BT insurance Fund trust
prospectus: February 5, 1997 as supplemented june 16, 1997
Small Cap Index Fund
This Prospectus offers shares of the Small Cap Index Fund (the
"Fund"), a series of BT Insurance Funds Trust (the "Trust"), which
is an open-end management investment company currently having six
series. Shares of the Fund are available to the public only
through the purchase of certain variable annuity and variable life
insurance contracts ("Contract(s)") issued by various insurance
companies (the "Companies").
The Fund seeks to replicate as closely as possible the performance
of the Russell 2000 Index before the deduction of Fund expenses
(the "Expenses"). There is no assurance, however, that the Fund
will achieve its stated objective.
Bankers Trust Company ("Bankers Trust") is the investment manager
(the "Manager") of the Fund.
Please read this Prospectus carefully before investing and retain
it for future reference. It contains important information about
the Fund that you should know and can refer to in deciding whether
the Fund's goals match your own.
A Statement of Additional Information ("SAI") with the same date
has been filed with the Securities and Exchange Commission, and is
incorporated herein by reference. You may request a free copy of
the SAI by calling the Trust at the Customer Service Center at the
telephone number shown in the accompanying prospectus.
Fund shares are not deposits or obligations of, or guaranteed by,
Bankers Trust or any depository institution. Shares are not
insured by the Federal Deposit Insurance Corporation, the Federal
Reserve Board or any other agency.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
bankers trust global investment management
a unit of bankers trust company
Investment Manager of the Fund
440 financial distributors, inc.
Distributor
4400 Computer Drive
Westborough, MA 01581
TABLE OF CONTENTS
Page
THE FUND 3
Who May Want to Invest
Investment Principles and Risks
THE FUND IN DETAIL 4
Investment Objectives and Policies
Risk Factors and Certain Securities and Investment Practices
Net Asset Value
Performance Information and Reports
Management of the Trust
SHAREHOLDER AND ACCOUNT POLICIES 13
Purchase and Redemption of Shares
Dividends, Distributions and Taxes
THE FUND
The Fund seeks to replicate as closely as possible (before
deduction of Expenses) the total return of the Russell 2000 Small
Stock Index (the "Russell 2000"), an index consisting of 2,000
small-capitalization common stocks. The Fund will include the
common stock of companies included in the Russell 2000, on the
basis of computer-generated statistical data, that are deemed
representative of the industry diversification of the entire
Russell 2000.
WHO MAY WANT TO INVEST
Shares of the Fund are available to the public only through the
purchase of Contracts issued by the Companies.
The Fund is not managed according to traditional methods of
"active" investment management, which involve the buying and
selling of securities based upon economic, financial and market
analysis and investment judgment. Instead, the Fund utilizes a
"passive" or "indexing" investment approach and attempts to
replicate the investment performance of the Russell 2000 through
statistical procedures.
The Fund may be appropriate for investors who are willing to
endure stock market fluctuations in pursuit of potentially higher
long-term returns. The Fund invests for growth and does not
pursue income as a primary objective. Over time, stocks, although
more volatile, have shown greater growth potential than other
types of securities. In the shorter term, however, stock prices
can fluctuate dramatically in response to market factors.
The Fund is intended to be a long-term investment vehicle and is
not designated to provide investors with a means of speculating on
short-term market movements. The Fund is not in itself a balanced
investment plan. Investors should consider their investment
objective and tolerance for risk when making an investment
decision. When an investor sells his or her Fund shares, they may
be worth more or less than what the investor paid for them.
INVESTMENT PRINCIPLES AND RISKS
The value of the Fund's investments varies based on many factors.
Stock values fluctuate, sometimes dramatically, in response to the
activities of individual companies and general market and economic
conditions. Over time, however, stocks have shown greater long-
term growth potential than other types of securities. Lower
quality securities offer higher yields, but also carry more risk.
General economic factors in the various world markets can also
impact the value of an investors investment. When investors sell
Fund shares, they may be worth more or less than what the
investors paid for them. See "Risk Factors and Certain Securities
and Investment Practices" for more information.
THE FUND IN DETAIL
INVESTMENT OBJECTIVES AND POLICIES
The following is a discussion of the various investments of and
techniques employed by the Fund. Additional information about the
investment policies of the Fund appears in "Risk Factors and
Certain Securities and Investment Practices" in this Prospectus
and in the Fund's SAI. There can be no assurance that the
investment objective of the Fund will be achieved.
The Fund seeks to replicate as closely as possible (before
deduction of Fund expenses) the total return of the Russell 2000.
The Russell 2000 is composed of approximately 2,000 small-
capitalization common stocks. A company's stock market
capitalization is the total market value of its floating
outstanding shares. As of December 31, 1995, the average stock
market capitalization of the Russell 2000 was $280 million and the
weighted average stock market capitalization of the Russell 2000
was $540 million.
The Fund is neither sponsored by nor affiliated with the Frank
Russell Company. Frank Russell's only relationship to the Fund is
the licensing of the use of the Russell 2000. Frank Russell
Company is the owner of the trademarks and copyrights relating to
the Russell indices.
The Fund invests in a statistically selected sample of the 2,000
stocks included in the Russell 2000. The stocks of the Russell
2000 to be included in the Fund will be selected utilizing a
statistical sampling technique known as "optimization." This
process selects stocks for the Fund so that various industry
weightings, market capitalizations and fundamental characteristics
(e.g., price-to-book, price-to-earnings and debt-to-asset ratios
and dividend yields) closely approximate those of the Russell
2000. For instance, if 10% of the capitalization of the Russell
2000 consists of utility companies with relatively small
capitalizations, then the Fund is constructed so that
approximately 10% of the Fund's assets are invested in the stocks
of utility companies with relatively small capitalizations. The
stocks held by the Fund are weighted to make the Fund's aggregate
investment characteristics similar to those of the Russell 2000 as
a whole.
General
Over time, the correlation between the performance of the Fund and
the Russell 2000 is expected to be 0.95 or higher before deduction
of Fund expenses. A correlation of 1.00 would indicate perfect
correlation, which would be achieved when the net asset value of
the Fund, including the value of its dividend and any capital gain
distributions, increases or decreases in exact proportion to
changes in the Russell 2000. The Fund's ability to track the
Russell 2000 may be affected by, among other things, transaction
costs, administration and other expenses incurred by the Fund,
changes in either the composition of the Russell 2000 or the
assets of the Fund, and the timing and amount of Fund investor
contributions and withdrawals, if any. In the unlikely event that
a high correlation is not achieved, the Trust's Board of Trustees
will consider alternatives. Because the Fund seeks to track the
Russell 2000, Bankers Trust will not attempt to judge the merits
of any particular stock as an investment.
Under normal circumstances, the Fund will invest at least 80% of
its assets in the securities of the Russell 2000.
As a diversified fund, no more than 5% of the assets of the Fund
may be invested in the securities of one issuer (other than U.S.
Government Securities), except that up to 25% of the Fund's assets
may be invested without regard to this limitation. The Fund will
not invest more than 25% of its assets in the securities of
issuers in any one industry. In the unlikely event that the
Russell 2000 should concentrate to an extent greater than that
amount, the Fund's ability to achieve its objective may be
impaired. These are fundamental investment policies of the Fund
which may not be changed without shareholder approval. No more
than 15% of the Fund's net assets may be invested in illiquid or
not readily marketable securities (including repurchase agreements
and time deposits with maturities of more than seven days).
Additional investment policies of the Fund are contained in the
SAI.
The Fund may maintain up to 25% of its assets in short-term debt
securities and money market instruments to meet redemption
requests or to facilitate investment in the securities of the
Russell 2000. Securities index futures contracts and related
options, warrants and convertible securities may be used for
several reasons: to simulate full investment in the Russell 2000
while retaining a cash balance for fund management purposes, to
facilitate trading, to reduce transaction costs or to seek higher
investment returns when a futures contract, option, warrant or
convertible security is priced more attractively than the
underlying equity security or the Russell 2000. These instruments
may be considered derivatives. See "Risk Factors and Certain
Securities and Investment Practices -- Derivatives."
The use of derivatives for non-hedging purposes may be considered
speculative. While each of these securities can be used as
leveraged investments, the Fund may not use them to leverage its
net assets. The Fund will not invest in such instruments as part
of a temporary defensive strategy (in anticipation of declining
stock prices) to protect the Fund against potential market
declines.
The Fund may lend its investment securities and purchase
securities on a when-issued and a delayed delivery basis. See
"Risk Factors and Certain Securities and Investment Practices" for
more information about the investment practices of the Fund.
RISK FACTORS AND CERTAIN SECURITIES AND INVESTMENT PRACTICES
The following pages contain more detailed information about types
of instruments in which the Fund may invest and strategies Bankers
Trust may employ in pursuit of the Fund's investment objective. A
summary of risks and restrictions associated with these instrument
types and investment practices is included as well.
Bankers Trust may not buy all of these instruments or use all of
these techniques to the full extent permitted unless it believes
that doing so will help the Fund achieve its goal. Holdings and
recent investment strategies are described in the financial
reports of the Fund, which are sent to Fund shareholders on a
semi-annual and annual basis.
Market Risk
As a mutual fund investing primarily in common stocks, the Fund is
subject to market risk --- i.e., the possibility that common stock
prices will decline over short or even extended periods. The U.S.
stock market tends to be cyclical, with periods when stock prices
generally rise and periods when prices generally decline.
Risks of Investing in Medium- and Small-Capitalization Stocks
Historically, medium- and small-capitalization stocks have been
more volatile in price than the larger-capitalization stocks
included in the Standard & Poor's 500 Composite Stock Price Index.
Among the reasons for the greater price volatility of these
securities are: the less certain growth prospects of smaller
firms, the lower degree of liquidity in the markets for such
stocks, and the greater sensitivity of medium- and small-size
companies to changing economic conditions. In addition to
exhibiting greater volatility, medium- and small-size company
stocks may fluctuate independently of larger company stocks.
Medium- and small-size company stocks may decline in price as
large company stocks rise, or rise in price as large company
stocks decline.
The Fund's investment objective is not a fundamental policy and
may be changed upon notice to, but without the approval of, the
Fund's shareholders. If there is a change in the Fund's
investment objective, the Fund's shareholders should consider
whether the Fund remains an appropriate investment in light of
their then-current needs. Shareholders of the Fund will receive
30 days prior written notice with respect to any change in the
investment objective of the Fund. See "Risk Factors and Certain
Securities and Investment Practices" in the SAI for a description
of the fundamental policies of the Fund that cannot be changed
without approval by "the vote of a majority of the outstanding
voting securities" (as defined in the Investment Company Act of
1940, as amended (the "1940 Act")) of the Fund.
For descriptions of the investment objective, policies and
restrictions of the Fund, see "The Fund in Detail" herein and
"Risk Factors and Certain Securities and Investment Practices"
herein and in the SAI. For descriptions of the management and
expenses of the Fund, see "Management of the Trust" herein and in
the SAI.
Short-Term Investments. The Fund may invest in certain short-term
fixed income securities. Such securities may be used to invest
uncommitted cash balances, to maintain liquidity to meet
shareholder redemptions or to serve as collateral for the
obligations underlying the Fund's investment in securities index
futures or related options or warrants. These securities include:
obligations issued or guaranteed by the U.S. Government or any of
its agencies or instrumentalities or by any of the states,
repurchase agreements, time deposits, certificates of deposit,
bankers' acceptances and commercial paper.
U.S. Government Securities are obligations of, or guaranteed by,
the U.S. Government, its agencies or instrumentalities. Some U.S.
Government securities, such as Treasury bills, notes and bonds,
are supported by the full faith and credit of the United States;
others, such as those of the Federal Home Loan Banks, are
supported by the right of the issuer to borrow from the Treasury;
others, such as those of the Federal National Mortgage
Association, are supported by the discretionary authority of the
U.S. Government to purchase the agency's obligations; and still
others, such as those of the Student Loan Marketing Association,
are supported only by the credit of the instrumentality.
Securities Lending. The Fund may lend its investment securities
to qualified institutional investors for either short-term or
long-term purposes of realizing additional income. Loans of
securities by the Fund will be collateralized by cash, letters of
credit, or securities issued or guaranteed by the U.S. Government
or its agencies. The collateral will equal at least 100% of the
current market value of the loaned securities, and such loans may
not exceed 30% of the value of the Fund's net assets. The risks
in lending portfolio securities, as with other extensions of
credit, consist of possible loss of rights in the collateral
should the borrower fail financially. In determining whether to
lend securities, Bankers Trust will consider all relevant facts
and circumstances, including the creditworthiness of the borrower.
When Issued and Delayed Delivery Securities. The Fund may purchase
securities on a when-issued or delayed delivery basis. Delivery of
and payment for these securities may take place as long as a month
or more after the date of the purchase commitment. The value of
these securities is subject to market fluctuation during this
period and no income accrues to the Fund until settlement takes
place. The Fund maintains with its custodian a segregated account
containing cash or liquid portfolio securities in an amount at
least equal to these commitments.
Derivatives
The Fund may invest in various instruments that are commonly known
as derivatives. Generally, a derivative is a financial
arrangement, the value of which is based on, or "derived" from, a
traditional security, asset, or market index. Some "derivatives"
such as mortgage-related and other asset-backed securities are in
many respects like any other investment, although they may be more
volatile or less liquid than more traditional debt securities.
There are, in fact, many different types of derivatives and many
different ways to use them. There are a range of risks associated
with those uses. Futures and options are commonly used for
traditional hedging purposes to attempt to protect the Fund from
exposure to changing interest rates, securities prices or currency
exchange rates and as a low cost method of gaining exposure to a
particular securities market without investing directly in those
securities. The Manager will only use derivatives for cash
management purposes. Derivatives will not be used to increase
portfolio risk above the level that would be achieved using only
traditional investment securities or to acquire exposure to
changes in the value of assets or indices that by themselves would
not be purchased for the Fund.
Securities Index Futures and Related Options. The Fund may enter
into securities index futures contracts and related options
provided that not more than 5% of its assets are required as a
margin deposit for futures contracts or options and provided that
not more than 20% of the Fund's assets are invested in futures and
options at any time. When the Fund has cash from new investments
in the Fund or holds a portion of its assets in money market
instruments, it may enter into index futures or options to attempt
to increase its exposure to the market. Strategies the Fund could
use to accomplish this include purchasing futures contracts,
writing put options and purchasing call options. When the Fund
wishes to sell securities, because of shareholder redemptions or
otherwise, it may use index futures or options to hedge against
market risk until the sale can be completed. These strategies
could include selling futures contracts, writing call options and
purchasing put options.
Warrants. Warrants are instruments which entitle the holder to
buy underlying equity securities at a specific price for a
specific period of time. A warrant tends to be more volatile than
its underlying securities and ceases to have value if it is not
exercised prior to its expiration date. In addition, changes in
the value of a warrant do not necessarily correspond to changes in
the value of its underlying securities.
Convertible Securities. The Fund may invest in convertible
securities which are a bond or preferred stock which may be
converted at a stated price within a specific period of time into
a specified number of shares of common stock of the same or
different issuer. Convertible securities are senior to common
stock in a corporation's capital structure, but usually are
subordinated to non-convertible debt securities. While providing a
fixed income stream -- generally higher in yield than the income
derived from a common stock but lower than that afforded by a non-
convertible debt security -- a convertible security also affords
an investor the opportunity, through its conversion feature, to
participate in the capital appreciation of common stock into which
it is convertible.
