in an equitable manner.
ACCOUNTING SERVICES
Under an Accounting Services Agreement dated as of June 30, 1997, Alliance
has agreed to provide, or arrange for the provision of, certain investment
accounting services, including calculation of net asset values, preparation
of financial statements for each Portfolio, and such other accounting
services as the Trust may from time to time reasonably request, in exchange
for reimbursement by the Trust of costs and expenses incurred in providing,
or arranging for the provision of, such services. For 1998, Alliance was
reimbursed for $706,110 of costs and expenses incurred in arranging for the
provision of accounting services. Because it entered into the Accounting
Services Agreement of June 30, 1997, the first full year for which Alliance
was reimbursed for such services was 1998.
BROKERAGE ALLOCATION
SELECTION OF BROKERS
Pursuant to the Investment Advisory Agreement, Alliance, on behalf of the
Trust, arranges for the placement of orders and other transactions for each
Portfolio.
BROKERAGE COMMISSIONS
The Portfolios are charged for securities brokers' commissions, transfer
taxes and similar fees relating to securities transactions. Alliance seeks to
obtain the best price and execution on all orders placed for the Portfolios,
considering all the circumstances except to the extent it may be permitted to
pay higher commissions as described below.
It is expected that securities will ordinarily be purchased in the primary
markets, whether over-the-counter or listed, and that listed securities may
be purchased in the over-the-counter market if that market is deemed the
primary market.
Transactions on stock exchanges involve the payment of brokerage commissions.
In transactions on stock exchanges in the United States, these commissions
are negotiated, whereas on many foreign stock exchanges these commissions are
fixed. However, brokerage commission rates in certain countries in which the
Portfolios may invest may be discounted for certain large domestic and
foreign investors such as the Portfolios. A number of foreign banks and
brokers will be used for execution of each Portfolio's portfolio
transactions. In the case of securities traded in the foreign and domestic
over-the-counter markets, there is generally no stated commission, but the
price usually includes an undisclosed com mission or mark-up. In underwritten
offerings, the price generally includes a disclosed fixed commission or
discount.
Alliance may, in the allocation of brokerage business, take into
consideration research and other brokerage services provided by brokers and
dealers to Equitable or Alliance. The research services include economic,
market, industry and company research material. Based upon an assessment of
the value of research and other brokerage services provided, proposed
allocations of brokerage for commission transactions are periodically
prepared internally. In limited cases, certain brokers have been advised
informally that, although the Trust is under no legal obligation, an attempt
will be made to meet the internally proposed level of allocated brokerage
business to the broker for brokerage and research services over a period of
time.
Commissions charged by brokers which provide research services may be
somewhat higher than commissions charged by brokers which do not provide
them. As permitted by Section 28(e) of the Securities Exchange Act of 1934
and by policies adopted by the Trustees, Alliance may cause the Trust to pay
a broker-dealer which provides brokerage and research services to Alliance an
amount of commission for effecting a securities transaction for the Trust in
excess of the commission another broker-dealer would have charged for
effecting that transaction.
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<PAGE>
Alliance does not engage brokers whose commissions it believes to be
unreasonable in relation to services provided. The overall reasonableness of
commissions paid will be evaluated by rating brokers on such general factors
as execution capabilities, quality of research (that is, quantity and quality
of information provided, diversity of sources utilized, nature and frequency
of communication, professional experience, analytical ability and
professional stature of the broker) and financial standing, as well as the
net results of specific transactions, taking into account such factors as
price, promptness, size of order and difficulty of execution. The research
services obtained will, in general, be used by Alliance for the benefit of
all accounts for which it makes investment decisions. The receipt of research
services from brokers will tend to reduce Alliance's expenses in managing the
Portfolios other than the Alliance Money Market Portfolio. This has been
taken into account when setting the amount paid for managing those
Portfolios. Although orders may be given by the Alliance Money Market
Portfolio to brokers or dealers which provide research services to Alliance,
the fact that the investment adviser may benefit from such research has not
been considered when setting the amount paid for managing that Portfolio.
This is because Alliance Money Market Portfolio transactions will generally
be with issuers or market makers where no commissions are charged. In 1996
the Trust paid an aggregate of $27,895,553 in brokerage commissions of which
$25,576,822 was paid to brokers relating to transactions aggregating
$12,956,909,742 which were directed to them in part for research services
provided by them. In 1997 the Trust paid an aggregate of $30,333,516 in
brokerage commissions of which $14,164,169 was paid to brokers relating to
transactions aggregating $15,241,230,017 which were directed to them in part
for research services provided by them. In 1998 the Trust paid an aggregate
of $32,234,714 in brokerage commissions of which $16,107,361 was paid to
brokers relating to transactions aggregating $19,844,316,122 which were
directed to them in part for research services provided by them.
BROKERAGE TRANSACTIONS WITH AFFILIATES
To the extent permitted by law, the Trust may engage in brokerage
transactions with its affiliate, Donaldson, Lufkin & Jenrette, Inc. ("DLJ"),
with brokers who are DLJ affiliates, or with unaffiliated brokers who trade
or clear through DLJ. The Investment Company Act generally prohibits the
Trust from engaging in securities transactions with DLJ or its affiliates, as
principal, unless pursuant to an exemptive order from the SEC. The Trust may
apply for such exemptive relief. The Trust has adopted procedures, prescribed
by the Investment Company Act, which are reasonably designed to provide that
any commissions or other remuneration it pays to DLJ or its affiliates do not
exceed the usual and customary broker's commission. In addition, the Trust
will adhere to the requirements under the Securities Exchange Act of 1934
governing floor trading. Also, due to securities law limitations, the Trust
will limit purchases of securities in a public offering, if such securities
are underwritten by DLJ or its affiliates. During the year ended December 31,
1996, the Trust paid $2,500 to Autranet, Inc., an affiliate of DLJ, and
during the fiscal year ended December 31, 1997, the Trust paid $29,805 to
DLJ, and during the year ended December 31, 1998, the Trust paid $25,510 to
DLJ, of which $13,940 was paid to DLJ's Pershing Division, in accordance with
the procedures described above. The percentage of the Trust's aggregate
brokerage commissions paid to DLJ for the year ended December 31, 1998 was
0.08%. The percentage of the Trust's aggregate dollar amount of transactions
involving the payment of commissions affected through DLJ during the year
ended December 31, 1998 was 0.09%.
TRUST EXPENSES AND OTHER CHARGES
Pursuant to the Trust's Investment Advisory Agreement, the Trust is obligated
to pay all of its operating expenses not specifically assumed by Alliance. In
addition, as principal underwriter of the Trust's Class IA shares, EQ
Financial Consultants, Inc. ("EQ Financial") will bear the Trust's marketing
expenses. A daily adjustment will be made in the values under certain
Contracts outstanding and offered by Equitable and Equitable Variable when
the management separate accounts of Equitable and Equitable Variable were
reorganized into unit investment trust form to offset completely the impact
of any such expense on values under such Contracts. Contracts sold by
insurers other than Equitable and Equitable Variable and new policy designs
of Equitable bear such expenses without adjustment. Although Equitable does
not expect the Trust to incur any federal income or excise tax liability (see
"Dividends, Distributions and Taxes" in the Prospectus), Equitable reserves
the right to exclude any such taxes from such adjustments.
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<PAGE>
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.
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 has determined that the matter affects only the interest of
shareholders of one or more classes, in which case only the shareholders of
such class or classes shall be entitled to vote thereon. Any matter shall be
deemed to have been effectively acted upon with respect to each Portfolio if
acted upon as provided in Rule 18f-2 under the 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 of shares shall have a
different designation; (2) each class 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 Plans for Class IB shares.
PURCHASE AND PRICING OF SECURITIES
As stated in the Prospectus, the Trust will offer and sell its shares at each
Portfolio's per share net asset value, which will be determined in the manner
set forth below.
The net asset value of the shares of each Portfolio of the Trust will be
determined once daily, immediately after the declaration of dividends, if
any, at the close of business on each business day. The net asset value per
share of each Portfolio will be computed by dividing the sum of the
investments held by that Portfolio, plus any cash or other assets, minus all
liabilities, by the total number of outstanding shares of that Portfolio at
such time. All expenses borne by the Trust, including the investment advisory
fee payable to Alliance, will be accrued daily.