In general, the market value of a convertible security is the
higher of its investment value (its value as a fixed income
security) or its conversion value (the value of the underlying
shares of common stock if the security is converted). As a fixed
income security, the market value of a convertible security
generally increases when interest rates decline and generally
decreases when interest rates rise; however, the price of a
convertible security generally increases as the market value of
the underlying stock increases, and generally decreases as the
market value of the underlying stock declines. Investments in
convertible securities generally entail less risk than investments
in the common stock of the same issuer.
Further risks associated with the use of futures contracts,
options, warrants and convertible securities. The risk of loss
associated with futures contracts in some strategies can be
substantial due to both the low margin deposits required and the
extremely high degree of leverage involved in futures pricing. As
a result, a relatively small price movement in a futures contract
may result in an immediate and substantial loss or gain. However,
the Fund will not use futures contracts, options, warrants and
convertible securities for speculative purposes or to leverage
their net assets. Accordingly, the primary risks associated with
the use of futures contracts, options, warrants and convertible
securities by the Fund are: (i) imperfect correlation between the
change in market value of the securities held by the Fund and the
prices of futures contracts, options, warrants and convertible
securities; and (ii) possible lack of a liquid secondary market
for a futures contract and the resulting inability to close a
futures position prior to its maturity date. The risk of
imperfect correlation will be minimized by investing only in those
contracts whose behavior is expected to resemble that of the
Fund's underlying securities. The risk that the Fund will be
unable to close out a futures position will be minimized by
entering into stock transactions on an exchange with an active and
liquid secondary market. However, options, warrants and
convertible securities purchased or sold over-the-counter may be
less liquid than exchange-traded securities. Illiquid securities,
in general, may not represent more than 15% of the net assets of
the Fund.
Asset Coverage. To assure that futures and related options, as
well as when-issued and delayed-delivery securities, are not used
by the Fund to achieve excessive investment leverage, the Fund
will cover such transactions, as required under applicable
interpretations of the Securities and Exchange Commission (the
"SEC"), either by owning the underlying securities, entering into
an off-setting transaction, or by establishing a segregated
account with the Fund's custodian containing cash or liquid
portfolio securities in an amount at all times equal to or
exceeding the Fund's commitment with respect to these instruments
or contracts.
Portfolio Turnover
The frequency of Fund transactions - the Fund's turnover rate -
will vary from year to year depending on market conditions and the
Fund's cash flows. The Fund's annual portfolio turnover rate is
not expected to exceed 100%.
NET ASSET VALUE
The Fund is open for business each day the NYSE is open (each such
day being a "Valuation Day"). The NYSE is currently open on each
day, Monday through Friday, except: (a) January 1st, Presidents'
Day (the third Monday in February), Good Friday, Memorial Day (the
last Monday in May), July 4th, Labor Day (the first Monday in
September), Thanksgiving Day (the last Thursday in November) and
December 25th; and (b) the preceding Friday or the subsequent
Monday when one of the calendar-determined holidays falls on a
Saturday or Sunday, respectively.
The net asset value per share of the Fund is calculated once on
each Valuation Day as of the close of regular trading on the NYSE,
which under normal circumstances is 4:00 p.m., New York time. The
net asset value per share of the Fund is computed by dividing the
value of the Fund's assets, less all liabilities, by the total
number of its shares outstanding. The Fund's securities and other
assets are valued primarily on the basis of market quotations or,
if quotations are not readily available, by a method which the
Fund's Board of Trustees believes accurately reflects fair value.
PERFORMANCE INFORMATION AND REPORTS
The Fund's performance may be used from time to time in
advertisements, shareholder reports or other communications to
existing or prospective owners of the Companies' variable
contracts. When performance information is provided in
advertisements, it will include the effect of all charges deducted
under the terms of the specified contract, as well as all
recurring and non-recurring charges incurred by the Fund.
Performance information may include the Fund's investment results
and/or comparisons of its investment results to the Lipper
International Average or other various unmanaged indices or
results of other mutual funds or investment or savings vehicles.
The Fund's investment results as used in such communications will
be calculated on a total rate of return basis in the manner set
forth below. From time to time, fund rankings may be quoted from
various sources, such as Lipper Analytical Services, Inc., Value
Line and Morningstar Inc.
The Trust may provide period and average annualized "total return"
quotations for the Fund. The Fund's "total return" refers to the
change in the value of an investment in the Fund over a stated
period based on any change in net asset value per share and
including the value of any shares purchasable with any dividends
or capital gains distributed during such period. Period total
return may be annualized. An annualized total return is a
compounded total return which assumes that the period total return
is generated over a one-year period, and that all dividends and
capital gain distributions are reinvested. An annualized total
return will be higher than a period total return if the period is
shorter than one year, because of the compounding effect.
Unlike some bank deposits or other investments which pay a fixed
yield for a stated period of time, the total return of the Fund
will vary depending upon interest rates, the current market value
of the securities held by the Fund and changes in the Fund's
expenses. In addition, during certain periods for which total
return quotations may be provided, Bankers Trust and/or the
Trust's other service providers may have voluntarily agreed to
waive portions of their respective fees, or reimburse certain
operating expenses of the Fund, on a month-to-month basis. Such
waivers will have the effect of increasing the Fund's net income
(and therefore its total return) during the period such waivers
are in effect.
Total returns are based on past results and are not an indication
of future performance.
Shareholders will receive unaudited financial reports semiannually
that include the Fund's financial statements, including listings
of investment securities held by the Fund at those dates. Annual
reports are audited by independent accountants.
MANAGEMENT OF THE TRUST
Board of Trustees
The affairs of the Fund are managed under the supervision of the
Board of Trustees of the Trust, of which the Fund is a series. By
virtue of the responsibilities assumed by Bankers Trust, neither
the Trust nor the Fund require employees other than the Trust's
officers. None of the Trust's officers devotes full time to the
affairs of the Trust or the Fund.
For more information with respect to the Trustees of the Trust,
see "Management of the Trust" in the Statement of Additional
Information.
Investment Manager
The Fund has retained the services of Bankers Trust Global
Investment Management, a unit of Bankers Trust, as investment
manager. Bankers Trust, a New York banking corporation with
executive offices at 280 Park Avenue, New York, New York 10017,
is a wholly-owned subsidiary of Bankers Trust New York
Corporation. Bankers Trust conducts a variety of general banking
and trust activities and is a major wholesaler supplier of
financial services to the international and domestic institutional
markets.
As of June 30, 1996, Bankers Trust New York Corporation was the
seventh largest bank holding company in the United States with
total assets of approximately $115 billion. Bankers Trust is a
worldwide merchant bank dedicated to servicing the needs of
corporations, governments, financial institutions and private
clients through a global network of over 120 offices in more than
40 countries. Investment management is a core business of Bankers
Trust, built on a tradition of excellence from its roots as a
trust bank founded in 1903. The scope of Bankers Trust's
investment management capability is unique due to its leadership
positions in both active and passive quantitative management and
its presence in major equity and fixed income markets around the
world. Bankers Trust is one of the nation's largest and most
experienced investment managers with approximately $215 billion in
assets under management globally.
Bankers Trust has more than 50 years of experience managing
retirement assets for the nation's largest corporations and
institutions. Now, the Trust brings Bankers Trust's extensive
investment management expertise - once available to only the
largest institutions in the U.S. - to individual investors.
Bankers Trust's officers have had extensive experience in managing
investment portfolios having objectives similar to those of the
Fund.
Bankers Trust, subject to the supervision and direction of the
Board of Trustees, manages the Fund in accordance with the Fund's
investment objective and stated investment policies, makes
investment decisions for the Fund, places orders to purchase and
sell securities and other financial instruments on behalf of the
Fund, employs professional investment managers and securities
analysts who provide research services to the Fund, oversees the
administration of all aspects of the Trust's business and affairs
and supervises the performance of professional services provided
by other vendors. Bankers Trust may utilize the expertise of any
of its world wide subsidiaries and affiliates to assist it in its
role as investment manager. All orders for investment
transactions on behalf of the Fund are placed by Bankers Trust
with broker-dealers and other financial intermediaries that it
selects, including those affiliated with Bankers Trust. A Bankers
Trust affiliate will be used in connection with a purchase or sale
of an investment for the Fund only if Bankers Trust believes that
the affiliate's charge for the transaction does not exceed usual
and customary levels. The Fund will not invest in obligations for
which Bankers Trust or any of its affiliates is the ultimate
obligor or accepting bank. The Fund may, however, invest in the
obligations of correspondents and customers of Bankers Trust.
As compensation for its services to the Fund, Bankers Trust
receives a fee from the Fund, accrued daily and paid monthly,
equal on an annual basis to 0.35% of the average daily net assets
of the Fund for its then-current fiscal year.
Bankers Trust has been advised by its counsel that, in counsel's
opinion, Bankers Trust currently may perform the services for the
Trust and the Fund described in this Prospectus and the SAI
without violation of the Glass-Steagall Act or other applicable
banking laws or regulations. State laws on this issue may differ
from the interpretations of relevant Federal law, and banks and
financial institutions may be required to register as dealers
pursuant to state securities law.
Fund Manager
Frank Salerno, Managing Director of Bankers Trust, is responsible
for the day-to-day management of the Fund. Mr. Salerno oversees
administration, management and trading of international and
domestic equity index strategies. He has been employed by Bankers
Trust since 1981.
Expenses
In addition to the fees of the Manager, the Fund is responsible
for the payment of all its other expenses incurred in the
operation of the Fund, which include, among other things, expenses
for legal and independent auditor's services, charges of the
Fund's custodian and transfer agent, SEC fees, a pro rata portion
of the fees of the Trust's unaffiliated trustees and officers,
accounting costs for reports sent to owners of the Contracts which
provide for investment in the Fund ("Contractowners"), the Fund's
pro rata portion of membership fees in trade organizations, a pro
rata portion of the fidelity bond coverage for the Trust's
officers, interest, brokerage and other trading costs, taxes, all
expenses of computing the Fund's net asset value per share,
expenses involved in registering and maintaining the registration
of the Fund's shares with the SEC and qualifying the Fund for sale
in various jurisdictions and maintaining such qualification,
litigation and other extraordinary or non-recurring expenses.
However, other typical Fund expenses such as Contractowner
servicing, distribution of reports to Contractowners and
prospectus printing and postage will be borne by the relevant
Company.
Administrator
First Data Investor Services Group, Inc. ("First Data"), a
subsidiary of First Data Corporation, One Exchange Place, Boston,
Massachusetts 02109, serves as the Fund's administrator pursuant
to an Administration Agreement with the Trust. Under the terms of
the Administration Agreement, First Data generally assists in all
aspects of the Fund's operations, other than providing investment
advice, subject to the overall authority of the Trust's Board of
Trustees. Pursuant to the terms of the Administration Agreement,
dated April 16, 1996, the Trust has agreed to pay First Data a
monthly fee at the annual rate of 0.02% of the value of the
Trust's average monthly net assets not exceeding $2 billion; 0.01%
of the Trust's monthly average net assets exceeding $2 billion but
not exceeding $3 billion; and 0.0075% of the Trust's monthly
average net assets exceeding $3 billion, in addition to a flat fee
of $70,000 per year per Fund.
Distributor
440 Financial Distributors, Inc. (the "Distributor") serves as
distributor of the Fund's shares to separate accounts of the
Companies for which it receives no separate fee from the Fund.
The principal business address of the Distributor is 4400 Computer
Drive, Westborough, Massachusetts 01581.
Custodian and Transfer Agent
Bankers Trust acts as custodian of the assets of the Fund and
First Data serves as the transfer agent for the Fund.
Organization of the Trust
The Trust was organized on January 19, 1996, under the laws of the
Commonwealth of Massachusetts. The Fund is a separate series of
the Trust. The Trust offers shares of beneficial interest of the
Fund and the Trust's other series, par value $0.001 per share.
The shares of each of the other series of the Trust are offered
through separate Prospectuses. No series of shares has any
preference over any other series. All shares, when issued, will
be fully paid and nonassessable. The Trust's Board of Trustees
has the authority to create additional series without obtaining
shareholder approval.
The Trust is an entity of the type commonly known as a
"Massachusetts business trust." Under Massachusetts law,
shareholders of such a business trust may, under certain
circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to
circumstances in which both inadequate insurance existed and the
Trust itself was unable to meet its obligations.
Through its separate accounts, the Companies are the Fund's sole
stockholders of record, so under the 1940 Act, such Companies are
deemed to be in control of the Fund. Nevertheless, when a
shareholders' meeting occurs, each Company solicits and accepts
voting instructions from its Contractowners who have allocated or
transferred monies for an investment in the Fund as of the record
date of the meeting. Each Company then votes the Fund's shares
that are attributable to its Contractowners' interests in the Fund
in proportion to the voting instructions received. Each Company
will vote any share that it is entitled to vote directly due to
amounts it has contributed or accumulated in its separate accounts
in the manner described in the prospectuses for its variable
annuities and variable life insurance policies.
Each share of the Fund is entitled to one vote, and fractional
shares are entitled to fractional votes. Fund shares have non-
cumulative voting rights, so the vote of more than 50% of the
shares can elect 100% of the Trustees.
The Trust is not required, and does not intend, to hold regular
annual shareholder meetings, but may hold special meetings for
consideration of proposals requiring shareholder approval.
The Fund is only available to owners of variable annuities or
variable life insurance policies issued by the Companies through
their respective separate accounts. The Fund does not currently
foresee any disadvantages to Contractowners arising from offering
its shares to variable annuity and variable life insurance policy
separate accounts simultaneously, and the Board of Trustees
monitors events for the existence of any material irreconcilable
conflict between or among Contractowners. If a material
irreconcilable conflict arises, one or more separate accounts may
withdraw their investment in the Fund. This could possibly force
the Fund to sell portfolio securities at disadvantageous prices.
Each Company will bear the expenses of establishing separate
portfolios for its variable annuity and variable life insurance
separate accounts if such action becomes necessary; however,
ongoing expenses that are ultimately borne by Contractowners will
likely increase due to the loss of economies of scale benefits
that can be provided to mutual funds with substantial assets.
SHAREHOLDER AND ACCOUNT POLICIES
PURCHASE AND REDEMPTION OF SHARES
Shares of the Fund will be continuously offered to each Company's
separate accounts at the net asset value per share next determined
after a proper purchase request has been received by the Company.
The Company then offers to Contractowners units in its separate
accounts which directly correspond to shares in the Fund. Each
Company submits purchase and redemption orders to the Fund based
on allocation instructions for premium payments, transfer
instructions and surrender or partial withdrawal requests which
are furnished to the Company by such Contractowners.
Contractowners can send such instructions and requests to the
Companies by first class mail, overnight mail or express mail sent
to the address set forth in the relevant Company's offering
memorandum included with this prospectus. The Fund and the
Distributor reserve the right to reject any purchase order for
shares of the Fund.
Payment for redeemed shares will ordinarily be made within seven
(7) business days after the Fund receives a redemption order from
the relevant Company. The redemption price will be the net asset
value per share next determined after the Company receives the
Contractowner's request in proper form.
The Fund may suspend the right of redemption or postpone the date
of payment during any period when trading on the NYSE is
restricted, or the NYSE is closed for other than weekends and
holidays; when an emergency makes it not reasonably practicable
for the Fund to dispose of assets or calculate its net asset
value; or as permitted by the SEC.