The net asset value per share of any series (i.e., Portfolio) will be
determined and computed as follows, in accordance with generally accepted
accounting principles, and consistent with the Investment Company Act:
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o The assets belonging to each series will include (a) all consideration
received by the Trust for the issue or sale of shares of that
particular series, together with all assets in which such consideration
is invested or reinvested, (b) all income, earnings, profits, and
proceeds thereof, including any proceeds derived from the sale,
exchange or liquidation of such assets, (c) any funds or payments
derived from any reinvestment of such proceeds in whatever form the
same may be and (d) General Items, if any, allocated to that series.
General Items includes any assets, income, earnings, profits, and
proceeds thereof, funds, or payments which are not readily identifiable
as belonging to any particular series. General Items will be allocated
as the Trust's Board of Trustees considers fair and equitable.
o The liabilities belonging to each series will include (a) the
liabilities of the Trust in respect of that series, (b) all expenses,
costs, charges and reserves attributable to that series, and (c) any
general liabilities, expenses, costs, charges or reserves of the Trust
which are not readily identifiable as belonging to any particular
series which have been allocated as the Trust's Board of Trustees
considers fair and equitable.
The value of each Portfolio will be determined at the close of business on
each "business day," i.e., each day in which the degree of trading in the
Portfolio might materially affect the net asset value of such Portfolio.
Normally, this would be each day that the NYSE is open and would include some
Federal holidays. For stocks and options, the close of trading is the 4:00
p.m. and 4:15 p.m. (Eastern time) close respectively of the NYSE and the
Options Price Reporting Authority; for bonds the close of trading is the
close of business in New York City, and for foreign securities it is the
close of business in the applicable foreign country with exchange rates
determined at 2:00 p.m. New York City time.
Values are determined according to generally accepted accounting practices
and all laws and regulations that apply. The assets of each Portfolio are
valued as follows:
o Stocks listed on national securities exchanges and certain
over-the-counter issues traded on the NASDAQ national market system are
valued at the last sale price, or, if there is no sale, at the latest
available bid price. Other unlisted stocks are valued at their last
sale price or, if there is no reported sale during the day, at a bid
price estimated by a broker.
o Foreign securities not traded directly, or in American Depositary
Receipt or similar form in the United States, are valued at
representative quoted prices in the currency of the country of origin.
Foreign currency is converted into its U.S. dollar equivalent at
current exchange rates.
o U.S. Treasury securities and other obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities, are valued at
representative quoted prices.
o Long-term corporate bonds may be valued on the basis of prices provided
by a pricing service when such prices are believed to reflect the fair
market value of such securities. The prices provided by a pricing
service take into account many factors, including institutional size,
trading in similar groups of securities and any developments related to
specific securities; however, when such prices are not available, such
bonds are valued at a bid price estimated by a broker.
o Short-term debt securities held by the Portfolios other than the Money
Market Portfolio which mature in 60 days or less are valued at
amortized cost, which approximates market value. Short-term debt
securities held by such Portfolios which mature in more than 60 days
are valued at representative quoted prices. Securities held by the
Money Market Portfolio are valued at prices based on equivalent yields
or yield spreads.
o Convertible preferred stocks listed on national securities exchanges
are valued as of their last sale price or, if there is no sale, at the
latest available bid price.
o Convertible bonds, and unlisted convertible preferred stocks, are
valued at bid prices obtained from one or more of the major dealers in
such bonds or stocks. Where there is a discrepancy between dealers,
values may be adjusted based on recent premium spreads to the
underlying common stocks.
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o Mortgage backed and asset backed securities are valued at prices
obtained from a bond pricing service where available, or at a bid price
obtained from one or more of the major dealers in such securities. If a
quoted price is unavailable, an equivalent yield or yield spread quotes
will be obtained from a broker and converted to a price.
o Purchased options, including options on futures, are valued at their
last bid price. Written options are valued at their last asked price.
o Futures contracts are valued as of their last sale price or, if there
is no sale, at the latest available bid price.
o Other securities and assets for which market quotations are not readily
available or for which valuation cannot be provided are valued in good
faith by the valuation committee of the Board of Trustees using its
best judgment.
The market value of a put or call option will usually reflect, among other
factors, the market price of the underlying security.
When the Trust writes a call option, an amount equal to the premium received
by the Trust is included in the Trust's financial statements as an asset and
an equivalent liability. The amount of the liability is subsequently
marked-to-market to reflect the current market value of the option written.
When an option expires on its stipulated expiration date or the Trust enters
into a closing purchase or sale transaction, the Trust realizes a gain (or
loss) without regard to any unrealized gain or loss on the underlying
security, and the liability related to such option is extinguished. When an
option is exercised, the Trust realizes a gain or loss from the sale of the
underlying security, and the proceeds of sale are increased by the premium
originally received, or reduced by the price paid for the option.
Alliance may, from time to time, under the general supervision of the Board
of Trustees or its valuation committee, utilize the services of one or more
pricing services for assistance in valuing the assets of the Trust. Alliance
will continuously monitor the performance of such pricing services.
CERTAIN TAX CONSIDERATIONS
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 that is a shareholder of a Portfolio
will generally not be taxed on distributions from that Portfolio.
Each Portfolio is treated for Federal income tax purposes as a separate
taxpayer. Under present law, as a Massachusetts business trust doing business
in New York, a Portfolio will also not be subject to any excise or income
taxes in Massachusetts or New York on such amounts. A number of technical
rules are prescribed for computing net investment income and net capital
gains. For example, dividends are generally treated as received on the
ex-dividend date. Also, certain foreign currency losses and capital losses
arising after October 31 of a given year may be treated as if they arise on
the first day of the next taxable year.
Portfolios investing in foreign securities or currencies may be subject to
foreign taxes which could reduce the investment performance of such
Portfolios.
To qualify for treatment as a regulated investment company, a Portfolio must,
among other things, derive in each taxable year at least 90% of its gross
income from dividends, interest, payments with respect to securities loans,
gains from the sale or other disposition of stock or securities or foreign
currencies, or other income derived with respect to its business of
investing. For purposes of this test, gross income is determined without
regard to losses from the sale or other disposition of stock or securities.
In addition, the Secretary of the Treasury has regulatory authority to
exclude from qualifying income described above
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foreign currency gains which are not "directly related" to a regulated
investment company's "principal business of investing" in stock, securities
or related options or futures. The Secretary of the Treasury has not to date
exercised this authority.
A Portfolio, in general, must also (a) diversify its holdings so that, at the
close of each quarter of its taxable year, (i) at least 50% of the market
value of its total assets consists of cash and cash items (including
receivables), U.S. Government securities, securities of other regulated
investment companies, and other securities limited generally with respect to
any one issuer to not more than 5% of the value of its total assets and not
more than 10% of the outstanding voting securities of such issuer, and (ii)
not more than 25% of the value of its total assets is invested in the
securities (other than U.S. Government securities or securities of other
regulated investment companies) of any issuer or two or more issuers which
the Fund controls and which are engaged in the same, similar, or related
trades or businesses; and (b) distribute with respect to each taxable year at
least 90% of the sum of its taxable net investment income, its net tax-exempt
income, and the excess, if any, of net short-term capital gains over net
long-term capital losses for such year.
Generally, in order to avoid a 4% nondeductible excise tax, each Portfolio of
the Trust must distribute to its shareholders during the calendar year the
following amounts:
o 98% of the Portfolio's ordinary income for the calendar year;
o 98% of the Portfolio's capital gain net income (all capital gains, both
long-term and short-term, minus all such capital losses), computed as
if the Portfolio were on a taxable year ending October 31 of the year
in question and beginning the previous November 1; and
o any undistributed ordinary income or capital gain net income for the
prior year.
The excise tax is inapplicable to any regulated investment company whose sole
shareholders are either tax-exempt pension trusts or separate accounts of
life insurance companies funding variable contracts. Although each Portfolio
believes that it is not subject to the excise tax, the Portfolios intend to
make the distributions required to avoid the imposition of such a tax.
Because the Trust is used to fund non-qualified Contracts, each Portfolio
must meet the diversification requirements imposed by the Code or these
policies will fail to qualify as life insurance and annuities. In general,
for a Portfolio to meet the investment diversification requirements of
Subchapter L of the Code, Treasury regulations require that no more than 55%
of the total value of the assets of the Portfolio may be represented by any
one investment, no more than 70% by two investments, no more than 80% by
three investments and no more than 90% by four investments. Generally, for
purposes of the regulations, all securities of the same issuer are treated as
a single investment. In the context of U.S. Government securities (including
any security that is issued, guaranteed or insured by the United States or an
instrumentality of the United States) each U.S. Government agency or
instrumentality is treated as a separate issuer. Compliance with the
regulations is tested on the last day of each calendar year quarter. There is
a 30-day period after the end of each calendar year quarter in which to cure
any non-compliance.