The accompanying offering memorandum for the Company's variable
annuity or variable life insurance policy describes the
allocation, transfer and withdrawal provisions of such annuity or
policy.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The Fund distributes substantially all of its net income and
capital gains to shareholders each year. The Fund distributes
capital gains and income dividends annually. All dividends and
capital gains distributions paid by the Fund will be automatically
reinvested, at net asset value, by the Companies' separate
accounts in additional shares of the Fund, unless an election is
made by a Contractowner to receive distributions in cash.
The Fund will be treated as a separate entity for federal income
tax purposes. The Fund intends to qualify as a "regulated
investment company" under the Internal Revenue Code of 1986, as
amended (the "Code"). As a regulated investment company the Fund
will not be subject to U.S. Federal income tax on its investment
company taxable income and net capital gains (the excess of net
long-term capital gains over net short-term capital losses), if
any, that it distributes to shareholders. The Fund intends to
distribute to its shareholders, at least annually, substantially
all of its investment company taxable income and net capital
gains, and therefore does not anticipate incurring a Federal
income tax liability.
The Code and Treasury Department regulations promulgated
thereunder require that mutual funds that are offered through
insurance company separate accounts must meet certain
diversification requirements to preserve the tax-deferral benefits
provided by the variable contracts which are offered in connection
with such separate accounts. The Manager intends to diversify the
Fund's investments in accordance with those requirements. The
enclosed offering memorandum for a Company's variable annuity or
variable life insurance policies describes the federal income tax
treatment of distributions from such contracts to Contractowners.
The foregoing is only a brief summary of important tax law
provisions that affect the Fund. Other Federal, state or local
tax law provisions may also affect the Fund and its operations.
Anyone who is considering allocating, transferring or withdrawing
monies held under a variable contract to or from the Fund should
consult a qualified tax adviser.
Investment Manager of the Fund
bankers trust global investment management
a unit of
bankers trust company
Administrator
first data investor services group, inc.
Distributor
440 FINANCIAL DISTRIBUTORS, INC.
Custodian
BANKERS TRUST COMPANY
Transfer Agent
first data investor services group, inc.
Independent Accountants
COOPERS & LYBRAND LLP
Counsel
WILLKIE FARR & GALLAGHER
..................................................................
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No person has been authorized to give any information or to make
any representation other than those contained in the Fund's
Prospectus, its Statement of Additional Information or the Fund's
official sales literature in connection with the offering of the
Fund's shares and, if given or made, such other information or
representations must not be relied on as having been authorized by
the Fund. This Prospectus does not constitute an offer in any
state in which, or to any person to whom, such offer may not
lawfully be made.
..................................................................
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STATEMENT OF
ADDITIONAL INFORMATION
FEBRUARY 5, 1997 AS SUPPLEMENTED JUNE 16, 1997
BT INSURANCE FUNDS TRUST
Small Cap Index Fund
BT Insurance Funds Trust (the "Trust") is currently
comprised of six series: the Small Cap Index Fund (the "Fund")
and five other series. The shares of the Fund are described
herein. Capitalized terms not otherwise defined herein shall have
the same meaning as in the Prospectus.
Table of Contents
Risk Factors and Certain Securities and Investment Practices
2
Performance Information 12
Valuation of Securities; Redemption in Kind 13
Management of the Trust 14
Organization of the Trust 18
Taxation 18
Shares of the Fund are available to the public only through the
purchase of certain variable annuity and variable life insurance
contracts ("Contract(s)") issued by various insurance companies
(the "Companies"). The investment adviser of the Fund is Bankers
Trust Global Investment Management, a unit of Bankers Trust
Company (the "Manager" or "Bankers Trust"). The distributor of
the Fund shares is First Data Distributors, Inc. (the
"Distributor" or "First Data Distributors").
The Prospectus for the Fund is dated February 5, 1997 as
supplemented June 16, 1997. The Prospectus provides the basic
information investors should know before investing and may be
obtained without charge by calling the Trust at the Customer
Service Center at the telephone number shown in the accompanying
prospectus. This Statement of Additional Information, which is
not a Prospectus, is intended to provide additional information
regarding the activities and operations of the Fund and should be
read in conjunction with the Fund's Prospectus. This Statement of
Additional Information is not an offer of any Fund for which an
investor has not received a Prospectus. Capitalized terms not
otherwise defined in this Statement of Additional Information have
the meanings accorded to them in the Fund's Prospectus.
bankers trust global investment management,
a unit of bankers trust company
Investment Manager of the Fund
The Trust's distributor is FIRST DATA distributors, inc., 4400
Computer Drive, Westborough, MA 01581.
RISK FACTORS AND CERTAIN SECURITIES AND INVESTMENT PRACTICES
Investment Objective
The investment objective of the Fund is described in the
Fund's Prospectus. There can, of course, be no assurance that the
Fund will achieve its investment objective.
Investment Practices
The following is a discussion of the various investments of
and techniques employed by the Fund:
Certificates of Deposit and Bankers' Acceptances.
Certificates of deposit are receipts issued by a depository
institution 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 acceptances have maturities of six months or less.
Commercial Paper. 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. A
variable amount master demand note (which is a type of commercial
paper) represents a direct borrowing arrangement involving
periodically fluctuating rates of interest under a letter
agreement between a commercial paper issuer and an institutional
lender pursuant to which the lender may determine to invest
varying amounts.
Illiquid Securities. Historically, illiquid securities have
included securities subject to contractual or legal restrictions
on resale because they have not been registered under the
Securities Act of 1933, as amended (the "1933 Act"), securities
which are otherwise not readily marketable and repurchase
agreements having a maturity of longer than seven days.
Securities which have not been registered under the 1933 Act are
referred to as private placements or restricted securities and are
purchased directly from the issuer or in the secondary market.
Mutual funds do not typically hold a significant amount of these
restricted or other illiquid securities because of the potential
for delays on resale and uncertainty in valuation. Limitations on
resale may have an adverse effect on the marketability of
portfolio securities and a mutual fund might be unable to dispose
of restricted or other illiquid securities promptly or at
reasonable prices and might thereby experience difficulty
satisfying redemptions within seven days. A mutual fund might
also have to register such restricted securities in order to
dispose of them resulting in additional expense and delay.
Adverse market conditions could impede such a public offering of
securities.
In recent years, however, a large institutional market has
developed for certain securities that are not registered under the
1933 Act, including repurchase agreements, commercial paper,
foreign securities, municipal securities and corporate bonds and
notes. Institutional investors depend on an efficient
institutional market in which the unregistered security can be
readily resold or on an issuer's ability to honor a demand for
repayment. The fact that there are contractual or legal
restrictions on resale of such investments to the general public
or to certain institutions may not be indicative of their
liquidity.
The Securities and Exchange Commission (the "SEC") has
adopted Rule 144A, which allows a broader institutional trading
market for securities otherwise subject to restriction on their
resale to the general public. Rule 144A establishes a "safe
harbor" from the registration requirements of the 1933 Act of
resales of certain securities to qualified institutional buyers.
The Manager anticipates that the market for certain restricted
securities such as institutional commercial paper will expand
further as a result of this regulation and the development of
automated systems for the trading, clearance and settlement of
unregistered securities of domestic and foreign issuers, such as
the PORTAL System sponsored by the National Association of
Securities Dealers, Inc.
The Manager will monitor the liquidity of Rule 144A
securities in the Fund's portfolio under the supervision of the
Trust's Board of Trustees. In reaching liquidity decisions, the
Manager will consider, among other things, the following factors:
(i) the frequency of trades and quotes for the security; (ii) the
number of dealers and other potential purchasers wishing to
purchase or sell the security; (iii) dealer undertakings to make a
market in the security and (iv) the nature of the security and of
the marketplace trades (e.g., the time needed to dispose of the
security, the method of soliciting offers and the mechanics of the
transfer).
Lending of Portfolio Securities. The Fund has the authority
to lend portfolio securities to brokers, dealers and other
financial organizations. The Fund will not lend securities to
Bankers Trust, the Distributor or their affiliates. By lending
its securities, the Fund can increase its income by continuing to
receive interest on the loaned securities as well as by either
investing the cash collateral in short-term securities or
obtaining yield in the form of interest paid by the borrower when
U.S. Government obligations are used as collateral. There may be
risks of delay in receiving additional collateral or risks of
delay in recovery of the securities or even loss of rights in the
collateral should the borrower of the securities fail financially.
The Fund will adhere to the following conditions whenever its
securities are loaned: (i) the Fund must receive at least 100
percent cash collateral or equivalent securities from the
borrower; (ii) the borrower must increase this collateral whenever
the market value of the securities including accrued interest
rises above the level of the collateral; (iii) the Fund must be
able to terminate the loan at any time; (iv) the Fund must receive
reasonable interest on the loan, as well as any dividends,
interest or other distributions on the loaned securities, and any
increase in market value; (v) the Fund may pay only reasonable
custodian fees in connection with the loan; and (vi) voting rights
on the loaned securities may pass to the borrower; provided,
however, that if a material event adversely affecting the
investment occurs, the Trust's Board of Trustees must terminate
the loan and regain the right to vote the securities.
Short-Term Instruments. When the Fund experiences large
cash inflows through the sale of securities and desirable equity
securities, that are consistent with the Fund's investment
objective, which are unavailable in sufficient quantities or at
attractive prices, the Fund may hold short-term investments for a
limited time pending availability of such equity securities.
Short-term instruments consist of: (i) short-term obligations
issued or guaranteed by the U.S. government or any of its agencies
or instrumentalities or by any of the states; (ii) other
short-term debt securities rated AA or higher by S&P or Aa or
higher by Moody's or, if unrated, of comparable quality in the
opinion of Bankers Trust; (iii) commercial paper; (iv) bank
obligations, including negotiable certificates of deposit, time
deposits and bankers' acceptances; and (v) repurchase agreements.
At the time the Fund invests in commercial paper, bank obligations
or repurchase agreements, the issuer of the issuer's parent must
have outstanding debt rated AA or higher by S&P or Aa or higher by
Moody's or outstanding commercial paper or bank obligations rated
A-1 by S&P or Prime-1 by Moody's; or, if no such ratings are
available, the instrument must be of comparable quality in the
opinion of Bankers Trust.
When-Issued and Delayed Delivery Securities. The Fund may
purchase securities on a when-issued or delayed delivery basis.
For example, delivery of and payment for these securities can take
place a month or more after the date of the purchase commitment.
The purchase price and the interest rate payable, if any, on the
securities are fixed on the purchase commitment date or at the
time the settlement date is fixed. The value of such securities
is subject to market fluctuation and no interest accrues to the
Fund until settlement takes place. At the time the Fund makes the
commitment to purchase securities on a when-issued or delayed
delivery basis, it will record the transaction, reflect the value
each day of such securities in determining its net asset value
and, if applicable, calculate the maturity for the purposes of
average maturity from that date. At the time of settlement a
when-issued security may be valued at less than the purchase
price. To facilitate such acquisitions, the Fund will maintain
with the Fund's custodian a segregated account with liquid assets,
consisting of cash, U.S. Government securities or other
appropriate securities, in an amount at least equal to such
commitments. On delivery dates for such transactions, the Fund
will meet its obligations from maturities or sales of the
securities held in the segregated account and/or from cash flow.
If the Fund chooses to dispose of the right to acquire a
when-issued security prior to its acquisition, it could, as with
the disposition of any other Fund obligation, incur a gain or loss
due to market fluctuation. It is the current policy of the Fund
not to enter into when-issued commitments exceeding in the
aggregate 15% of the market value of the Fund's total assets, less
liabilities other than the obligations created by when-issued
commitments.
Additional U.S. Government Obligations. The Fund may invest
in obligations issued or guaranteed by U.S. Government agencies or
instrumentalities. These obligations may or may not be backed by
the "full faith and credit" of the United States. In the case of
securities not backed by the full faith and credit of the United
States, the Fund must look principally to the federal agency
issuing or guaranteeing the obligation for ultimate repayment, and
may not be able to assert a claim against the United States itself
in the event the agency or instrumentality does not meet its
commitments. Securities in which the Fund may invest that are not
backed by the full faith and credit of the United States include,
but are not limited to, obligations of the Tennessee Valley
Authority, the Federal Home Loan Mortgage Corporation and the U.S.
Postal Service, each of which has the right to borrow from the
U.S. Treasury to meet its obligations, and obligations of the
Federal Farm Credit System and the Federal Home Loan Banks, both
of whose obligations may be satisfied only by the individual
credits of each issuing agency. Securities which are backed by
the full faith and credit of the United States include obligations
of the Government National Mortgage Association, the Farmers Home
Administration, and the export-import Bank.
Equity Investments. The Fund may invest in equity
securities listed on any domestic securities exchange or traded in
the over-the-counter market as well as certain restricted or
unlisted securities. They may or may not pay dividends or carry
voting rights. Common stock occupies the most junior position in
a company's capital structure.
Reverse Repurchase Agreements. The Fund may borrow funds
for temporary or emergency purposes, such as meeting larger than
anticipated redemption requests, and not for leverage, by among
other things, agreeing to sell portfolio securities to financial
institutions such as banks and broker-dealers and to repurchase
them at a mutually agreed date and price (a "reverse repurchase
agreement"). At the time the Fund enters into a reverse
repurchase agreement it will place in a segregated custodial cash
account, U.S. Government Obligations or high-grade debt
obligations having a value equal to the repurchase price,
including accrued interest. Reverse repurchase agreements involve
the risk that the market value of the securities sold by the Fund
may decline below the repurchase price of those securities.
Reverse repurchase agreements are considered to be borrowings by
the Fund.
Warrants. Warrants entitle the holder to buy common stock
from the issuer at a specific price (the strike price) for a
specific period of time. The strike price of warrants sometimes
is much lower than the current market price of the underlying
securities, yet warrants are subject to similar price
fluctuations. As a result, warrants may be more volatile
investments than the underlying securities.
Warrants do not entitle the holder to dividends or voting
rights with respect to the underlying securities and do not
represent any rights in the assets of the issuing company. Also,
the value of the warrant does not necessarily change with the
value of the underlying securities and a warrant ceases to have
value if it is not exercised prior to the expiration date.
Convertible Securities. Convertible securities may be a
debt security or preferred stock which may be converted into
common stock or carries the right to purchase common stock.
Convertible securities entitle the holder to exchange the
securities for a specified number of shares of common stock,
usually of the same company, at specified prices within a certain
period of time.
The terms of any convertible security determine its ranking
in a company's capital structure. In the case of subordinated
convertible debentures, the holders' claims on assets and earnings
are subordinated to the claims of other creditors, and are senior
to the claims of preferred and common shareholders. In the case
of convertible preferred stock, the holders' claims on assets and
earnings are subordinated to the claims of all creditors and are
senior to the claims of common shareholders.
Futures Contracts and Options on Futures Contracts
General. The successful use of such instruments draws upon
the Manager's skill and experience with respect to such
instruments. When futures are purchased to hedge against a
possible increase in the price of securities before the Fund is
able to invest its cash (or cash equivalents) in an orderly
fashion, it is possible that the market may decline instead; if
the Fund then concludes not to invest its cash at that time
because of concern as to possible further market decline or for
other reasons, the Fund will realize a loss on the futures
contract that is not offset by a reduction in the price of the
instruments that were to be purchased. In addition, the
correlation between movements in the price of futures contracts or
options on futures contracts and movements in the price of the
securities hedged will not be perfect and could produce
unanticipated losses.