PORTFOLIO PERFORMANCE
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 of these Portfolios 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, 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.(1) Class IA
shares are not subject to any 12b-1 fees.
- ------------
(1) With respect to the Alliance Small Cap Growth Portfolio, the 12b-1 fee is
paid at an annual rate not to exceed the lesser of (a) 0.25% of the average
daily net assets of the Portfolio attributable to Class IB shares and (b) an
amount that, when added to certain other expenses of the Class IB shares,
would result in the ratio of such expenses to average daily net assets
attributable to Class IB shares equalling 1.20%.
33
<PAGE>
At any time in the future, yields and total returns may be higher or lower
than past yields or returns and there can be no assurance that any historical
results will continue. All returns assume reinvestment of distributions at
net asset value and represent past performance; they do not guarantee future
results. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their
original cost. Returns and yields shown do not reflect insurance company
charges and fees applicable to the Contracts.
ALLIANCE MONEY MARKET PORTFOLIO YIELD
The Alliance Money Market Portfolio calculates yield information for
seven-day periods and may illustrate that information in advertisements or
sales materials. The seven-day current yield calculation is based on a
hypothetical shareholder account with one share at the beginning of the
period. To determine the seven-day rate of return, the net change in the
share value is computed by subtracting the share value at the beginning of
the period from the share value (exclusive of capital changes) at the end of
the period. The net change is divided by the share value at the beginning of
the period to obtain the base period rate of return. This seven-day base
period return is then multiplied by 365/7 to produce an annualized current
yield figure carried to the nearest one-hundredth of one percent.
Realized capital gains or losses and unrealized appreciation or depreciation
of the Portfolio are excluded from this calculation. The net change in share
values also reflects all accrued expenses of the Alliance Money Market
Portfolio as well as the value of additional shares purchased with dividends
from the original shares and any additional shares.
The effective yield is obtained by adjusting the current yield to give effect
to the compounding nature of the Alliance Money Market Portfolio's
investments, as follows: The unannualized base period return is compounded by
adding one to the base period return, raising the sum to a power equal to 365
divided by 7, and subtracting one from the result--i.e., effective yield =
[(base period return +1)365/7] -1.
Alliance Money Market Portfolio yields will fluctuate daily. Accordingly,
yields for any given period are not necessarily representative of future
results. Yield is a function of the type and quality of the instruments in
the Alliance Money Market Portfolio, maturities and rates of return on
investments, among other factors. In addition, the value of shares of the
Alliance Money Market Portfolio will fluctuate and not remain constant.
The Alliance Money Market Portfolio yield may be compared with yields of
other investments. However, it should not be compared to the return on fixed
rate investments which guarantee rates of interest for specified periods. The
yield also should not be compared to the yield of money market funds made
available to the general public because their yields usually are calculated
on the basis of a constant $1 price per share and they pay out earnings in
dividends which accrue on a daily basis. Investment income of the Alliance
Money Market Portfolio, including any realized gains as well as accrued
interest, is not paid out in dividends but is reflected in the share value.
The Alliance Money Market Portfolio yield also does not reflect insurance
company charges and fees applicable to Contracts.
The seven-day current yield for Class IB shares of the Money Market Portfolio
was 4.44% for the period ended December 31, 1998. The effective yield for
that period was 4.54%.
ALLIANCE QUALITY BOND, ALLIANCE INTERMEDIATE GOVERNMENT SECURITIES AND
ALLIANCE HIGH YIELD PORTFOLIO YIELDS
The Alliance Quality Bond, Alliance Intermediate Government Securities and
Alliance High Yield Portfolios each may illustrate its yield in
advertisements or sales materials. Such yields will be computed by
annualizing net investment income, as determined by the SEC's formula,
calculated on a per share basis for a recent 30-day period and dividing that
amount by a Portfolio share's net asset value (reduced by any undeclared
earned income expected to be paid shortly as a dividend) on the last trading
day of that period. Net investment income will reflect amortization of any
market value premium or discount of fixed income securities (except for
obligations backed by mortgages or other assets) over such period and may
include recognition of a pro rata portion of the stated dividend rate of
dividend paying portfolio securities. The Portfolios' yields will vary from
time to time depending upon market conditions, the compostition of
34
<PAGE>
each Portfolio's portfolio and operating expenses of the Trust allocated to
each Portfolio. Yield should also be considered relative to changes in the
value of a Portfolio's shares and to the relative risks associated with the
investment objectives and policies of the Portfolios. These yields do not
reflect insurance company charges and fees applicable to the Contracts.
At any time in the future, yields and total return may be higher or lower
than past yields and there can be no assurance that any historical results
will continue.
The 30-day yields for Class IB shares of the Alliance Quality Bond, Alliance
Intermediate Government Securities and Alliance High Yield Portfolios for the
period ended December 31, 1998 were 4.90%, 4.46% and 14.22%, respectively.
TOTAL RETURN CALCULATIONS
Each Portfolio may provide or advertise average annual total return
information calculated according to a formula prescribed by the SEC.
According to that formula, average annual total return figures represent the
average annual compounded rate of return for the stated period. Average
annual total return quotations reflect the percentage change between the
beginning value of a static account in the Portfolio and the ending value of
that account measured by the then current net asset value of that Portfolio
assuming that all dividends and capital gains distributions during the stated
period were invested in shares of the Portfolio when paid. Total return is
calculated by finding the average annual compounded rates of return of a
hypothetical investment that would equate the initial amount invested to the
ending redeemable value of such investment, according to the following
formula:
T = (ERV/P)1/n -1
where T equals average annual total return; where ERV, the ending redeemable
value, is the value at the end of the applicable period of a hypothetical
$1,000 investment made at the beginning of the applicable period; where P
equals a hypothetical initial investment of $1,000; and where n equals the
number of years. These total returns do not reflect insurance company charges
and fees applicable to the Contracts.
The average annual total returns through December 31, 1998 for Class IB
shares of the Alliance Common Stock Portfolio for one year, five years, and
ten years were 29.06%, 21.67%, and 18.38%, respectively.
The average annual total returns through December 31, 1998 for Class IB
shares of the Alliance Intermediate Government Securities Portfolio for one
year, five years, and since inception (on April 1, 1991) were 7.48%, 5.13%,
and 6.83%, respectively.
The average annual total returns through December 31, 1998 for Class IB
shares of the Alliance High Yield Portfolio for one year, five years, and ten
years were (5.38)%, 9.74%, and 10.91%, respectively.
The average annual total returns through December 31, 1998 for Class IB
shares of the Alliance Balanced Portfolio for one year, five years, and ten
years were 17.82%, 10.56%, and 12.25%, respectively.
The average annual total returns through December 31, 1998 for Class IB
shares of the Alliance Global Portfolio for one year, five years, and ten
years were 21.50%, 14.01%, and 14.55%, respectively.
The average annual total returns through December 31, 1998 for Class IB
shares of the Alliance Aggressive Stock Portfolio for one year, five years,
and ten years were 0.05%, 11.25%, and 18.65%, respectively.
The average annual total returns through December 31, 1998 for Class IB
shares of the Alliance Conservative Investors Portfolio for one year, five
years, and since inception (on October 2, 1989) were 13.60%, 9.13%, and
9.71%, respectively.
The average annual total returns through December 31, 1998 for Class IB
shares of the Alliance Growth Investors Portfolio for one year, five years,
and since inception (on October 2, 1989) were 18.83%, 13.66%, and 15.81%,
respectively.
The average annual total returns through December 31, 1998 for Class IB
shares of the Alliance Quality Bond Portfolio for one year, five years and
since inception (on October 1, 1993) were 8.43%, 6.52% and 6.05%,
respectively.
35
<PAGE>
The average annual total returns through December 31, 1998 for Class IB
shares of the Alliance Growth and Income Portfolio for one year, five years
and since inception (on October 1, 1993) were 20.56%, 17.57% and 16.56%,
respectively.
The average annual total returns through December 31, 1998 for Class IB
shares of the Alliance Equity Index Portfolio for one year and since
inception (on March 1, 1994) were 27.74% and 24.07%, respectively.
The average annual total returns through December 31, 1998 for Class IB
shares of the Alliance International Portfolio for one year and since
inception (April 3, 1995) were 10.30% and 7.22%, respectively.
The average annual total returns through December 31, 1998 for Class IB
shares of the Alliance Small Cap Growth Portfolio for one year and since
inception (May 1, 1997) were (4.44)% and 12.06%.