Successful use of the futures contract and related options
are subject to special risk considerations. A liquid secondary
market for any futures or options contract may not be available
when a futures or options position is sought to be closed. In
addition, there may be an imperfect correlation between movements
in the securities in the Fund. Successful use of futures or
options contracts is further dependent on Bankers Trust's ability
to correctly predict movements in the securities markets and no
assurance can be given that its judgment will be correct.
Successful use of options on securities or stock indices are
subject to similar risk considerations. In addition, by writing
covered call options, the Fund gives up the opportunity, while the
option is in effect, to profit from any price increase in the
underlying securities above the options exercise price.
Futures Contracts. The Fund may enter into securities index
futures contracts. U.S. futures contracts have been designed by
exchanges which have been designated "contracts markets" by the
CFTC, and must be executed through a futures commission merchant,
or brokerage firm, which is a member of the relevant contract
market. Futures contracts trade on a number of exchange markets,
and, through their clearing corporations, the exchanges guarantee
performance of the contracts as between the clearing members of
the exchange.
These investments will be made by the Fund solely for cash
management purposes. Such investments will only be made if they
are economically appropriate to the reduction of risks involved in
the management of the Fund. In this regard, the Fund may enter
into futures contracts or options on futures related to the
Russell 2000 Index.
At the same time a futures contract is purchased or sold,
the Fund must allocate cash or securities as a deposit payment
("initial deposit"). It is expected that the initial deposit
would be approximately 1 1/2% to 5% of a contract's face value.
Daily thereafter, the futures contract is valued and the payment
of "variation margin" may be required, since each day the Fund
would provide or receive cash that reflects any decline or
increase in the contract's value.
Although futures contracts by their terms call for the
actual delivery or acquisition of securities, in most cases the
contractual obligation is fulfilled before the date of the
contract without having to make or take delivery of the
securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a
commodities exchange an identical futures contract calling for
delivery in the same month. Such a transaction, which is effected
through a member of an exchange, cancels the obligation to make or
take delivery of the securities. Since all transactions in the
futures market are made, offset or fulfilled through a
clearinghouse associated with the exchange on which the contracts
are traded, the Fund will incur brokerage fees when it purchases
or sells futures contracts.
The ordinary spreads between prices in the cash and futures
market, due to differences in the nature of those markets, are
subject to distortions. First, all participants in the futures
market are subject to initial deposit and variation margin
requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through
offsetting transactions which could distort the normal
relationship between the cash and futures markets. Second, the
liquidity of the futures market depends on participants entering
into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take
delivery, liquidity in the futures market could be reduced, thus
producing distortion. Third, from the point of view of
speculators, the margin deposit requirements in the futures market
are less onerous than margin requirements in the securities
market. Therefore, increased participation by speculators in the
futures market may cause temporary price distortions.
In addition, futures contracts entail risks. The Manager
believes that use of such contracts will benefit the Fund. The
successful use of futures contracts, however, depends on the
degree of correlation between the futures and securities markets.
Options on Futures Contracts. The Fund may use stock index
futures on a continual basis to equitize cash so that the Fund may
maintain 100% equity exposure. The Board of Trustees has adopted
a restriction that the Fund will not enter into any futures
contracts or options on futures contracts if immediately
thereafter the amount of margin deposits on all the futures
contracts of the Fund and premiums paid on outstanding options on
futures contracts owned by the Fund (other than those entered into
for bona fide hedging purposes) would exceed 5% of the market
value of the total assets of the Fund.
The Fund may purchase and write options on the futures
contract described above. A futures option gives the holder, in
return for the premium paid, the right to buy (call) from or sell
(put) to the writer of the option a futures contract at a
specified price at any time during the period of the option. Upon
exercise, the writer of the option is obligated to pay the
difference between the cash value of the futures contract and the
exercise price. Like the buyer or seller of a futures contract,
the holder, or writer, of an option has the right to terminate its
position prior to the scheduled expiration of the option by
selling, or purchasing an option of the same series, at which time
the person entering into the closing transaction will realize a
gain or loss. The Fund will be required to deposit initial margin
and variation margin with respect to put and call options on
futures contracts written by it pursuant to brokers' requirements
similar to those described above. Net option premiums received
will be included as initial margin deposits. In anticipation of a
decline in interest rates, the Fund may purchase call options on
futures contracts as a substitute for the purchase of futures
contracts to hedge against a possible increase in the price of
securities which the Fund intends to purchase. Similarly, if the
value of the securities held by the Fund is expected to decline as
a result of an increase in interest rates, the Fund might purchase
put options or sell call options on futures contracts rather than
sell futures contracts.
Investments in futures options involve some of the same
considerations that are involved in connection with investments in
futures contracts (for example, the existence of a liquid
secondary market). In addition, the purchase or sale of an option
also entails the risk that changes in the value of the underlying
futures contract will not correspond to changes in the value of
the option purchased. Depending on the pricing of the option
compared to either the futures contract upon which it is based, or
upon the price of the securities being hedged, an option may or
may not be less risky than ownership of the futures contract or
such securities. In general, the market prices of options can be
expected to be more volatile than the market prices on the
underlying futures contracts. Compared to the purchase or sale of
futures contracts, however, the purchase of call or put options on
futures contracts may frequently involve less potential risk to
the Fund because the maximum amount at risk is the premium paid
for the options (plus transaction costs). The writing of an
option on a futures contract involves risks similar to those risks
relating to the sale of futures contracts.
The Fund's ability to terminate over-the-counter options
will be more limited than with exchange-traded options. It is
also possible that broker-dealers participating in over-the-
counter options transactions will not fulfill their obligations.
Until such time as the staff of the SEC changes its position, the
Fund will treat purchased over-the-counter options and assets used
to cover written over-the-counter options as illiquid securities.
With respect to options written with primary dealers in U.S.
Government securities pursuant to an agreement requiring a closing
purchase transaction at a formula price, the amount of illiquid
securities may be calculated with reference to the repurchase
formula.
Options on Securities Indices. The Fund may purchase
and write (sell) call and put options on securities indices. Such
options give the holder the right to receive a cash settlement
during the term of the option based upon the difference between
the exercise price and the value of the index.
Options on securities indices entail certain risks. The
absence of a liquid secondary market to close out options
positions on securities indices may occur, although the Fund
generally will only purchase or write such an option if the
Manager believes the option can be closed out.
Use of options on securities indices also entails the risk
that trading in such options may be interrupted if trading in
certain securities included in the index is interrupted. The Fund
will not purchase such options unless the Manager believes the
market is sufficiently developed such that the risk of trading in
such options is no greater than the risk of trading in options on
securities.
Price movements in the Fund's portfolio may not correlate
precisely with movements in the level of an index and, therefore,
the use of options on indices cannot serve as a complete hedge.
Because options on securities indices require settlement in cash,
the Manager may be forced to liquidate portfolio securities to
meet settlement obligations.
Investment Restrictions
The following investment restrictions are "fundamental
policies" of the Fund and may not be changed without the approval
of a "majority of the outstanding voting securities" of the Fund.
"Majority of the outstanding voting securities" under the 1940
Act, and as used in this Statement of Additional Information and
the Prospectus, means, with respect to the Fund, the lesser of (i)
67% or more of the outstanding voting securities of the Fund
present at a meeting, if the holders of more than 50% of the
outstanding voting securities of the Fund are present or
represented by proxy or (ii) more than 50% of the outstanding
voting securities of the Fund.
As a matter of fundamental policy, the Fund may not:
(1) borrow money or mortgage or hypothecate assets of the Fund,
except that in an amount not to exceed 1/3 of the current value of
the Fund's assets, it may borrow money as a temporary measure for
extraordinary or emergency purposes and enter into reverse
repurchase agreements or dollar roll transactions, and except that
it may pledge, mortgage or hypothecate not more than 1/3 of such
assets to secure such borrowings (it is intended that money would
be borrowed only from banks and only either to accommodate
requests for the withdrawal of beneficial interests (redemption of
shares) while effecting an orderly liquidation of portfolio
securities or to maintain liquidity in the event of an
unanticipated failure to complete a portfolio security transaction
or other similar situations) or reverse repurchase agreements,
provided that collateral arrangements with respect to options and
futures, including deposits of initial deposit and variation
margin, are not considered a pledge of assets for purposes of this
restriction (as an operating policy, the Funds may not engage in
dollar roll transactions);
(2) underwrite securities issued by other persons except insofar
as the Trust or the Funds may technically be deemed an underwriter
under the 1933 Act in selling a portfolio security;
(3) make loans to other persons except: (a) through the lending
of the Fund's portfolio securities and provided that any such
loans not exceed 30% of the Fund's total assets (taken at market
value); or (b) through the use of repurchase agreements or the
purchase of short-term obligations;
(4) purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or
interests therein), in the ordinary course of business (except
that the Trust may hold and sell, for the Fund's portfolio, real
estate acquired as a result of the Fund's ownership of
securities);
(5) concentrate its investments in any particular industry
(excluding U.S. Government securities), but if it is deemed
appropriate for the achievement of the Fund's investment
objective(s), up to 25% of its total assets may be invested in any
one industry;
(6) issue any senior security (as that term is defined in the
1940 Act) if such issuance is specifically prohibited by the
1940 Act or the rules and regulations promulgated thereunder
(except to the extent permitted in investment restriction No. 1),
provided that collateral arrangements with respect to options and
futures, including deposits of initial deposit and variation
margin, are not considered to be the issuance of a senior security
for purposes of this restriction; and
(7) purchase the securities of any one issuer if as a result more
than 5% of the value of its total assets would be invested in the
securities of such issuer or the Fund would own more than 10% of
the outstanding voting securities of such issuer, except that up
to 25% of the value of its total assets may be invested without
regard to these 5% limitation and provided that there is no
limitation with respect to investments in U.S. Government
Securities.
Additional investment restrictions adopted by the Fund,
which may be changed by the Board of Trustees, provide that the
Fund may not:
(i) purchase any security or evidence of interest
therein on margin, except that such short-term credit as may be
necessary for the clearance of purchases and sales of securities
may be obtained and except that deposits of initial deposit and
variation margin may be made in connection with the purchase,
ownership, holding or sale of futures;
(ii) invest for the purpose of exercising control or
management;
(iii) purchase for the Fund securities of any
investment company if such purchase at the time thereof would
cause: (a) more than 10% of the Fund's total assets (taken at the
greater of cost or market value) to be invested in the securities
of such issuers; (b) more than 5% of the Fund's total assets
(taken at the greater of cost or market value) to be invested in
any one investment company; or (c) more than 3% of the outstanding
voting securities of any such issuer to be held for the Fund (as
an operating policy, the Fund will not invest in another open-end
registered investment company); or
(iv) invest more than 15% of the Fund's net assets
(taken at the greater of cost or market value) in securities that
are illiquid or not readily marketable not including (a) Rule 144A
securities that have been determined to be liquid by the Board of
Trustees; and (b) commercial paper that is sold under section 4(2)
of the 1933 Act which is not traded flat or in default as to
interest or principal.
There will be no violation of any investment restriction if
that restriction is complied with at the time the relevant action
is taken notwithstanding a later change in market value of an
investment, in net or total assets, in the securities rating of
the investment, or any other later change.
The Fund will comply with the state securities laws and
regulations of all states in which it is registered.
Portfolio Transactions and Brokerage Commissions
The Manager is responsible for decisions to buy and sell
securities, futures contracts and options on such securities and
futures for the Fund, the selection of brokers, dealers and
futures commission merchants to effect transactions and the
negotiation of brokerage commissions, if any. Broker-dealers may
receive brokerage commissions on fund transactions, including
options, futures and options on futures transactions and the
purchase and sale of underlying securities upon the exercise of
options. Orders may be directed to any broker-dealer or futures
commission merchant, including to the extent and in the manner
permitted by applicable law, Bankers Trust or its subsidiaries or
affiliates. Purchases and sales of certain fund securities on
behalf of the Fund are frequently placed by the Manager with the
issuer or a primary or secondary market-maker for these securities
on a net basis, without any brokerage commission being paid by the
Fund. Trading does, however, involve transaction costs.
Transactions with dealers serving as market-makers reflect the
spread between the bid and asked prices. Transaction costs may
also include fees paid to third parties for information as to
potential purchasers or sellers of securities. Purchases of
underwritten issues may be made which will include an underwriting
fee paid to the underwriter.
The Manager seeks to evaluate the overall reasonableness of
the brokerage commissions paid (to the extent applicable) in
placing orders for the purchase and sale of securities for the
Fund taking into account such factors as price, commission
(negotiable in the case of national securities exchange
transactions), if any, size of order, difficulty of execution and
skill required of the executing broker-dealer through familiarity
with commissions charged on comparable transactions, as well as by
comparing commissions paid by the Fund to reported commissions
paid by others. The Manager reviews on a routine basis commission
rates, execution and settlement services performed, making
internal and external comparisons.
The Manager is authorized, consistent with Section 28(e) of
the Securities Exchange Act of 1934, as amended, when placing
portfolio transactions for the Fund with a broker to pay a
brokerage commission (to the extent applicable) in excess of that
which another broker might have charged for effecting the same
transaction on account of the receipt of research, market or
statistical information. The term "research, market or
statistical information" includes advice as to the value of
securities; the advisability of investing in, purchasing or
selling securities; the availability of securities or purchasers
or sellers of securities; and furnishing analyses and reports
concerning issuers, industries, securities, economic factors and
trends, portfolio strategy and the performance of accounts.
Consistent with the policy stated above, the Rules of Fair
Practice of the National Association of Securities Dealers, Inc.
and such other policies as the Trustees of the Trust may
determine, the Manager may consider sales of shares of a Fund as a
factor in the selection of broker-dealers to execute portfolio
transactions. Bankers Trust will make such allocations if
commissions are comparable to those charged by nonaffiliated,
qualified broker-dealers for similar services.
Higher commissions may be paid to firms that provide
research services to the extent permitted by law. Bankers Trust
may use this research information in managing the Fund's assets,
as well as the assets of other clients.
Except for implementing the policies stated above, there is
no intention to place portfolio transactions with particular
brokers or dealers or groups thereof. In effecting transactions
in over-the-counter securities, orders are placed with the
principal market-makers for the security being traded unless,
after exercising care, it appears that more favorable results are
available otherwise.
Although certain research, market and statistical
information from brokers and dealers can be useful to the Fund and
to the Manager, it is the opinion of the management of the Trust
that such information is only supplementary to the Manager's own
research effort, since the information must still be analyzed,
weighed and reviewed by the Manager's staff. Such information may
be useful to the Manager in providing services to clients other
than the Fund, and not all such information is used by the Manager
in connection with the Fund. Conversely, such information
provided to the Manager by brokers and dealers through whom other
clients of the Manager effect securities transactions may be
useful to the Manager in providing services to the Fund.
In certain instances there may be securities which are
suitable for the Fund as well as for one or more of the Manager's
other clients. Investment decisions for the Fund and for the
Manager's other clients are made with a view to achieving their
respective investment objectives. It may develop that a
particular security is bought or sold for only one client even
though it might be held by, or bought or sold for, other clients.
Likewise, a particular security may be bought for one or more
clients when one or more clients are selling that same security.