Each Portfolio, from time to time, also may advertise its cumulative total
return figures. Cumulative total return is the compound rate of return on a
hypothetical initial investment of $1,000 for a specified period. Cumulative
total return quotations reflect changes in the price of a Portfolio's shares
and assume that all dividends and capital gains distributions during the
period were reinvested in shares of that Portfolio. Cumulative total return
is calculated by finding the compound rates of return of a hypothetical
investment over such period, according to the following formula (cumulative
total return is then expressed as a percentage):
C = (ERV/P) -1
Where:
C = Cumulative Total Return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value; ERV is the value, at the end of the applicable
period, of a hypothetical $1,000 investment made at the beginning of
the applicable period.
The cumulative total returns, since the inception of each Portfolio through
December 31, 1998, for Class IB shares of the Alliance Common Stock, Alliance
Intermediate Government Securities, Alliance High Yield, Alliance Balanced,
Alliance Global, Alliance Aggressive Stock, Alliance Conservative Investors,
Alliance Growth Investors, Alliance Quality Bond, Alliance Growth and Income,
Alliance Equity Index, Alliance International and Alliance Small Cap Growth
Portfolios were 3,001.18%, 66.92%, 222.11%, 357.44%, 272.35%, 710.24%,
135.73%, 288.65%, 36.12%, 123.54%, 183.45%, 29.86%, and 20.95%, respectively.
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.
OTHER SERVICES
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, serves as the Trust's independent accountants.
The financial statements of the Alliance Common Stock, Alliance Money Market,
Alliance Balanced, Alliance Aggressive Stock, Alliance High Yield, Alliance
Global, Alliance Conservative Investors, Alliance Growth Investors, Alliance
Intermediate Government Securities, Alliance Quality Bond, Alliance Growth
and Income, Alliance Equity Index, Alliance International and Alliance Small
Cap Growth Portfolios for the year ended December 31, 1998, which are
included in this SAI, have been audited by PricewaterhouseCoopers LLP, the
Trust's independent accountants for such periods, as stated in their report
appearing herein, and have been so included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
36
<PAGE>
CUSTODIAN
The Chase Manhattan Bank, whose principal address is One Chase Manhattan
Plaza, New York, New York 10081, has been designated the Custodian of the
Trust's portfolio securities and other assets.
TRANSFER AGENT
Equitable serves as the transfer agent and dividend disbursing agent for the
Trust. For the year ended December 31, 1998, Equitable received no
compensation for providing such services for the Trust.
UNDERWRITER
The Trust has distribution agreements (the "Class IB Underwriting
Agreements") with each of Equitable Distributors, Inc. ("EDI") and EQ
Financial Consultants, Inc. ("EQ Financial") (each a "Class IB Distributor")
with respect to the Class IB shares. Both EDI and EQ Financial are indirect
wholly owned subsidiaries of Equitable and affiliates of Alliance. The
address for EDI is 787 Seventh Avenue, New York, New York 10019. The address
for EQ Financial is 1290 Avenue of the Americas, New York, New York 10104.
The Class IB Underwriting Agreements became effective on July 1, 1998. The
Class IB Underwriting Agreement with EDI replaced an earlier substantially
identical agreement (the "First Underwriting Agreement") that was amended to
reflect the addition of EQ Financial as a Class IB Distributor.
The Class IB Underwriting Agreements will remain in effect until July 1,
1999, and from year to year thereafter only if their continuance is approved
annually by (1) a majority of the Trustees who are not parties to such
agreement or "interested person" (as defined in the Investment Company Act)
of the Trust or a Portfolio and who have no direct or indirect financial
interest in the operation of the distribution plan adopted under Rule 12b-1
of the Investment Company Act (the "Distribution Plan") or any such related
agreement (the "Independent Trustees") and (2) either by vote of a majority
of the Trustees or a majority of the outstanding voting securities of the
Trust. Most recently, continuance of the Agreement until July 1, 2000 was
approved by a vote, cast in person, of the Trustees including a majority of
the Trustees who are not "interested persons", as defined in the 1940 Act, at
their meeting held on March 11, 1998.
Each Class IB Distributor will pay for printing and distributing prospectuses
or reports prepared for its use in connection with its offering of the Class
IB shares to prospective investors and preparing, printing and mailing any
other literature or advertising in connection with its offering of the Class
IB shares to prospective investors. Each Class IB Distributor will pay all
fees and expenses in connection with its qualification and registration as a
broker or dealer under Federal and state laws and of any activity which is
primarily intended to result in the sale of Class IB shares issued by the
Trust, unless the Distribution Plan in effect for Class IB shares provides
that the Trust or another entity shall bear some or all of such expenses.
As agent, each Class IB Distributor may offer shares of each Portfolio on a
continuous basis to the separate accounts of insurance companies offering the
Contracts in all states in which the Portfolio or the Trust may from time to
time be registered or where permitted by applicable law. The Class IB
Underwriting Agreements provided that each Class IB Distributor accepts
orders for shares at net asset value without sales commissions or loads being
charged. Neither Class IB Distributor has made any firm commitment to acquire
shares of any Portfolio.
A description of the Distribution Plan and related services and fees
thereunder is provided in the prospectus. On June 7, 1996, the Board of
Trustees of the Trust unanimously approved the Distribution Plan. In
connection with its consideration of the Distribution Plan, the Board of
Trustees was furnished with drafts of the Distribution Plan and the related
materials, including information related to the advantages and disadvantages
of Rule 12b-1 plans currently being used in the mutual fund industry
generally and with other competing funding vehicles for variable annuity and
variable life contracts. Legal counsel for the Independent Trustees provided
additional information, summarized the provisions of the proposed
Distribution Plan and discussed the legal and regulatory considerations in
adopting such Distribution Plan.
37
<PAGE>
The Board considered various factors in connection with its decision as to
whether to approve the Distribution Plan, including (a) the nature and causes
of the circumstances which make implementation of the Distribution Plan
necessary and appropriate; (b) the way in which the Distribution Plan would
address those circumstances, including the nature and potential amount of
expenditures; (c) the nature of the anticipated benefits; (d) the possible
benefits of the Distribution Plan to any other person relative to those of
the Trust; (e) the effect of the Distribution Plan on existing owners of
variable annuity contracts and variable life insurance policies; (f) the
merits of possible alternative plans or pricing structures; (g) competitive
conditions in the variable products industry; and (h) the relationship of the
Distribution Plan to other distribution efforts of the Trust.
Based upon its review of the foregoing factors and the materials presented to
it, and in light of its fiduciary duties under relevant state law and the
Investment Company Act, the Board determined, in the exercise of its business
judgment, that the Distribution Plan is reasonably likely to benefit the
Trust and the shareholders of its Portfolios.
The Distribution Plan and any Rule 12b-1 related agreement that is entered
into by the Trust or a Class IB Distributor in connection with the
Distribution Plan will continue in effect for a period of more than one year
only so long as its continuance is specifically approved at least annually by
a vote of a majority of the Trust's Board of Trustees, and of a majority of
the Independent Trustees, cast in person at a meeting called for the purpose
of voting on the Distribution Plan, or the Rule 12b-1 related agreement, as
applicable. In addition, the Distribution Plan and any Rule 12b-1 related
agreement may be terminated as to Class IB shares of a Portfolio at any time,
and in the case of any Rule 12b-1 related agreement, upon 60 days' written
notice, without penalty, by vote of a majority of the outstanding Class IB
shares of that Portfolio or by vote of a majority of the Independent
Trustees. The Distribution Plan also provides that it may not be amended to
increase materially the amount (to more than .50% of average daily net assets
annually) that may be spent for distribution of Class IB shares of a
Portfolio without the approval of Class IB shareholders of that Portfolio.
The Trustees currently limit payments under the Distribution Plan to .25% of
a Portfolio's aggregate average daily net assets attributable to the Class IB
shares. The Distribution Plan provides that a portion of the distribution
services fee in an amount not to exceed .25% of the aggregate average daily
net assets of a Portfolio attributable to Class IB shares constitutes a
service fee that the Class IB Distributor will use for personal service
and/or the maintenance of shareholder accounts. The Distribution Plan also
provides that Alliance may use its own resources, which may include
management fees received by Alliance from the Trust or other investment
companies which it manages and Alliance's past profits, to finance the
distribution of the Portfolios' shares.
The Class IB Underwriting Agreements provide that each Class IB Distributor
will receive fees, from each Portfolio other than the Alliance Small Cap
Growth Portfolio, at the annual rate of 0.25% of the average annual net
assets of such Portfolio attributable to Class IB shares for which such Class
IB Distributor provides services and/or assumes expenses under the
Distribution Plan. With respect to the Alliance Small Cap Growth Portfolio,
this amount shall not exceed the lesser of (a) 0.25% of the average daily net
assets of the Portfolio attributable to Class IB shares for which each Class
IB Distributor provides services and/or assumes expenses under the
Distribution Plan, and (b) an amount that, when added to certain other
expenses of the Class IB shares, would result in a ratio of expenses to
average daily net assets attributable to Class IB shares for which such Class
IB Distributor provides services and/or assumes expenses under the
Distribution Plan equaling 1.20%. The underwriters receive no compensation
other than that paid pursuant to the distribution plan.
For services rendered by EDI in connection with the distribution of Class IB
shares pursuant to the Distribution Plan, EDI received $63 with respect to
the Class IB shares of Alliance Aggressive Stock Portfolio, $134 with respect
to the Class IB shares of Alliance Common Stock Portfolio, $78 with respect
to the Class IB shares of Alliance Growth Investors Portfolio, $49 with
respect to the Class IB shares of Alliance Global Portfolio, $58 with respect
to the Class IB shares of Alliance High Yield Portfolio and $254 with respect
to the Class IB shares of Alliance Money Market Portfolio, for the period
October 2, 1996 to December 31, 1996.
For services rendered by EDI in connection with the distribution of Class IB
shares pursuant to the Distribution Plan, the EDI received $75,004 with
respect to the Class IB shares of the Alliance Aggressive
38
<PAGE>
Stock Portfolio, $196,197 with respect to the Class IB shares of the Alliance
Common Stock Portfolio, $43,043 with respect to the Class IB shares of the
Alliance Growth Investors Portfolio, $35,117 with respect to the Class IB
shares of the Alliance Global Portfolio, $50,330 with respect to the Class IB
shares of the Alliance High Yield Portfolio and $99,710 with respect to the
Class IB shares of the Alliance Money Market Portfolio, $2,784 with respect
to the Class IB shares of the Alliance Intermediate Government Securities
Portfolio, $3,118 with respect to the Class IB shares of the Alliance
Conservative Investors Portfolio, $108 with respect to the Class IB shares of
the Alliance Equity Index Portfolio, $2,877 with respect to the Class IB
shares of the Alliance International Portfolio, $22,465 with respect to the
Class IB shares of the Alliance Small Cap Growth Portfolio, and $21,823 with
respect to the Class IB shares of the Alliance Growth and Income Portfolio
for the year ended December 31, 1997.
For services rendered by EDI in connection with the distribution of Class IB
shares pursuant to the Distribution Plan, EDI received $212,434 with respect
to the Class IB shares of the Alliance Aggressive Stock Portfolio, $822,063
with respect to the Class IB shares of the Alliance Common Stock Portfolio,
$81,555 with respect to the Class IB shares of the Alliance Growth Investors
Portfolio, $50,069 with respect to the IB shares of the Alliance Global
Portfolio, $293,757 with respect to the Class IB shares of the Alliance High
Yield Portfolio, $410,852 with respect to the Class IB shares of the Alliance
Money Market Portfolio, $10,449 with respect to the Class IB shares of the
Alliance Intermediate Government Securities Portfolio, $0 with respect to the
Class IB shares of the Alliance Quality Bond Portfolio, $12,335 with respect
to the Class IB shares of the Alliance Conservative Investors Portfolio, $0
with respect to the Class IB shares of the Alliance Balanced Portfolio, $220
with respect to the Class IB shares of the Alliance Equity Index Portfolio,
$5,351 with respect to the Class IB shares of the Alliance International
Portfolio, $154,743 with respect to the Class IB shares of the Alliance Small
Cap Growth Portfolio, and $64,479 with respect to the Class IB shares of the
Alliance Growth and Income Portfolio for the year ended December 31, 1998.
For services rendered by EQ Financial in connection with the distribution of
Class IB shares pursuant to the Distribution Plan, EQ Financial received
$68,024 with respect to the Class IB shares of the Alliance Aggressive Stock
Portfolio, $368,150 with respect to the Class IB shares of the Alliance
Common Stock Portfolio, $66,710 with respect to the Class IB shares of the
Alliance Growth Investors Portfolio, $32,062 with respect to the IB shares of
the Alliance Global Portfolio, $67,672 with respect to the Class IB shares of
the Alliance High Yield Portfolio, $136,611 with respect to the Class IB
shares of the Alliance Money Market Portfolio, $26,488 with respect to the
Class IB shares of the Alliance Intermediate Government Securities Portfolio,
$0 with respect to the Class IB shares of the Alliance Quality Bond
Portfolio, $28,060 with respect to the Class IB shares of the Alliance
Conservative Investors Portfolio, $6 with respect to the Class IB shares of
the Alliance Balanced Portfolio, $374 with respect to the Class IB shares of
the Alliance Equity Index Portfolio, $7,935 with respect to the Class IB
shares of the Alliance International Portfolio, $34,876 with respect to the
Class IB shares of the Alliance Small Cap Growth Portfolio, and $110,293 with
respect to the Class IB shares of the Alliance Growth and Income Portfolio
for the year ended December 31, 1998.
39
<PAGE>
EDI informed the Trust that expenses incurred by the Trust and costs
allocated to it in connection with activities primarily intended to result in
the sale of Class IB shares were as follows for the year ended December 31,
1998:
AMOUNT OF EXPENSE AND ALLOCATED COST
<TABLE>
<CAPTION>
ALLIANCE ALLIANCE ALLIANCE ALLIANCE ALLIANCE ALLIANCE
CATEGORY OF EXPENSE AGGRESSIVE STOCK COMMON STOCK GROWTH INVESTORS GLOBAL HIGH YIELD MONEY MARKET
- ------------------------- ---------------- -------------- ---------------- ---------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Advertising/Marketing .... $ 2,048 $ 7,502 $ 887 $ 525 $ 2,475 $ 3,686
Printing and Mailing of
Prospectuses and
Semi-Annual and Annual
Reports to Other than
Current Shareholders .... $ 13,489 $ 51,843 $ 5,228 $ 3,202 $ 18,391 $ 26,073
Compensation to
Underwriters............. $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Compensation to Dealers .
Compensation to Sales
Personnel................ $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Interest, Carrying or
Other Financing Charges . $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Other (includes personnel
cost of those home
office employees
involved in the
distribution effort and
the travel-related
expenses incurred by the
marketing personnel
conducting seminars) .... $196,897 $762,718 $75,440 $46,342 $272,691 $381,093
</TABLE>
AMOUNT OF EXPENSE AND ALLOCATED COST
<TABLE>
<CAPTION>
ALLIANCE
INTERMEDIATE ALLIANCE ALLIANCE ALLIANCE ALLIANCE
GOVERNMENT CONSERVATIVE EQUITY ALLIANCE SMALL CAP GROWTH &
CATEGORY OF EXPENSE SECURITIES INVESTORS INDEX INTERNATIONAL GROWTH INCOME
- ------------------------- -------------- -------------- ---------- --------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Advertising/Marketing .... $ 132 $ 156 $ 3 $ 71 $ 1,465 $ 825
Printing and Mailing of
Prospectuses and
Semi-Annual and Annual
Reports to Other than
Current Shareholders .... $ 664 $ 784 $ 14 $ 348 $ 9,828 $ 4,123
Compensation to
Underwriters............. $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Compensation to Dealers .
Compensation to Sales
Personnel................ $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Interest, Carrying or
Other Financing Charges . $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Other (includes personnel
cost of those home
office employees
involved in the
distribution effort and
the travel-related
expenses incurred by the
marketing personnel
conducting seminars) .... $9,653 $11,395 $203 $4,933 $143,450 $59,531
</TABLE>
40
<PAGE>
EQ Financial informed the Trust that expenses incurred by the Trust and costs
allocated to it in connection with activities primarily intended to result in
the sale of Class IB shares were as follows for the period July 1, 1998
through December 31, 1998:
AMOUNT OF EXPENSE AND ALLOCATED COST
<TABLE>
<CAPTION>
ALLIANCE ALLIANCE ALLIANCE ALLIANCE ALLIANCE ALLIANCE
CATEGORY OF EXPENSE AGGRESSIVE STOCK COMMON STOCK GROWTH INVESTORS GLOBAL HIGH YIELD MONEY MARKET
- ------------------------- ---------------- -------------- ---------------- ---------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Advertising/Marketing .... $ 657 $ 3,790 $ 696 $ 328 $ 671 $ 1,468
Printing and Mailing of
Prospectuses and
Semi-Annual and Annual
Reports to Other than
Current Shareholders .... $ 912 $ 4,613 $ 824 $ 405 $ 884 $ 1,626
Compensation to
Underwriters............. $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Compensation to Dealers .