Some simultaneous transactions are inevitable when several clients
receive investment advice from the same investment adviser,
particularly when the same security is suitable for the investment
objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same
security, the securities are allocated among clients in a manner
believed to be equitable to each. It is recognized that in some
cases this system could have a detrimental effect on the price or
volume of the security as far as the Fund is concerned. However,
it is believed that the ability of the Fund to participate in
volume transactions will produce better executions for the Fund.
PERFORMANCE INFORMATION
Standard Performance Information
From time to time, quotations of the Fund's performance may
be included in advertisements, sales literature or shareholder
reports. These performance figures are calculated in the
following manner:
Total Return: The Fund's average annual total return is
calculated for certain periods by determining the average annual
compounded rates of return over those periods that would cause an
investment of $1,000 (made at the maximum public offering price
with all distributions reinvested) to reach the value of that
investment at the end of the periods. The Fund may also calculate
total return figures which represent aggregate performance over a
period or year-by-year performance.
Performance Results: Any total return quotation provided
for the Fund should not be considered as representative of the
performance of the Fund in the future since the net asset value
and offering price of shares of the Fund will vary based not only
on the type, quality and maturities of the securities held in the
Fund, but also on changes in the current value of such securities
and on changes in the expenses of the Fund. These factors and
possible differences in the methods used to calculate total return
should be considered when comparing the total return of the Fund
to total returns published for other investment companies or other
investment vehicles. Total return reflects the performance of
both principal and income.
Comparison of Fund Performance
Comparison of the quoted nonstandardized performance of
various investments is valid only if performance is calculated in
the same manner. Since there are different methods of calculating
performance, investors should consider the effect of the methods
used to calculate performance when comparing performance of the
Fund with performance quoted with respect to other investment
companies or types of investments.
In connection with communicating its performance to current
or prospective shareholders, the Fund also may compare these
figures to the performance of other mutual funds tracked by mutual
fund rating services or to unmanaged indices which may assume
reinvestment of dividends but generally do not reflect deductions
for administrative and management costs.
Evaluations of the Fund's performance made by independent
sources may also be used in advertisements concerning the Fund.
Sources for the Fund's performance information could include the
following: Barron's, Business Week, Changing Times, The
Kiplinger's Magazine, Consumer Digest, Financial Times, Financial
World, Forbes, Fortune, Investor's Daily, Lipper Analytical
Services, Inc.'s Mutual Fund Performance Analysis, Money,
Morningstar Inc., New York Times, Personal Investing News,
Personal Investor, Success, U.S. News and World Report, Value
Line, Wall Street Journal, Weisenberger Investment Companies
Services and Working Women.
VALUATION OF SECURITIES; REDEMPTION IN KIND
Equity and debt securities (other than short-term debt
obligations maturing in 60 days or less), including listed
securities and securities for which price quotations are
available, will normally be valued on the basis of market
valuations furnished by a pricing service. Short-term debt
obligations and money market securities maturing in 60 days or
less are valued at amortized cost, which approximates market.
Securities for which market quotations are not available are
valued by Bankers Trust pursuant to procedures adopted by the
Trust's Board of Trustees. It is generally agreed that securities
for which market quotations are not readily available should not
be valued at the same value as that carried by an equivalent
security which is readily marketable.
The problems inherent in making a good faith determination
of value are recognized in the codification effected by SEC
Financial Reporting Release No. 1 ("FRR 1" (formerly Accounting
Series Release No. 113)) which concludes that there is "no
automatic formula" for calculating the value of restricted
securities. It recommends that the best method simply is to
consider all relevant factors before making any calculation.
According to FRR 1 such factors would include consideration of
the:
type of security involved, financial statements, cost
at date of purchase, size of holding, discount from market value
of unrestricted securities of the same class at the time of
purchase, special reports prepared by analysts, information as to
any transactions or offers with respect to the security, existence
of merger proposals or tender offers affecting the security, price
and extent of public trading in similar securities of the issuer
or comparable companies, and other relevant matters.
To the extent that the Fund purchases securities which are
restricted as to resale or for which current market quotations are
not available, the Manager of the Fund will value such securities
based upon all relevant factors as outlined in FRR 1.
The Trust, on behalf of the Fund, reserves the right, if
conditions exist which make cash payments undesirable, to honor
any request for redemption or repurchase order by making payment
in whole or in part in readily marketable securities chosen by the
Trust, and valued as they are for purposes of computing the Fund's
net asset value (a redemption in kind). If payment is made to a
Fund shareholder in securities, the shareholder may incur
transaction expenses in converting these securities into cash.
The Trust, on behalf of the Fund, and the Fund have elected,
however, to be governed by Rule 18f-1 under the 1940 Act as a
result of which the Fund is obligated to redeem shares with
respect to any one investor during any 90-day period, solely in
cash up to the lesser of $250,000 or 1% of the net asset value of
the Fund at the beginning of the period.
MANAGEMENT OF THE TRUST
The Board of Trustees of the Trust is composed of persons
experienced in financial matters who meet throughout the year to
oversee the activities of the Fund. In addition, the Trustees
review contractual arrangements with companies that provide
services to the Fund and review the Fund's performance.
The Trustees and officers of the Trust and their principal
occupations during the past five years are set forth below. Their
titles may have varied during that period. Asterisks indicate
those Trustees who are "interested persons" (as defined in the
1940 Act) of the Trust. Unless otherwise indicated, the address
of each Trustee and officer is One Exchange Place, Boston,
Massachusetts.
Trustees and Officers
Name,
Address and
Age
Position
Held with
the Trust
Principal
Occupations
During
Past 5 Years
Robert R.
Coby, 45
118 North
Drive
North
Massapequa,
NY 11758
Trustee
President of
Leadership
Capital Inc.
since 1995;
Chief
Operating
Officer of CS
First Boston
Investment
Management
(1994-1995);
President of
Blackhawk L.P.
(1993-1994);
Chief
Financial
Officer of
Equitable
Capital prior
to February
1993.
Desmond G.
FitzGerald,
52
2015 West
Main Street
Stamford, CT
06902
Trustee
Chairman of
North American
Properties
Group since
January 1987.
James S.
Pasman, Jr.,
65
29 The
Trillium
Pittsburgh,
PA 15238
Trustee
Retired;
President and
Chief
Operations
Officer of
National
Intergroup
Inc. (1989-
1991).
*William E.
Small, 55
Trustee
and
President
Executive Vice
President of
First Data
Investor
Services Group
Inc. ("First
Data") since
1994; Senior
Vice President
of The
Shareholder
Services
Group, Inc.
(1993-1994);
independent
consultant
(1990-1993).
Michael
Kardok, 37
Vice
President
and
Treasurer
Vice President
of First Data
since May
1994; Vice
President of
The Boston
Company
Advisors Inc.
prior to May
1994.
Julie A.
Tedesco, 39
Vice
President
and
Secretary
Counsel of
First Data
since May
1994; Counsel
of The Boston
Company
Advisors Inc.
(1992-1994);
Associate at
Hutchins,
Wheeler &
Dittmar prior
to July 1992.
Mr. Kardok and Ms. Tedesco also hold similar positions for
other investment companies for which First Data Distributors or an
affiliate serves as the principal underwriter.
No person who is an officer or director of Bankers Trust is
an officer or Trustee of the Trust. No director, officer or
employee of First Data Distributors or any of its affiliates will
receive any compensation from the Trust for serving as an officer
or Trustee of the Trust.
As of September 1, 1996 the Trustees and officers of the
Trust owned in the aggregate less than 1% of the shares of the
Fund or the Trust (all series taken together).
Investment Manager
Under the terms of the Fund's investment management
agreement with Bankers Trust (the "Management Agreement"), Bankers
Trust manages the Fund subject to the supervision and direction of
the Board of Trustees of the Trust. Bankers Trust will: (i) act
in strict conformity with the Trust's Declaration of Trust, the
1940 Act and the Investment Advisers Act of 1940, as the same may
from time to time be amended; (ii) manage the Fund in accordance
with the Fund's investment objectives, restrictions and policies;
(iii) make investment decisions for the Fund; (iv) place purchase
and sale orders for securities and other financial instruments on
behalf of the Fund; (v) oversee the administration of all aspects
of the Trust's business and affairs; and (vi) supervise the
performance of professional services provided by others.
Bankers Trust bears all expenses in connection with the
performance of services under the Management Agreement. The Fund
bears certain other expenses incurred in its operation, including:
taxes, interest, brokerage fees and commissions, if any; fees of
Trustees of the Trust who are not officers, directors or employees
of Bankers Trust, First Data Distributors or any of their
affiliates; SEC fees and state Blue Sky qualification fees;
charges of custodians and transfer and dividend disbursing agents;
certain insurance premiums; outside auditing and legal expenses;
cost of maintenance of corporate existence; costs attributable to
investor services, including, without limitation, telephone and
personnel expenses; costs of preparing and printing prospectuses
and statements of additional information for regulatory purposes
and for distribution to existing shareholders; costs of
shareholders' reports and meetings of shareholders, officers and
Trustees of the Trust; and any extraordinary expenses.
Bankers Trust may have deposit, loan and other commercial
banking relationships with the issuers of obligations which may be
purchased on behalf of the Fund, including outstanding loans to
such issuers which could be repaid in whole or in part with the
proceeds of securities so purchased. Such affiliates deal, trade
and invest for their own accounts in such obligations and are
among the leading dealers of various types of such obligations.
Bankers Trust, in making its investment decisions, does not obtain
or use material inside information in its possession or in the
possession of any of its affiliates. In making investment
recommendations for the Fund, Bankers Trust will not inquire or
take into consideration whether an issuer of securities proposed
for purchase or sale by the Fund is a customer of Bankers Trust,
its parent or its subsidiaries or affiliates and in dealing with
its customers, Bankers Trust, its parent, subsidiaries and
affiliates will not inquire or take into consideration whether
securities of such customers are held by any fund managed by
Bankers Trust or any such affiliate.
The Fund's prospectus contains disclosure as to the amount
of Bankers Trust's investment advisory and administration and
services fees.
Bankers Trust has agreed that if in any fiscal year the
aggregate expenses of the Fund (including fees pursuant to the
Management Agreement, but excluding interest, taxes, brokerage
and, if permitted by the relevant state securities commissions,
extraordinary expenses) exceed the expense limitation of any state
having jurisdiction over the Fund, Bankers Trust will reimburse
the Fund for the excess expense to the extent required by state
law. As of the date of this Statement of Additional Information,
the most restrictive annual expense limitation applicable to the
Fund is 2.50% of the Fund's first $30 million of average annual
net assets, 2.00% of the next $70 million of average annual assets
and 1.50% of the remaining average annual net assets.
Administrator
First Data, One Exchange Place, Boston, Massachusetts 02109,
serves as administrator of the Fund. As administrator, First Data
is obligated on a continuous basis to provide such administrative
services as the Board of Trustees of the Trust reasonably deems
necessary for the proper administration of the Fund. First Data
will generally assist in all aspects of the Fund's operations;
supply and maintain office facilities (which may be in First
Data's own offices), statistical and research data, data
processing services, clerical, accounting, bookkeeping and
recordkeeping services (including without limitation the
maintenance of such books and records as are required under the
1940 Act and the rules thereunder, except as maintained by other
agents), internal auditing, executive and administrative services,
and stationery and office supplies; prepare reports to
shareholders or investors; prepare and file tax returns; supply
financial information and supporting data for reports to and
filings with the SEC and various state Blue Sky authorities;
supply supporting documentation for meetings of the Board of
Trustees; provide monitoring reports and assistance regarding
compliance with the Declaration of Trust, by-laws, investment
objectives and policies and with Federal and state securities
laws; arrange for appropriate insurance coverage; calculate net
asset values, net income and realized capital gains or losses, and
negotiate arrangements with, and supervise and coordinate the
activities of, agents and others to supply services.
Custodian and Transfer Agent
Bankers Trust, 130 Liberty Stree (One Bankers Trust Plaza),
New York, New York 10006, serves as custodian for the Fund. As
custodian, it holds the Fund's assets. Bankers Trust will comply
with the self-custodian provisions of Rule 17f-2 under the 1940
Act.
First Data serves as transfer agent of the Trust. Under its
transfer agency agreement with the Trust, First Data maintains the
shareholder account records for the Fund, handles certain
communications between shareholders and the Fund and causes to be
distributed any dividends and distributions payable by the Fund.
Bankers Trust and First Data may be reimbursed by the Fund
for out-of-pocket expenses.
Use of Name
The Trust and Bankers Trust have agreed that the Trust may
use "BT" as part of its name for so long as Bankers Trust serves
as investment manager to the Fund. The Trust has acknowledged
that the term "BT" is used by and is a property right of certain
subsidiaries of Bankers Trust and that those subsidiaries and/or
Bankers Trust may at any time permit others to use that term.
The Trust may be required, on 60 days' notice from Bankers
Trust at any time, to abandon use of the acronym "BT" as part of
its name. If this were to occur, the Trustees would select an
appropriate new name for the Trust, but there would be no other
material effect on the Trust, its shareholders or activities.
Banking Regulatory Matters
Bankers Trust has been advised by its counsel that in its
opinion Bankers Trust may perform the services for the Fund
contemplated by the Management Agreement and other activities for
the Fund described in the Prospectus and this Statement of
Additional Information without violation of the Glass-Steagall Act
or other applicable banking laws or regulations. However, counsel
has pointed out that future changes in either Federal or state
statutes and regulations concerning the permissible activities of
banks or trust companies, as well as future judicial or
administrative decisions or interpretations of present and future
statutes and regulations, might prevent Bankers Trust from
continuing to perform those services for the Trust and the Fund.
State laws on this issue may differ from the interpretations of
relevant Federal law and banks and financial institutions may be
required to register as dealers pursuant to state securities law.
If the circumstances described above should change, the Boards of
Trustees would review the relationships with Bankers Trust and
consider taking all actions necessary in the circumstances.
Counsel and Independent Accountants
Willkie Farr & Gallagher, One Citicorp Center, 153 East 53rd
Street, New York, New York 10022-4669, serves as Counsel to the
Trust and the Fund. Ernst & Young L.L.P., 787 Seventh Avenue, New
York, New York 10019, acts as independent accountants of the Trust
and the Fund.
ORGANIZATION OF THE TRUST
Shares of the Trust do not have cumulative voting rights,
which means that holders of more than 50% of the shares voting for
the election of Trustees can elect all Trustees. Shares are
transferable but have no preemptive, conversion or subscription
rights. Shareholders generally vote by Fund, except with respect
to the election of Trustees and the ratification of the selection
of independent accountants.
Through its separate accounts the Companies are the Fund's
sole stockholders of record, so under the 1940 Act, the Companies
are deemed to be in control of the Fund. Nevertheless, when a
shareholders' meeting occurs, each Company solicits and accepts
voting instructions from its Contractowners who have allocated or
transferred monies for a investment in the Fund as of the record
date of the meeting. Each Company then votes the Fund's shares
that are attributable to its Contractowners' interests in the Fund
in proportion to the voting instructions received. Each Company
will vote any share that it is entitled to vote directly due to
amounts it has contributed or accumulated in its separate accounts
in the manner described in the offering memoranda for its variable
annuities and variable life insurance policies.