Compensation to Sales
Personnel................ $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Interest, Carrying or
Other Financing Charges . $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Other (includes personnel
cost of those home
office employees
involved in the
distribution effort and
the travel-related
expenses incurred by the
marketing personnel
conducting seminars) .... $66,458 $359,747 $65,191 $31,329 $66,117 $133,517
</TABLE>
AMOUNT OF EXPENSE AND ALLOCATED COST
<TABLE>
<CAPTION>
ALLIANCE
INTERMEDIATE ALLIANCE ALLIANCE ALLIANCE ALLIANCE
GOVERNMENT CONSERVATIVE EQUITY ALLIANCE SMALL CAP GROWTH &
CATEGORY OF EXPENSE SECURITIES INVESTORS INDEX INTERNATIONAL GROWTH INCOME
- ------------------------ -------------- -------------- ---------- --------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Advertising/Marketing ... $306 $309 $4 $ 77 $385 $1,143
Printing and Mailing of
Prospectuses and
Semi-Annual and Annual
Reports to Other than
Current Shareholders ... $286 $324 $4 $106 $401 $1,371
Compensation to
Underwriters............ $ 0 $ 0 $0 $ 0 $ 0 $ 0
Compensation to Dealers
Compensation to Sales
Personnel............... $ 0 $ 0 $0 $ 0 $ 0 $ 0
Interest, Carrying or
Other Financing
Charges................. $ 0 $ 0 $0 $ 0 $ 0 $ 0
41
<PAGE>
ALLIANCE
INTERMEDIATE ALLIANCE ALLIANCE ALLIANCE ALLIANCE
GOVERNMENT CONSERVATIVE EQUITY ALLIANCE SMALL CAP GROWTH &
CATEGORY OF EXPENSE SECURITIES INVESTORS INDEX INTERNATIONAL GROWTH INCOME
- ------------------------ -------------- -------------- ---------- --------------- ----------- ----------
Other (includes
personnel cost of those
home office employees
involved in the
distribution effort and
the travel-related
expenses incurred by
the marketing personnel
conducting seminars) ... $26,488 $27,427 $366 $7,752 $34,090 $107,779
</TABLE>
FINANCIAL STATEMENTS
The Trust's audited financial statements for the fiscal year ended
December 31, 1998 included in the Trust's Annual Reports filed with the
Securities and Exchange Commission on March 10, 1999 pursuant to Section 30(d)
of the Investment Company Act of 1940, as amended, and the rules promulgated
thereunder, are hereby incorporated into this Statement of Additional
Information by reference.
42
<PAGE>
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS
(a) Amended and Restated Agreement and Declaration of Trust of the
Trust (previously filed with Post-Effective Amendment No. 29 on
May 1, 1997).
(b) By-Laws of the Trust (previously filed with Post-Effective
Amendment No. 29 on May 1, 1997).
(c) (1) Portions of Amended and Restated Agreement and Declaration
of Trust relating to shareholders' rights (previously filed
with Post-Effective Amendment No. 28 on February 14, 1997).
(2) Portions of By-Laws of the Trust relating to shareholders'
rights (previously filed with Post-Effective Amendment
No. 28 on February 14, 1997).
(d) Investment Advisory Agreement between the Trust and Alliance dated
May 1, 1997 (previously filed with Post-Effective Amendment No. 29
on May 1, 1997).
(e) (1) Class IA Distribution Agreement between the Trust and EQ
Financial Consultants, Inc. (previously filed with
Post-Effective Amendment No. 27 on May 9, 1996).
(2) Class IB Distribution Agreement between the Trust and
Equitable Distributors, Inc. (previously filed with
Post-Effective Amendment No. 27 on May 9, 1996).
(f) Not applicable.
(g) Custodian Agreement between the Trust and Chase, dated August 25,
1988 (previously filed with Post-Effective Amendment No. 29 on
May 1, 1997).
(h) Not applicable.
(i) Opinion of Ropes & Gray
(j) (1) Consent of PricewaterhouseCoopers LLP.
(2) Powers of Attorney (previously filed with Post-Effective
Amendment No. 29 on May 1, 1997).
(k) Not applicable.
<PAGE>
(l) Not applicable.
(m) Rule 12b-1 Plan (previously filed with Post-Effective Amendment
No. 27 on May 9, 1996).
(n) Financial Data Schedules.
(o) Rule 18f-3 Plan (previously filed with Post-Effective Amendment
No. 27 on May 9, 1996).
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE FUND
Equitable controls the Trust by virtue of their ownership of 99.0% of the
Trust's Class IA shares and 100% of the Trust's Class IB shares as of
December 31, 1998. All Trust shareholders are required to solicit instructions
from their policy owners as to certain matters. The Trust also offers its
shares to insurance companies unaffiliated with Equitable.
On July 22, 1992, Equitable converted from a New York mutual life
insurance company to a publicly-owned New York stock life insurance company. At
that time Equitable became a wholly-owned subsidiary of The Equitable Companies
Incorporated ("Holding Company" or "EQ") and currently Equitable constitutes
the Holding Company's only operating business.
The largest stockholder of the Holding Company is AXA, a French insurance
holding company. AXA currently owns approximately 60% of the outstanding shares
of common stock of the Holding Company plus convertible preferred stock. AXA, a
public company with shares traded on the Paris Bourse (the French stock
exchange), is the principal holding company for most of the companies in one of
the largest insurance groups in Europe. The majority of AXA's stock is owned by
a group of five French mutual insurance companies.
The response to Item 26 included in Post-Effective Amendment No. 5 to the
Registration Statement on Form N-4 for Separate Account A of Equitable (File
Nos. 33-47949 and 811-1705) is incorporated herein by reference.
ITEM 27. INDEMNIFICATION
DECLARATION OF TRUST
The Declaration of Trust provides in substance that no Trustee or officer
and no investment adviser or other third party shall be liable to the Trust,
its shareholders, or to any shareholder, Trustee, officer, employee or agent
for any action or failure to act, except upon a showing of bad faith, willful
misfeasance, gross negligence or reckless disregard of duties. The
<PAGE>
Declaration of Trust further provides in substance that, with the exceptions
stated above, a Trustee or officer of the Trust is entitled to be indemnified
against all liability incurred in connection with the affairs of the Trust. In
addition, the Declaration of Trust authorizes the Trust to purchase and pay for
liability insurance to indemnify the Trustees and officers against certain
claims and liabilities.
MASSACHUSETTS LAW
Under Massachusetts law, shareholders of a Massachusetts business trust
such as the Trust may, under certain circumstances, be held personally liable
as partners for the obligations of the Trust. The Trust's Declaration of Trust
contains an express disclaimer of shareholder liability for acts or obligations
of the Trust and requires that notice of such disclaimer be given in each
agreement, obligation or instrument entered into or executed by the Trust or
the Trustees.
INSURANCE
To the extent permitted by New York law and subject to all applicable
requirements thereof, Equitable has undertaken to indemnify each Trustee and
officer of the Trust, so long as Equitable indirectly controls the Trust, who
is made or threatened to be made a party to any action or proceeding, whether
civil or criminal, by reason of the fact that he or she, his or her testator or
intestate, is or was a Trustee or officer of the Trust.
The Trustees and officers are insured under a policy issued by Lloyd's of
London to Equitable and certain affiliates:
Annual Limit: $25,000,000
Deductible: $5,000,000 each loss and aggregate for company
retention, nil per trustee and officer individually.
The Trustees and officers are also insured under a policy issued by
X.L. Insurance Company of $25,000,000 coverage and a policy issued by
A.C.E. Insurance Company of $50,000,000 coverage excess of the Lloyd's policy.
UNDERTAKING
Insofar as indemnification for liability arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
<PAGE>
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
The descriptions of Alliance Capital Management L.P. under the caption
"Management of the Trust" in the Prospectus and under the caption "Investment
Advisory and Other Services" in the Statement of Additional Information
constituting Parts A and B, respectively, of this Registration Statement are
incorporated by reference herein.