Massachusetts law provides that shareholders could under
certain circumstances be held personally liable for the
obligations of the Trust. However, the Trust's Declaration of
Trust disclaims shareholder liability for acts or obligations of
the Trust and requires that notice of this disclaimer be given in
each agreement, obligation or instrument entered into or executed
by the Trust or a Trustee. The Declaration of Trust provides for
indemnification from the Trust's property for all losses and
expenses of any shareholder held personally liable for the
obligations of the Trust. Thus, the risk of a shareholder's
incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust itself would be unable
to meet its obligations, a possibility that the Trust believes is
remote. Upon payment of any liability incurred by a Trust, the
shareholder paying the liability will be entitled to reimbursement
from the general assets of the Trust. The Trustees intend to
conduct the operations of the Trust in a manner so as to avoid, as
far as possible, ultimate liability of the shareholders for
liabilities of the Trust.
The Trust was organized on January 19, 1996.
TAXATION
Taxation of the Funds
The Trust intends to qualify annually and to elect the Fund
to be treated as a regulated investment company under the Code.
As a regulated investment company, the Fund will not be
subject to U.S. Federal income tax on its investment company
taxable income and net capital gains (the excess of net long-term
capital gains over net short-term capital losses), if any, that it
distributes to its shareholders, that is, the Companies' separate
accounts. The Fund intends to distribute to its shareholders, at
least annually, substantially all of its investment company
taxable income and net capital gains and, therefore, does not
anticipate incurring Federal income tax liability.
The Code and Treasury Department regulations promulgated
thereunder require that mutual funds that are offered through
insurance company separate accounts must meet certain
diversification requirements to preserve the tax-deferred benefits
provided by the variable contracts which are offered in connection
with such separate accounts. The Manager intends to diversify the
Fund's investments in accordance with those requirements. The
offering memoranda for each Company's variable annuities and
variable life insurance policies describe the federal income tax
treatment of distributions from such contracts.
To comply with regulations under Section 817(h) of the Code,
the Fund will be required to diversify its investments so that on
the last day of each calendar quarter no more than 55% of the
value of its assets is represented by any one investment, no more
than 70% is represented by any two investments, no more than 80%
is represented by any three investments and no more than 90% is
represented by any four investments. Generally, all securities of
the same issuer are treated as a single investment. For the
purposes of Section 817(h) of the Code, obligations of the U.S.
Treasury and each U.S. Government instrumentality are treated as
securities of separate issuers. The Treasury Department has
indicated that it may issue future pronouncements addressing the
circumstances in which a variable annuity contract owner's control
of the investments of a separate account may cause the variable
contract owner, rather than the separate account's sponsoring
insurance company, to be treated as the owner of the assets held
by the separate account. If the variable annuity contract owner
is considered the owner of the securities underlying the separate
account, income and gains produced by those securities would be
included currently in the variable annuity contract owner's gross
income. It is not known what standards will be set forth in such
pronouncements or when, if at all, these pronouncements may be
issued. In the event that rules or regulations are adopted, there
can be no assurance that the Fund will be able to operate as
described currently in the Prospectus or that the Fund will not
have to change its investment policies or goals.
The foregoing is only a brief summary of important tax law
provisions that affect the Fund. Other Federal, state or local
tax law provisions may also affect the Fund and its operations.
Anyone who is considering allocating, transferring or withdrawing
monies held under a variable contract to or from the Fund should
consult a qualified tax adviser.
Distributions
All dividends and capital gains distributions paid by the
Fund will be automatically reinvested, at net asset value, by the
Companies' separate accounts in additional shares of the Fund.
There is no fixed dividend rate, and there can be no assurance
that the Fund will pay any dividends or realize any capital gains.
However, the Fund currently intends to pay dividends and capital
gains distributions, if any, on an annual basis. The offering
memorandum for a Company's variable annuity or variable life
insurance policies describes the frequency of distributions to
Contractowners and the Federal income tax treatment of
distributions from such contracts to Contractowners.
Sale of Shares
Any gain or loss realized by a shareholder upon the sale or
other disposition of shares of the Fund, or upon receipt of a
distribution in complete liquidation of the Fund, generally will
be a capital gain or loss which will be long-term or short-term,
generally depending upon the shareholder's holding period for the
shares. Any loss realized on a sale or exchange will be
disallowed to the extent the shares disposed of are replaced
(including shares acquired pursuant to a dividend reinvestment
plan) within a period of 61 days beginning 30 days before and
ending 30 days after disposition of the shares. In such a case,
the basis of the shares acquired will be adjusted to reflect the
disallowed loss. Any loss realized by a shareholder on a
disposition of fund shares held by the shareholder for six months
or less will be treated as a long-term capital loss to the extent
of any distributions of net capital gains received by the
shareholder with respect to such shares.
Shareholders will be notified annually as to the U.S.
Federal tax status of distributions.
Backup Withholding
The Fund may be required to withhold U.S. Federal income tax
at the rate of 31% of all taxable distributions payable to
shareholders who fail to provide the Fund with their correct
taxpayer identification number or to make required certifications,
or who have been notified by the Internal Revenue Service that
they are subject to backup withholding. Corporate shareholders and
certain other shareholders specified in the Code generally are
exempt from such backup withholding. Backup withholding is not an
additional tax. Any amounts withheld may be credited against the
shareholder's U.S. Federal income tax liability.
Other Taxation
The Trust is organized as a Massachusetts business trust
and, under current law, neither the Trust nor the Fund is viable
for any income or franchise tax in the Commonwealth of
Massachusetts, provided that the Fund continues to qualify as a
regulated investment company under Subchapter M of the Code.
Fund shareholders may be subject to state and local taxes on
their fund distributions. Shareholders are advised to consult
their own tax advisers with respect to the particular tax
consequences to them of an investment in the Fund.
Investment Manager of the Fund
bankers trust global investment management
a unit of
BANKERS TRUST COMPANY
Administrator
first data investor services group, inc.
Distributor
FIRST DATA distributors, inc.
Custodian
BANKERS TRUST COMPANY
Transfer Agent
first data investor services group, inC.
Independent Accountants
ERNST & YOUNG LLP
Counsel
WILLKIE FARR & GALLAGHER
No person has been authorized to give any information
or to make any representations other than those contained in
the Fund's Prospectuses, the Statement of Additional
Information or the Trust's official sales literature in
connection with the offering of the Fund's shares and, if
given or made, such other information or representations
must not be relied on as having been authorized by the
Trust. Neither the Prospectus nor this Statement of
Additional Information constitutes an offer in any state in
which, or to any person to whom, such offer may not lawfully
be made.
BT insurance funds trust
prospectus: February 5, 1997 as supplemented june 16, 1997
EAFE Equity Index Fund
This Prospectus offers shares of the EAFE Equity Index Fund
(the "Fund"). The Fund is a series of BT Insurance Funds
Trust (the "Trust"), which is an open-end management
investment company currently having six series. Shares of
the Fund are available to the public only through the
purchase of certain variable annuity and variable life
insurance contracts ("Contract(s)") issued by various
insurance companies (the "Companies").
The Fund seeks to replicate as closely as possible the
performance of the Morgan Stanley Capital International
Europe, Australia, Far East (EAFE) Index (the "EAFE Index")
before the deduction of Fund expenses (the "Expenses").
There is no assurance, however, that the Fund will achieve
its stated objective.
Bankers Trust Company ("Bankers Trust") is the investment
manager (the "Manager") of the Fund.
Please read this Prospectus carefully before investing and
retain it for future reference. It contains important
information about the Fund that you should know and can
refer to in deciding whether the Fund's goals match your
own.
A Statement of Additional Information ("SAI") with the same
date has been filed with the Securities and Exchange
Commission (SEC), and is incorporated herein by reference.
You may request a free copy of the SAI by calling the Trust
at the Customer Service Center at the telephone number shown
in the accompanying prospectus.
Fund shares are not deposits or obligations of, or
guaranteed by, Bankers Trust or any depository institution.
Shares are not insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board or any other agency.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The EAFE Index is the exclusive property of Morgan Stanley.
Morgan Stanley Capital International is a service mark of
Morgan Stanley and has been licensed for use by Bankers
Trust Company.
bankers trust global investment management
a unit of bankers trust company
Investment Manager of the Fund
FIRST DATA distributors, inc.
Distributor
4400 Computer Drive
Westborough, MA 01581
TABLE OF CONTENTS
Page
THE FUND 3
Who May Want to Invest
Investment Principles and Risks
THE FUND IN DETAIL 4
Investment Objectives and Policies
Risk Factors and Certain Securities and Investment
Practices
Net Asset Value
Performance Information and Reports
Management of the Trust
SHAREHOLDER AND ACCOUNT POLICIES 14
Purchase and Redemption of Shares
Dividends, Distributions and Taxes
THE FUND
The Fund seeks to replicate as closely as possible (before
deduction of Expenses) the total return of EAFE Index, a
capitalization-weighted index containing approximately 1,100
equity securities of companies located outside the United
States. The Fund will be invested primarily in equity
securities of business enterprises organized and domiciled
outside of the United States or for which the principal
trading market is outside the United States. Statistical
methods will be employed to replicate the EAFE Index by
buying most of the EAFE Index securities. Securities
purchased for the Fund will generally, but not necessarily,
be traded on a foreign securities exchange.
WHO MAY WANT TO INVEST
Shares of the Fund are available to the public only through
the purchase of Contracts issued by the Companies.
The Fund is not managed according to traditional methods of
"active" investment management, which involve the buying and
selling of securities based upon economic, financial and
market analysis and investment judgment. Instead, the Fund
utilizes a "passive" or "indexing" investment approach and
attempts to replicate the investment performance of the EAFE
Index through statistical procedures.
The Fund may be appropriate for investors who are willing to
endure stock market fluctuations in pursuit of potentially
higher long-term returns. The Fund invests for growth and
does not pursue income. Over time, stocks, although more
volatile, have shown greater growth potential than other
types of securities. In the shorter term, however, stock
prices can fluctuate dramatically in response to market
factors.
The Fund may be appropriate for investors who want to pursue
their investment goals in markets outside of the United
States. By including international investments in their
portfolio, investors can achieve an extra level of
diversification and also participate in opportunities around
the world. However, there are additional risks involved
with international investing. The performance of
international funds depends upon currency values, the
political and regulatory environment, and overall economic
factors in the countries in which the Fund invests.
The Fund is intended to be a long-term investment vehicle
and is not designated to provide investors with a means of
speculating on short-term market movements. The Fund is not
in itself a balanced investment plan. Investors should
consider their investment objective and tolerance for risk
when making an investment decision. When an investor sells
his or her Fund shares, they may be worth more or less than
what the investor paid for them.
INVESTMENT PRINCIPLES AND RISKS
The value of the Fund's investments varies based on many
factors. Stock values fluctuate, sometimes dramatically, in
response to the activities of individual companies and
general market and economic conditions. Over time, however,
stocks have shown greater long-term growth potential than
other types of securities. Lower quality securities offer
higher yields, but also carry more risk.
Because many foreign investments are denominated in foreign
currencies, changes in the value of these currencies can
significantly affect the Fund's share price. General
economic factors in the various world markets can also
impact the value of an investors investment. When
investors sell Fund shares, they may be worth more or less
than what the investors paid for them. See "Risk Factors
and Certain Securities and Investment Practices" for more
information.
THE FUND IN DETAIL
INVESTMENT OBJECTIVES AND POLICIES
The following is a discussion of the various investments of
and techniques employed by the Fund. Additional information
about the investment policies of the Fund appears in "Risk
Factors and Certain Securities and Investment Practices" in
this Prospectus and in the Fund's SAI. There can be no
assurance that the investment objective of the Fund will be
achieved.
The Fund seeks to replicate as closely as possible (before
deduction of Expenses) the total return of the EAFE Index.
The Fund attempts to achieve this objective by investing in
a statistically selected sample of the equity securities
included in the EAFE Index.
The EAFE Index is a capitalization-weighted index containing
approximately 1,100 equity securities of companies located
in countries outside the United States. The countries
currently included in the EAFE Index are Australia, Austria,
Belgium, Denmark, Finland, France, Germany, Hong Kong,
Ireland, Italy, Japan, Malaysia, The Netherlands, New
Zealand, Norway, Singapore, Spain, Sweden, Switzerland and
United Kingdom.
The Fund is constructed to have aggregate investment
characteristics similar to those of the EAFE Index. The
Fund invests in a statistically selected sample of the
securities of companies included in the EAFE Index, although
not all companies within a country will be represented in
the Fund at the same time. Stocks are selected for
inclusion in the Fund based on country of origin, market
capitalization, yield, volatility and industry sector.
Bankers Trust will manage the Fund using advanced
statistical techniques to determine which stocks are to be
purchased or sold to replicate the EAFE Index. From time to
time, adjustments may be made in the Fund because of changes
in the composition of the EAFE Index, but such changes
should be infrequent.
The Fund is not sponsored, endorsed, sold or promoted by
Morgan Stanley. Morgan Stanley makes no representation or
warranty, express or implied, to the owners of the Fund or
any member of the public regarding the advisability of
investing in securities generally or in the Fund
particularly or the ability of the EAFE Index to track
general stock market performance. Morgan Stanley is the
licenser of certain trademarks, service marks and trade
names of Morgan Stanley and of the EAFE Index which is
determined, composed and calculated by Morgan Stanley
without regard to the issuer of the Fund or the Fund itself.
Morgan Stanley has no obligation to take the needs of the
issuer of the Fund or the owners of the Fund into
consideration in determining, composing or calculating the
EAFE Index. Inclusion of a security in the EAFE Index in no
way implies an opinion by Morgan Stanley as to its
attractiveness as an investment. Morgan Stanley is not
responsible for and has not participated in the
determination of the timing of, prices at, or quantities of
the Fund to be issued or in the determination or calculation
of the equation by which the Fund is redeemable for cash.
Morgan Stanley has no obligation or liability to owners of
the Fund in connection with the administration, marketing or
trading of the Fund. The Fund is neither sponsored by nor
affiliated with Morgan Stanley.
ALTHOUGH MORGAN STANLEY SHALL OBTAIN INFORMATION FOR
INCLUSION IN OR FOR USE IN THE CALCULATION OF THE INDICES
FROM SOURCES WHICH MORGAN STANLEY CONSIDERS RELIABLE, MORGAN
STANLEY DOES NOT GUARANTEE THE ACCURACY AND/OR THE
COMPLETENESS OF THE INDICES OR ANY DATA INCLUDED THEREIN.
MORGAN STANLEY MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO
RESULTS TO BE OBTAINED BY LICENSEE, LICENSEE'S CUSTOMERS AND
COUNTERPARTIES, OWNERS OF THE PRODUCTS, OR ANY OTHER PERSON
OR ENTITY FROM THE USE OF THE INDICES OR ANY DATA INCLUDED
THEREIN IN CONNECTION WITH THE RIGHTS LICENSED HEREUNDER OR
FOR ANY OTHER USE. MORGAN STANLEY MAKES NO EXPRESS OR
IMPLIED WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS ALL
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE WITH RESPECT TO THE INDICES OR ANY DATA INCLUDED
THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT
SHALL MORGAN STANLEY HAVE ANY LIABILITY FOR ANY DIRECT,
INDIRECT, SPECIAL, PUNITIVE, CONSEQUENTIAL OR ANY OTHER
DAMAGES (INCLUDING LOST PROFITS) EVEN IF NOTIFIED OF THE
POSSIBILITY OF SUCH DAMAGES.
General
Over time, the correlation between the performance of the
Fund and the EAFE Index is expected to be 0.95 or higher
before deduction of Fund expenses. A correlation of 1.00
would indicate perfect correlation, which would be achieved
when the net asset value of the Fund, including the value of
its dividend and any capital gain distributions, increases
or decreases in exact proportion to changes in the EAFE
Index. The Fund's ability to track the EAFE Index may be
affected by, among other things, transaction costs,
administration and other expenses incurred by the Fund,
changes in either the composition of the EAFE Index or the
assets of the Fund, and the timing and amount of Fund
investor contributions and withdrawals, if any. In the
unlikely event that a high correlation is not achieved, the
Trust's Board of Trustees will consider alternatives.
Because the Fund seeks to track the EAFE Index, Bankers
Trust will not attempt to judge the merits of any particular
stock as an investment.
Under normal circumstances, the Fund will invest at least
80% of its assets in the securities of the EAFE Index.
As a diversified fund, no more than 5% of the assets of the
Fund may be invested in the securities of one issuer (other
than U.S. Government Securities), except that up to 25% of
the Fund's assets may be invested without regard to this
limitation. The Fund will not invest more than 25% of its
assets in the securities of issuers in any one industry. In
the unlikely event that the EAFE Index should concentrate to
an extent greater than that amount, the Funds ability to
achieve its objective may be impaired. No more than 15% of
the Fund's net assets may be invested in illiquid or not
readily marketable securities (including repurchase
agreements and time deposits with maturities of more than
seven days). These are fundamental investment policies of
the Fund which may not be changed without shareholder
approval. Additional investment policies of the Fund are
contained in the SAI.
The Fund may maintain up to 25% of its assets in short-term
debt securities and money market instruments to meet
redemption requests or to facilitate investment in the
securities of the EAFE Index. Securities index futures
contracts and related options, warrants and convertible
securities may be used for several reasons: to simulate
full investment in the EAFE Index while retaining a cash
balance for fund management purposes, to facilitate trading,
to reduce transaction costs or to seek higher investment
returns when a futures contract, option, warrant or
convertible security is priced more attractively than the
underlying equity security or EAFE Index. These instruments
may be considered derivatives. See "Risk Factors and
Certain Securities and Investment Practices -- Derivatives."
The use of derivatives for non-hedging purposes may be
considered speculative. While each of these securities can
be used as leveraged investments, the Fund may not use them
to leverage its net assets. The Fund will not invest in
such instruments as part of a temporary defensive strategy
(in anticipation of declining stock prices) to protect the
Fund against potential market declines.
The Fund may lend its investment securities and purchase
securities on a when-issued and a delayed delivery basis.
The Fund may engage in foreign currency forward and futures
transactions for the purpose of enhancing Fund returns or
hedging against foreign exchange risk arising from the
Fund's investment or anticipated investment in securities
denominated in foreign currencies. See "Risk Factors and
Certain Securities and Investment Practices" for more
information about the investment practices of the Fund.
RISK FACTORS AND CERTAIN SECURITIES AND INVESTMENT PRACTICES
The following pages contain more detailed information about
types of instruments in which the Fund may invest and
strategies Bankers Trust may employ in pursuit of the Fund's
investment objective. A summary of risks and restrictions
associated with these instrument types and investment
practices is included as well.
Bankers Trust may not buy all of these instruments or use
all of these techniques to the full extent permitted unless
it believes that doing so will help the Fund achieve its
goal. Holdings and recent investment strategies are
described in the financial reports of the Fund, which are
sent to Fund shareholders on a semi-annual and annual basis.
Market Risk
As a mutual fund investing primarily in common stocks, the
Fund is subject to market risk --- i.e., the possibility
that common stock prices will decline over short or even
extended periods. The U.S. and foreign stock markets tend
to be cyclical, with periods when stock prices generally
rise and periods when prices generally decline.
Risks of Investing in Foreign Securities
Investors should realize that investing in securities of
foreign issuers involves considerations not typically
associated with investing in securities of companies
organized and operated in the United States. Investors
should realize that the value of the Fund's foreign
investments may be adversely affected by changes in
political or social conditions, diplomatic relations,
confiscatory taxation, expropriation, nationalization,
limitation on the removal of funds or assets, or imposition
of (or change in) exchange control or tax regulations in
foreign countries. In addition, changes in government
administrations or economic or monetary policies in the
United States or abroad could result in appreciation or
depreciation of portfolio securities and could favorably or
unfavorably affect the Fund's operations. Furthermore, the
economies of individual foreign nations may differ from the
U.S. economy, whether favorably or unfavorably, in areas
such as growth of gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance
of payments position; it may also be more difficult to
obtain and enforce a judgment against a foreign issuer. In
general, less information is publicly available with respect
to foreign issuers than is available with respect to U.S.
companies. Most foreign companies are also not subject to
the uniform accounting and financial reporting requirements
applicable to issuers in the United States. Any foreign
investments made by the Fund must be made in compliance with
U.S. and foreign currency restrictions and tax laws
restricting the amounts and types of foreign investments.
Because foreign securities generally are denominated and pay
dividends or interest in foreign currencies, the value of
the net assets of the Fund as measured in U.S. dollars will
be affected favorably or unfavorably by changes in exchange
rates. In order to protect against uncertainty in the level
of future foreign currency exchange rates, the Fund is also
authorized to enter into certain foreign currency exchange
transactions. Furthermore, the Fund's foreign investments
may be less liquid and their prices may be more volatile
than comparable investments in securities of U.S. companies.
The settlement periods for foreign securities, which are
often longer than those for securities of U.S. issuers, may
affect Fund liquidity. Finally, there may be less government
supervision and regulation of securities exchanges, brokers
and issuers in foreign countries than in the United States.
The Fund's investment objective is not a fundamental policy
and may be changed upon notice to, but without the approval
of, the Fund's shareholders. If there is a change in the
Fund's investment objective, the Fund's shareholders should
consider whether the Fund remains an appropriate investment
in light of their then-current needs. Shareholders of the
Fund will receive 30 days prior written notice with respect
to any change in the investment objective of the Fund. See
"Risk Factors and Certain Securities and Investment
Practices" in the SAI for a description of the fundamental
policies of the Fund that cannot be changed without approval
by "the vote of a majority of the outstanding voting
securities" (as defined in the Investment Company Act of
1940, as amended (the "1940 Act")) of the Fund.
For descriptions of the investment objective, policies and
restrictions of the Fund, see "The Fund in Detail" herein
and "Risk Factors and Certain Securities and Investment
Practices" herein and in the SAI. For a description of the
management and expenses of the Fund, see "Management of the
Trust" herein and in the SAI.
Short-Term Investments. The Fund may invest in certain
short-term fixed income securities. Such securities may be
used to invest uncommitted cash balances, to maintain
liquidity to meet shareholder redemptions or to serve as
collateral for the obligations underlying the Fund's
investment in securities index futures or related options or
warrants. These securities include: obligations issued or
guaranteed by the U.S. Government or any of its agencies or
instrumentalities or by any of the states, repurchase
agreements, time deposits, certificates of deposit, bankers'
acceptances and commercial paper.
U.S. Government Securities are obligations of, or guaranteed
by, the U.S. Government, its agencies or instrumentalities.
Some U.S. Government securities, such as Treasury bills,
notes and bonds, are supported by the full faith and credit
of the United States; others, such as those of the Federal
Home Loan Banks, are supported by the right of the issuer to
borrow from the Treasury; others, such as those of the
Federal National Mortgage Association, are supported by the
discretionary authority of the U.S. Government to purchase
the agency's obligations; and still others, such as those of
the Student Loan Marketing Association, are supported only
by the credit of the instrumentality.
Securities Lending. The Fund may lend its investment
securities to qualified institutional investors for either
short-term or long-term purposes of realizing additional
income. Loans of securities by the Fund will be
collateralized by cash, letters of credit, or securities
issued or guaranteed by the U.S. Government or its agencies.
The collateral will equal at least 100% of the current
market value of the loaned securities, and such loans may
not exceed 30% of the value of the Fund's net assets. The
risks in lending portfolio securities, as with other
extensions of credit, consist of possible loss of rights in
the collateral should the borrower fail financially. In
determining whether to lend securities, Bankers Trust will
consider all relevant facts and circumstances, including the
creditworthiness of the borrower.
When Issued and Delayed Delivery Securities. The Fund may
purchase securities on a when-issued or delayed delivery
basis. Delivery of and payment for these securities may take
place as long as a month or more after the date of the
purchase commitment. The value of these securities is
subject to market fluctuation during this period and no
income accrues to the Fund until settlement takes place.
The Fund maintains with its custodian a segregated account
containing cash or liquid portfolio securities in an amount
at least equal to these commitments.
Derivatives
The Fund may invest in various instruments that are commonly
known as derivatives. Generally, a derivative is a financial
arrangement, the value of which is based on, or "derived"
from, a traditional security, asset, or market index. Some
"derivatives" such as mortgage-related and other asset-
backed securities are in many respects like any other
investment, although they may be more volatile or less
liquid than more traditional debt securities. There are, in
fact, many different types of derivatives and many different
ways to use them. There are a range of risks associated with
those uses. Futures and options are commonly used for
traditional hedging purposes to attempt to protect the Fund
from exposure to changing interest rates, securities prices
or currency exchange rates and as a low cost method of
gaining exposure to a particular securities market without
investing directly in those securities. The Manager will
only use derivatives for cash management purposes.
Derivatives will not be used to increase portfolio risk
above the level that would be achieved using only
traditional investment securities or to acquire exposure to
changes in the value of assets or indices that by themselves
would not be purchased for the Fund.
Securities Index Futures and Related Options. The Fund may
enter into securities index futures contracts and related
options provided that not more than 5% of its assets are
required as a margin deposit for futures contracts or
options and provided that not more than 20% of the Fund's
assets are invested in futures and options at any time.
When the Fund has cash from new investments in the Fund or
holds a portion of its assets in money market instruments,
it may enter into index futures or options to attempt to
increase its exposure to the market. Strategies the Fund
could use to accomplish this include purchasing futures
contracts, writing put options and purchasing call options.
When the Fund wishes to sell securities, because of
shareholder redemptions or otherwise, it may use index
futures or options to hedge against market risk until the
sale can be completed. These strategies could include
selling futures contracts, writing call options and
purchasing put options.
Warrants. Warrants are instruments which entitle the holder
to buy underlying equity securities at a specific price for
a specific period of time. A warrant tends to be more
volatile than its underlying securities and ceases to have
value if it is not exercised prior to its expiration date.
In addition, changes in the value of a warrant do not
necessarily correspond to changes in the value of its
underlying securities.
Convertible Securities. The Fund may invest in convertible
securities which are a bond or preferred stock which may be
converted at a stated price within a specific period of time
into a specified number of shares of common stock of the
same or different issuer. Convertible securities are senior
to common stock in a corporation's capital structure, but
usually are subordinated to non-convertible debt securities.
While providing a fixed income stream -- generally higher in
yield than the income derived from a common stock but lower
than that afforded by a non-convertible debt security -- a
convertible security also affords an investor the
opportunity, through its conversion feature, to participate
in the capital appreciation of common stock into which it is
convertible.
In general, the market value of a convertible security is
the higher of its investment value (its value as a fixed
income security) or its conversion value (the value of the
underlying shares of common stock if the security is
converted). As a fixed income security, the market value of
a convertible security generally increases when interest
rates decline and generally decreases when interest rates
rise; however, the price of a convertible security generally
increases as the market value of the underlying stock
increases, and generally decreases as the market value of
the underlying stock declines. Investments in convertible
securities generally entail less risk than investments in
the common stock of the same issuer.
Further risks associated with the use of futures contracts,
options, warrants and convertible securities. The risk of
loss associated with futures contracts in some strategies
can be substantial due to both the low margin deposits
required and the extremely high degree of leverage involved
in futures pricing. As a result, a relatively small price
movement in a futures contract may result in an immediate
and substantial loss or gain. However, the Fund will not
use futures contracts, options, warrants and convertible
securities for speculative purposes or to leverage their net
assets. Accordingly, the primary risks associated with the
use of futures contracts, options, warrants and convertible
securities by the Fund are: (i) imperfect correlation
between the change in market value of the securities held by
the Fund and the prices of futures contracts, options,
warrants and convertible securities; and (ii) possible lack
of a liquid secondary market for a futures contract and the
resulting inability to close a futures position prior to its
maturity date. The risk of imperfect correlation will be
minimized by investing only in those contracts whose
behavior is expected to resemble that of the Fund's
underlying securities. The risk that the Fund will be
unable to close out a futures position will be minimized by
entering into stock transactions on an exchange with an
active and liquid secondary market. However, options,
warrants and convertible securities purchased or sold over-
the-counter may be less liquid than exchange-traded
securities. Illiquid securities, in general, may not
represent more than 15% of the net assets of the Fund.
Foreign Currency Forward, Futures and Related Options
Transactions. The Fund may enter into foreign currency
forward and foreign currency futures contracts in order to
maintain the same currency exposure as the EAFE Index. The
Fund may not enter into such contracts as a way of
protecting against anticipated adverse changes in exchange
rates between foreign currencies and the U.S. dollar. A
foreign currency forward contract is an obligation to
purchase or sell a specific currency at a future date, which
may be any fixed number of days from the date of the
contract agreed upon by the parties, at a price set at the
time of the contract. Such contracts do not eliminate
fluctuations in the underlying prices of securities held by
the Fund. Although such contracts tend to minimize the risk
of loss due to a decline in the value of a currency that has
been sold forward, and the risk of loss due to an increase
in the value of a currency that has been purchased forward,
at the same time they tend to limit any potential gain that
might be realized should the value of such currency
increase.
Asset Coverage. To assure that futures and related options,
as well as when-issued and delayed-delivery securities, are
not used by the Fund to achieve excessive investment
leverage, the Fund will cover such transactions, as required
under applicable interpretations of the SEC, either by
owning the underlying securities, entering into an off-
setting transaction, or by establishing a segregated account
with the Fund's custodian containing cash or liquid
portfolio securities in an amount at all times equal to or
exceeding the Fund's commitment with respect to these
instruments or contracts.
Portfolio Turnover
The frequency of Fund transactions - the Fund's turnover
rate - will vary from year to year depending on market
conditions and the Fund's cash flows. The Fund's annual
portfolio turnover rate is not expected to exceed 100%.
NET ASSET VALUE
The Fund is open for business on each day when both the New
York Stock Exchange (NYSE) and the Tokyo Stock Exchange
are open (each such day being a "Valuation Day"). The net
asset value per share of the Fund is calculated once on each
Valuation Day as of the close of regular trading on the
NYSE, which under normal circumstances is 4:00 p.m., New
York time. The Fund will not process orders on any day when
either the NYSE or the Tokyo Stock Exchange is closed.
Orders received on such days will be priced on the next day
the Fund computes its net asset value. As such, investors
may experience a delay in purchasing or redeeming shares of
the Fund. Some of the Fund's securities are listed on
foreign exchanges which trade on Saturdays or other days
when the NYSE and Tokyo Stock Exchange are closed. Since
the Fund does not price on these days, the Fund's net asset
value may by significantly affected on days when an investor
has no access to the Fund's assets. The net asset value per
share of the Fund is computed by dividing the value of the
Fund's assets, less all liabilities, by the total number of
its shares outstanding. The Fund's securities and other
assets are valued primarily on the basis of market
quotations or, if quotations are not readily available, by a
method which the Fund's Board of Trustees believes
accurately reflects fair value.