The information as to the directors and executive officers of Alliance
Capital Management Corporation, the general partner of Alliance Capital
Management L.P., set forth in Alliance Capital Management L.P.'s Form ADV filed
with the Securities and Exchange Commission on April 21, 1988 (File
No. 801-32361) and amended through the date hereof, is incorporated by
reference.
ITEM 27. PRINCIPAL UNDERWRITERS
(a) EQ Financial Consultants, Inc. is the principal underwriter of the
Trust's Class IA shares, and EQ Financial Consultants, Inc. and Equitable
Distributors, Inc. are the principal underwriters of the Trust's Class IB
shares.
(b) Set forth below is certain information regarding the directors and
officers of EQ Financial Consultants, Inc. and Equitable Distributors, Inc.,
the Trust's principal underwriters. The business address of the persons whose
names are preceded by a single asterisk is 1290 Avenue of the Americas, New
York, New York 10104. The business address of the persons whose names are
preceded by a double asterisk is 660 Newport Center Drive, Suite 1200, Newport
Beach, CA 92660. Mr. Laughlin's business address is 1345 Avenue of the
Americas, 39th Floor, New York, New York 10105. Mr. Komweiss's business address
is 4251 Crums Mill Road, Harrisburg, PA 17112. The business address of Mr.
Bullen and Ms. Fazio is 200 Plaza Drive, Secaucus, New Jersey 07096.
EQ FINANCIAL CONSULTANTS, INC.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
POSITIONS AND POSITIONS AND
NAME AND PRINCIPAL OFFICES WITH OFFICES WITH
BUSINESS ADDRESS EQ FINANCIAL REGISTRANT
CONSULTANTS, INC. (HUDSON RIVER TRUST)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
DIRECTORS
* Derry E. Bishop Director
* Harvey E. Blitz Director
* Michael J. Laughlin Director
* Michael S. Martin Director
* Michael F. McNelis Director
* Richard V. Silver Director
* Mark R. Wutt Director
- -----------------------------------------------------------------------------------------------
OFFICERS
* Michael S. Martin Chairman of the Board
and Chief Executive Officer
* Michael F. McNelis President and Chief Operating Officer
* Martin J. Telles Executive Vice President
and Chief Marketing Officer
* Derry E. Bishop Executive Vice President
* Harvey Blitz Executive Vice President
* Thomas J. Duddy, Jr. Executive Vice President
* Fred A. Folco Executive Vice President
* William J. Green Executive Vice President
* Edward J. Hayes Executive Vice President
* Craig A. Junkins Executive Vice President
* Peter D. Noris Executive Vice President Trustee
* Mark A. Silberman Senior Vice President and Chief
Financial Officer
* Theresa A. Nurge-Alws Senior Vice President
* Donna M. Dazzo First Vice President
* Robin K. Murray First Vice President
* Michael Brzozowski Vice President and Compliance Director
* Raymond T. Barry Vice President
* Claire A. Comerford Vice President
* Amy Franceschini Vice President
* Linda Funigiello Vice President
* Mark Generales Vice President
* Peter R. Kornweiss Vice President
* Frank Lupo Vice President
* Rosemary Magee Vice President
* Michael McBryan Vice President
* T.S. Narayanan Vice President
* Bill Nestel Vice President
* Laura A. Pellegrini Vice President
* Dan Roebuck Vice President
* Sid Smith Vice President
* Dan Wiley Vice President
<PAGE>
* Mike Woodhead Vice President
* Mary E. Cantwell Assistant Vice President
* Tom C. Gosness Assistant Vice President
* Ara Klidjian Assistant Vice President
* John T. McCabe Assistant Vice President
* Janet E. Hannon Secretary
* Linda J. Galasso Assistant Secretary
- -----------------------------------------------------------------------------------------------
</TABLE>
EQUITABLE DISTRIBUTORS, INC.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
POSITIONS AND POSITIONS AND
NAME AND PRINCIPAL OFFICES WITH OFFICES WITH
BUSINESS ADDRESS EQUITABLE REGISTRANT
DISTRIBUTORS, INC. (HUDSON RIVER TRUST)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
DIRECTORS
** Greg Brakovich Director
* Edward J. Hayes Director
** James A. Shepherdson, III Director
* Jose S. Suquet Director
* Charles Wilder Director
- -----------------------------------------------------------------------------------------------
OFFICERS
* Jose S. Suquet Chairman of the Board
** Greg Brakovich Co-President and Co-Chief Executive
Officer and Managing Director
** James A. Shepherdson, III Co-President and Co-Chief Executive
Officer and Managing Director
** Hunter Allen Senior Vice President
* Elizabeth Forget Senior Vice President
** Jennifer Hall Senior Vice President
** Al Haworth Senior Vice President
** Stuart Hutchins Senior Vice President
** Ken Jaffe Senior Vice President
** Michael McDaniel Senior Vice President
** Debora Buffington Chief Compliance Officer
* Mark A. Silberman Vice President and Chief Financial
Officer
* Raymond J. Barry Vice President
** Mark Brandenberger Vice President
* Thomas D. Bullen Vice President
** Dave Hughes Vice President
** Marry Krager Vice President
** Michelle O'Haren Vice President
</TABLE>
<PAGE>
EQUITABLE DISTRIBUTORS, INC.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
POSITIONS AND POSITIONS AND
NAME AND PRINCIPAL OFFICES WITH OFFICES WITH
BUSINESS ADDRESS EQUITABLE REGISTRANT
DISTRIBUTORS, INC. (EQ ADVISORS TRUST)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
* Ronald R. Quist Treasurer
* Janet Hannon Secretary
* Linda J. Galasso Assistant Secretary
- -----------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<PAGE>
(c) Not applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
The Trust's accounts and records required to be maintained by Section
31(a) of the Investment Company Act of 1940 and the Rules thereunder are in the
physical possession of the following:
The Trust
Rule 31a-1(b)(4)
Rule 31a-2(a)(1)
Alliance Capital Management Corporation
135 West 50th Street
New York, New York 10019
Rule 31a-1(b)(1)-(3),(5)-(12)
Rule 31a-2(a)(1)-(2)
Chase Global Funds Services Company
<PAGE>
73 Tremont Street
Boston, MA 02108
Rule 31a-1(b)(2)-(3)
Rule 31a-2(a)(2)
ITEM 29. MANAGEMENT SERVICES
Inapplicable.
ITEM 30. UNDERTAKINGS
The Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to shareholders
upon request and without charge.
<PAGE>
NOTICE
A copy of the Declaration of Trust of The Hudson River Trust (the "Trust")
is on file with the Secretary of State of The Commonwealth of Massachusetts and
notice is hereby given that this Registration Statement has been executed on
behalf of the Trust by an officer of the Trust as an officer and by its
Trustees as trustees and not individually and the obligations of or arising out
of this Registration Statement are not binding upon any of the Trustees,
officers or shareholders individually but are binding only upon the assets and
property of the Trust.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Amendment to its Registration
Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly
caused this Post-Effective Amendment No. 34 to its Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of New York and the State of New York on the 30th day of April 1999.
THE HUDSON RIVER TRUST
By: EDMUND P. BERGAN, JR.
-------------------------------
Title: Secretary
Pursuant to the requirements of the Securities Act of 1933, this amended
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
PRINCIPAL EXECUTIVE OFFICER:
John D. Carifa,
President and Chief Executive Officer
PRINCIPAL FINANCIAL OFFICER:
Mark D. Gersten,
Treasurer and Chief Financial Officer
PRINCIPAL ACCOUNTING OFFICER:
Thomas R. Manley,
Controller and Chief Accounting Officer
TRUSTEES:
John D. Carifa
Brenton W. Harries
Howard E. Hassler
William L. Mannion
Michael Hegarty
<PAGE>
Clifford L. Michel
Peter D. Noris
Donald J. Robinson
By: EDMUND P. BERGAN, JR.
-------------------------------
Edmund P. Bergan, Jr.
As Attorney-in-Fact
April 30, 1999
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
(23)(i) Opinion of Ropes & Gray
(23)(j)(1) Consent of PricewaterhouseCoopers LLP
(23)(n) Financial Data Schedules.
<PAGE>
ROPES & GRAY
ONE INTERNATIONAL PLACE
BOSTON, MASSACHUSETTS 02110-2624
(617) 951-7000
Fax: (617) 951-7050
April 30, 1999
The Hudson River Trust
1345 Avenue of the Americas
New York, New York 10105
Ladies and Gentlemen:
We are furnishing this opinion in connection with the offer and sale by The
Hudson River Trust, a Massachusetts business trust (the "Trust"), of shares of
beneficial interest, $0.00001 par value (the "Shares"), of its Aggressive Stock
Portfolio, Balanced Portfolio, Common Stock Portfolio, Conservative Investors
Portfolio, Equity Index Portfolio, Global Portfolio, Growth and Income
Portfolio, Growth Investors Portfolio, High Yield Portfolio, Intermediate
Government Securities Portfolio, International Portfolio, Small Cap Growth
Portfolio, Money Market Portfolio and Quality Bond Portfolio (each, a "Series")
pursuant to a registration statement on Form N-1A (the "Registration Statement")
under the Securities Act of 1933 as amended.
We are familiar with the action taken by the Trustees of the Trust to
authorize the issuance of the Shares. We have examined the Trust's By-Laws, as
amended, and its Agreement and Declaration of Trust, as amended (the
"Declaration of Trust"), on file in the office of the Secretary of The
Commonwealth of Massachusetts and such other documents as we have deemed
necessary for the purposes of this opinion.
We assume that upon sale of the Shares the Trust will receive the net asset
value thereof.
Based upon the foregoing, we are of the opinion that the Trust is
authorized to issue an unlimited number of Shares, and that, as Shares are
issued and sold, they will be validly issued, fully paid and nonassessable by
the Trust.
The Trust is an entity of the type commonly know as a "Massachusetts
business trust." Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Declaration of Trust disclaims
<PAGE>
Hudson River Trust -2- April 30, 1999
shareholder liability for acts or obligations of the Trust and requires that
notice of such disclaimer be given in each agreement, obligation or instrument
entered into or executed by the Trust or the Trustees. The Declaration of Trust
provides for indemnification out of the property of a Series for all loss and
expense of any shareholder of that Series held personally liable solely by
reason of his or her having been a shareholder of that Series. Thus, the risk of
shareholder liability is limited to circumstances in which the particular Series
itself would be unable to meet its obligations.
We consent to the filing of this opinion as an exhibit to the Registration
Statement.
Very truly yours,
ROPES & GRAY
Ropes & Gray
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statements of Additional Information
constituting part of this Post-Effective Amendment No. 34 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
February 8, 1999, relating to the financial statements and financial highlights
of The Hudson River Trust, which appears in such Statements of Additional
Information, and to the incorporation by reference of our report into the
Prospectuses which constitute part of this Registration Statement. We also
consent to the references to us under the heading "Financial Highlights" in such
Prospectuses and to the references to us under the heading "Other Services -
Independent Accountants" in such Statements of Additional Information.
PRICEWATERHOUSECOOPERS LLP
1177 Avenue of the Americas
New York, New York
April 23, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000759751
<NAME> THE HUDSON RIVER TRUST
<SERIES>
<NUMBER> 041
<NAME> ALLIANCE AGGRESSIVE STOCK PORTFOLIO - CLASS IA
<MULTIPLIER> 1
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 4,308,145,162
<INVESTMENTS-AT-VALUE> 4,635,521,062
<RECEIVABLES> 28,777,626
<ASSETS-OTHER> 1,564,793
<OTHER-ITEMS-ASSETS> 386,886,300
<TOTAL-ASSETS> 5,052,749,781
<PAYABLE-FOR-SECURITIES> 140,296,740
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 411,764,006
<TOTAL-LIABILITIES> 552,060,746
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<PAID-IN-CAPITAL-COMMON> 4,176,552,382
<SHARES-COMMON-STOCK> 127,297,449
<SHARES-COMMON-PRIOR> 126,731,100
<ACCUMULATED-NII-CURRENT> (148,225)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (3,091,022)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 327,375,900
<NET-ASSETS> 4,346,906,699
<DIVIDEND-INCOME> 23,762,346
<INTEREST-INCOME> 12,833,136
<OTHER-INCOME> 0
<EXPENSES-NET> (25,900,808)
<NET-INVESTMENT-INCOME> 10,694,674
<REALIZED-GAINS-CURRENT> 94,437,250
<APPREC-INCREASE-CURRENT> (90,382,441)
<NET-CHANGE-FROM-OPS> 14,749,483
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (19,956,153)
<DISTRIBUTIONS-OF-GAINS> (209,908,935)
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<NUMBER-OF-SHARES-SOLD> 33,480,797
<NUMBER-OF-SHARES-REDEEMED> (40,575,903)
<SHARES-REINVESTED> 7,661,455
<NET-CHANGE-IN-ASSETS> (162,568,268)
<ACCUMULATED-NII-PRIOR> (113,631)
<ACCUMULATED-GAINS-PRIOR> 128,925,055
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 24,448,459
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 25,900,808
<AVERAGE-NET-ASSETS> 4,431,301,091
<PER-SHARE-NAV-BEGIN> 36.22
<PER-SHARE-NII> 0.09
<PER-SHARE-GAIN-APPREC> (0.28)
<PER-SHARE-DIVIDEND> (0.16)
<PER-SHARE-DISTRIBUTIONS> (1.72)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 34.15
<EXPENSE-RATIO> 0.56
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000759751
<NAME> THE HUDSON RIVER TRUST
<SERIES>
<NUMBER> 042
<NAME> ALLIANCE AGGRESSIVE STOCK PORTFOLIO - CLASS IB
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 4,308,145,162
<INVESTMENTS-AT-VALUE> 4,635,521,062
<RECEIVABLES> 28,777,626
<ASSETS-OTHER> 1,564,793
<OTHER-ITEMS-ASSETS> 386,886,300
<TOTAL-ASSETS> 5,052,749,781
<PAYABLE-FOR-SECURITIES> 140,296,740
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 411,764,006
<TOTAL-LIABILITIES> 552,060,746
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4,176,552,382
<SHARES-COMMON-STOCK> 4,521,093
<SHARES-COMMON-PRIOR> 2,034,175
<ACCUMULATED-NII-CURRENT> (148,225)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (3,091,022)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 327,375,900
<NET-ASSETS> 153,782,336
<DIVIDEND-INCOME> 23,762,346
<INTEREST-INCOME> 12,833,136
<OTHER-INCOME> 0
<EXPENSES-NET> (25,900,808)
<NET-INVESTMENT-INCOME> 10,694,674
<REALIZED-GAINS-CURRENT> 94,437,250
<APPREC-INCREASE-CURRENT> (90,382,441)
<NET-CHANGE-FROM-OPS> 14,749,483
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (496,396)
<DISTRIBUTIONS-OF-GAINS> (6,821,111)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,372,000
<NUMBER-OF-SHARES-REDEEMED> (129,735)
<SHARES-REINVESTED> 244,653
<NET-CHANGE-IN-ASSETS> (162,568,268)
<ACCUMULATED-NII-PRIOR> (113,631)
<ACCUMULATED-GAINS-PRIOR> 128,925,055
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 24,448,459
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 25,900,808
<AVERAGE-NET-ASSETS> 112,159,907
<PER-SHARE-NAV-BEGIN> 36.13
<PER-SHARE-NII> 0.01
<PER-SHARE-GAIN-APPREC> (0.29)
<PER-SHARE-DIVIDEND> (0.12)
<PER-SHARE-DISTRIBUTIONS> (1.72)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 34.01
<EXPENSE-RATIO> 0.82
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000759751
<NAME> THE HUDSON RIVER TRUST
<SERIES>
<NUMBER> 031
<NAME> ALLIANCE BALANCED PORTFOLIO - CLASS IA
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 1,658,268,429
<INVESTMENTS-AT-VALUE> 1,941,246,382
<RECEIVABLES> 18,370,873
<ASSETS-OTHER> 726,080
<OTHER-ITEMS-ASSETS> 350,884,795
<TOTAL-ASSETS> 2,311,228,130
<PAYABLE-FOR-SECURITIES> 21,775,641
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 353,012,828
<TOTAL-LIABILITIES> 374,788,469
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,633,744,309
<SHARES-COMMON-STOCK> 104,635,096
<SHARES-COMMON-PRIOR> 98,055,256
<ACCUMULATED-NII-CURRENT> 4,480,474
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 15,152,087
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 283,062,791
<NET-ASSETS> 1,936,429,168
<DIVIDEND-INCOME> 9,448,238
<INTEREST-INCOME> 53,093,665
<OTHER-INCOME> 0
<EXPENSES-NET> (8,167,343)
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<CIK> 0000759751
<NAME> THE HUDSON RIVER TRUST
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<NAME> ALLIANCE SMALL CAP GROWTH PORTFOLIO - CLASS IB
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