PERFORMANCE INFORMATION AND REPORTS
The Fund's performance may be used from time to time in
advertisements, shareholder reports or other communications
to existing or prospective owners of the Companies' variable
contracts. When performance information is provided in
advertisements, it will include the effect of all charges
deducted under the terms of the specified contract, as well
as all recurring and non-recurring charges incurred by the
Fund. Performance information may include the Fund's
investment results and/or comparisons of its investment
results to the MSCI GDP weighted the EAFE Index, and the
Lipper International Average or other various unmanaged
indices or results of other mutual funds or investment or
savings vehicles. The Fund's investment results as used in
such communications will be calculated on a total rate of
return basis in the manner set forth below. From time to
time, fund rankings may be quoted from various sources, such
as Lipper Analytical Services, Inc., Value Line and
Morningstar Inc.
The Trust may provide period and average annualized "total
return" quotations for the Fund. The Fund's "total return"
refers to the change in the value of an investment in the
Fund over a stated period based on any change in net asset
value per share and including the value of any shares
purchasable with any dividends or capital gains distributed
during such period. Period total return may be annualized.
An annualized total return is a compounded total return
which assumes that the period total return is generated over
a one-year period, and that all dividends and capital gain
distributions are reinvested. An annualized total return
will be higher than a period total return if the period is
shorter than one year, because of the compounding effect.
Unlike some bank deposits or other investments which pay a
fixed yield for a stated period of time, the total return of
the Fund will vary depending upon interest rates, the
current market value of the securities held by the Fund and
changes in the Fund's expenses. In addition, during certain
periods for which total return quotations may be provided,
Bankers Trust and/or the Trust's other service providers may
have voluntarily agreed to waive portions of their
respective fees, or reimburse certain operating expenses of
the Fund, on a month-to-month basis. Such waivers will have
the effect of increasing the Fund's net income (and
therefore its total return) during the period such waivers
are in effect.
Total returns are based on past results and are not an
indication of future performance.
Shareholders will receive unaudited financial reports
semiannually that include the Fund's financial statements,
including listings of investment securities held by the Fund
at those dates. Annual reports are audited by independent
accountants.
MANAGEMENT OF THE TRUST
Board of Trustees
The affairs of the Fund are managed under the supervision of
the Board of Trustees of the Trust, of which the Fund is a
series. By virtue of the responsibilities assumed by
Bankers Trust, neither the Trust nor the Fund requires
employees other than the Trust's officers. None of the
Trust's officers devotes full time to the affairs of the
Trust or the Fund.
For more information with respect to the Trustees of the
Trust, see "Management of the Trust" in the SAI.
Investment Manager
The Fund has retained the services of Bankers Trust Global
Investment Management, a unit of Bankers Trust, as
investment manager. Bankers Trust, a New York banking
corporation with executive offices at 130 Liberty Street
(One Bankers Trust Plaza), New York, New York 10006, is a
wholly-owned subsidiary of Bankers Trust New York
Corporation. Bankers Trust conducts a variety of general
banking and trust activities and is a major wholesaler
supplier of financial services to the international and
domestic institutional markets.
As of March 31, 1997, Bankers Trust New York Corporation was
the seventh largest bank holding company in the United
States with total assets of approximately $122 billion.
Bankers Trust is a worldwide merchant bank dedicated to
servicing the needs of corporations, governments, financial
institutions and private clients through a global network of
over 80 offices in more than 48 countries. Investment
management is a core business of Bankers Trust, built on a
tradition of excellence from its roots as a trust bank
founded in 1903. The scope of Bankers Trust's investment
management capability is unique due to its leadership
positions in both active and passive quantitative management
and its presence in major equity and fixed income markets
around the world. Bankers Trust is one of the nation's
largest and most experienced investment managers with
approximately $233 billion in assets under management
globally.
Bankers Trust, subject to the supervision and direction of
the Board of Trustees, manages the Fund in accordance with
the Fund's investment objective and stated investment
policies, makes investment decisions for the Fund, places
orders to purchase and sell securities and other financial
instruments on behalf of the Fund, employs professional
investment managers and securities analysts who provide
research services to the Fund, oversees the administration
of all aspects of the Trust's business and affairs and
supervises the performance of professional services provided
by other vendors. Bankers Trust may utilize the expertise
of any of its world wide subsidiaries and affiliates to
assist it in its role as investment manager. All orders for
investment transactions on behalf of the Fund are placed by
Bankers Trust with broker-dealers and other financial
intermediaries that it selects, including those affiliated
with Bankers Trust. A Bankers Trust affiliate will be used
in connection with a purchase or sale of an investment for
the Fund only if Bankers Trust believes that the affiliate's
charge for the transaction does not exceed usual and
customary levels. The Fund will not invest in obligations
for which Bankers Trust or any of its affiliates is the
ultimate obligor or accepting bank. The Fund may, however,
invest in the obligations of correspondents and customers of
Bankers Trust.
As compensation for its services to the Fund, Bankers Trust
receives a fee from the Fund, accrued daily and paid
monthly, equal on an annual basis to 0.45% of the average
daily net assets of the Fund for its then-current fiscal
year.
Bankers Trust has been advised by its counsel that, in
counsel's opinion, Bankers Trust currently may perform the
services for the Trust and the Fund described in this
Prospectus and the SAI without violation of the Glass-
Steagall Act or other applicable banking laws or
regulations. State laws on this issue may differ from the
interpretations of relevant Federal law, and banks and
financial institutions may be required to register as
dealers pursuant to state securities law.
Fund Manager
Richard J. Vella, Managing Director of Bankers Trust, is
responsible for the day-to-day management of the Fund. Mr.
Vella has been employed by Bankers Trust since 1985 and has
ten years of trading and investment experience.
Expenses
In addition to the fees of the Manager, the Fund is
responsible for the payment of all its other expenses
incurred in the operation of the Fund, which include, among
other things, expenses for legal and independent auditor's
services, charges of the Fund's custodian and transfer
agent, SEC fees, a pro rata portion of the fees of the
Trust's unaffiliated trustees and officers, accounting costs
for reports sent to owners of the Contracts which provide
for investment in the Fund ("Contractowners"), the Fund's
pro rata portion of membership fees in trade organizations,
a pro rata portion of the fidelity bond coverage for the
Trust's officers, interest, brokerage and other trading
costs, taxes, all expenses of computing the Fund's net asset
value per share, expenses involved in registering and
maintaining the registration of the Fund's shares with the
SEC and qualifying the Fund for sale in various
jurisdictions and maintaining such qualification, litigation
and other extraordinary or non-recurring expenses. However,
other typical Fund expenses such as Contractowner servicing,
distribution of reports to Contractowners and prospectus
printing and postage will be borne by the relevant Company.
Administrator
First Data Investor Services Group, Inc. ("First Data"), a
subsidiary of First Data Corporation, One Exchange Place,
Boston, Massachusetts 02109, serves as the Fund's
administrator pursuant to an Administration Agreement with
the Trust. Under the terms of the Administration Agreement,
First Data generally assists in all aspects of the Fund's
operations, other than providing investment advice, subject
to the overall authority of the Trust's Board of Trustees.
Pursuant to the terms of the Administration Agreement, dated
April 16, 1996, the Trust has agreed to pay First Data a
monthly fee at the annual rate of 0.02% of the value of the
Trust's average monthly net assets not exceeding $2 billion;
0.01% of the Trust's monthly average net assets exceeding $2
billion but not exceeding $3 billion and 0.0075% of the
Trust's monthly average net assets exceeding $3 billion, in
addition to a flat fee of $70,000 per year per Fund.
Distributor
First Data Distributors, Inc. (the "Distributor") serves as
distributor of the Fund's shares to separate accounts of the
Companies for which it receives no separate fee from the
Fund. The principal business address of the Distributor is
4400 Computer Drive, Westborough, Massachusetts 01581.
Custodian and Transfer Agent
Bankers Trust acts as custodian of the assets of the Fund
and First Data serves as the transfer agent for the Fund.
Organization of the Trust
The Trust was organized on January 19, 1996, under the laws
of the Commonwealth of Massachusetts. The Fund is a
separate series of the Trust. The Trust offers shares of
beneficial interest of the Fund and the Trust's other
series, par value $0.001 per share. The shares of the other
series of the Trust are offered through separate
Prospectuses. No series of shares has any preference over
any other series. All shares, when issued, will be fully
paid and nonassessable. The Trust's Board of Trustees has
the authority to create additional series without obtaining
shareholder approval.
The Trust is an entity of the type commonly known as a
"Massachusetts business trust." Under Massachusetts law,
shareholders of such a business trust may, under certain
circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder incurring
financial loss on account of shareholder liability is
limited to circumstances in which both inadequate insurance
existed and the Trust itself was unable to meet its
obligations.
Through its separate accounts, the Companies are the Fund's
sole stockholders of record, so under the 1940 Act, such
Companies are deemed to be in control of the Fund.
Nevertheless, when a shareholders' meeting occurs, each
Company solicits and accepts voting instructions from its
Contractowners who have allocated or transferred monies for
an investment in the Fund as of the record date of the
meeting. Each Company then votes the Fund's shares that are
attributable to its Contractowners' interests in the Fund in
proportion to the voting instructions received. Each
Company will vote any share that it is entitled to vote
directly due to amounts it has contributed or accumulated in
its separate accounts in the manner described in the
prospectuses for its variable annuities and variable life
insurance policies.
Each share of the Fund is entitled to one vote, and
fractional shares are entitled to fractional votes. Fund
shares have non-cumulative voting rights, so the vote of
more than 50% of the shares can elect 100% of the Trustees.
The Trust is not required, and does not intend, to hold
regular annual shareholder meetings, but may hold special
meetings for consideration of proposals requiring
shareholder approval.
The Fund is only available to owners of variable annuities
or variable life insurance policies issued by the Companies
through their respective separate accounts. The Fund does
not currently foresee any disadvantages to Contractowners
arising from offering its shares to variable annuity and
variable life insurance policy separate accounts
simultaneously, and the Board of Trustees monitors events
for the existence of any material irreconcilable conflict
between or among Contractowners. If a material
irreconcilable conflict arises, one or more separate
accounts may withdraw their investment in the Fund. This
could possibly force the Fund to sell portfolio securities
at disadvantageous prices. Each Company will bear the
expenses of establishing separate portfolios for its
variable annuity and variable life insurance separate
accounts if such action becomes necessary; however, ongoing
expenses that are ultimately borne by Contractowners will
likely increase due to the loss of economies of scale
benefits that can be provided to mutual funds with
substantial assets.
SHAREHOLDER AND ACCOUNT POLICIES
PURCHASE AND REDEMPTION OF SHARES
Shares of the Fund will be continuously offered to each
Company's separate accounts at the net asset value per share
next determined after a proper purchase request has been
received by the Company. The Company then offers to
Contractowners units in its separate accounts which directly
correspond to shares in the Fund. Each Company submits
purchase and redemption orders to the Fund based on
allocation instructions for premium payments, transfer
instructions and surrender or partial withdrawal requests
which are furnished to the Company by such Contractowners.
Contractowners can send such instructions and requests to
the Companies by first class mail, overnight mail or express
mail sent to the address set forth in the relevant Company's
offering memorandum included with this prospectus. The Fund
and the Distributor reserve the right to reject any purchase
order for shares of the Fund.
Payment for redeemed shares will ordinarily be made within
seven (7) business days after the Fund receives a redemption
order from the relevant Company. The redemption price will
be the net asset value per share next determined after the
Company receives the Contractowner's request in proper form.
The Fund may suspend the right of redemption or postpone the
date of payment during any period when trading on the NYSE
is restricted, or the NYSE is closed for other than weekends
and holidays; when an emergency makes it not reasonably
practicable for the Fund to dispose of assets or calculate
its net asset value; or as permitted by the SEC.
The accompanying offering memorandum for the Company's
variable annuity or variable life insurance policy describes
the allocation, transfer and withdrawal provisions of such
annuity or policy.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The Fund distributes substantially all of its net income and
capital gains to shareholders each year. The Fund
distributes capital gains and income dividends annually.
All dividends and capital gains distributions paid by the
Fund will be automatically reinvested, at net asset value,
by the Companies' separate accounts in additional shares of
the Fund, unless an election is made by a Contractowner to
receive distributions in cash.
The Fund will be treated as a separate entity for federal
income tax purposes. The Fund intends to qualify as a
"regulated investment company" under the Internal Revenue
Code of 1986, as amended (the "Code"). As a regulated
investment company the Fund will not be subject to U.S.
Federal income tax on its investment company taxable income
and net capital gains (the excess of net long-term capital
gains over net short-term capital losses), if any, that it
distributes to shareholders. The Fund intends to distribute
to its shareholders, at least annually, substantially all of
its investment company taxable income and net capital gains,
and therefore does not anticipate incurring a Federal income
tax liability.
The Code and Treasury Department regulations promulgated
thereunder require that mutual funds that are offered
through insurance company separate accounts must meet
certain diversification requirements to preserve the tax-
deferral benefits provided by the variable contracts which
are offered in connection with such separate accounts. The
Manager intends to diversify the Fund's investments in
accordance with those requirements. The enclosed offering
memorandum for a Company's variable annuity or variable life
insurance policies describes the federal income tax
treatment of distributions from such contracts to
Contractowners.
The foregoing is only a brief summary of important tax law
provisions that affect the Fund. Other Federal, state and
local tax law provisions may also affect the Fund and its
operations. Anyone who is considering allocating,
transferring or withdrawing monies held under a variable
contract to or from the Fund should consult a qualified tax
adviser.
Investment Manager of the Fund
bankers trust global investment management
a unit of
bankers trust company
Administrator
first data investor services group, inc.
Distributor
FIRST DATA DISTRIBUTORS, INC.
Custodian
BANKERS TRUST COMPANY
Transfer Agent
first data investor services group, inc.
Independent Accountants
COOPERS & LYBRAND LLP
Counsel
WILLKIE FARR & GALLAGHER
..................................................................
.............
No person has been authorized to give any information or to make
any representation other than those contained in the Fund's
Prospectus, its SAI or the Fund's official sales literature in
connection with the offering of the Fund's shares and, if given or
made, such other information or representations must not be relied
on as having been authorized by the Fund. This Prospectus does not
constitute an offer in any state in which, or to any person to
whom, such offer may not lawfully be made.
..................................................................
.............
STATEMENT OF
ADDITIONAL INFORMATION
FEBRUARY 5, 1997 AS SUPPLEMENTED JUNE 16, 1997
BT INSURANCE FUNDS TRUST
EAFE Equity Index Fund
BT Insurance Funds Trust (the "Trust") is currently
comprised of six series: the EAFE Equity Index Fund (the "Fund")
and five other series. The shares of the Fund are described
herein. Capitalized terms not otherwise defined herein shall have
the same meaning as in the Prospectus.
Table of Contents
Risk Factors and Certain Securities and Investment Practices
2
Performance Information 16
Valuation of Securities; Redemption in Kind 17
Management of the Trust 18
Organization of the Trust 22
Taxation 23
Shares of the Fund are available to the public only through the
purchase of certain variable annuity and variable life insurance
contracts ("Contract(s)") issued by various insurance companies
(the "Companies"). The investment adviser of the Fund is Bankers
Trust Global Investment Management, a unit of Bankers Trust
Company (the "Manager" or "Bankers Trust"). The distributor of
the Fund shares is First Data Distributors, Inc. (the
"Distributor" or "First Data Distributors").
The Prospectus for the Fund is dated February 5, 1997 as
supplemented June 16, 1997. The Prospectus provides the basic
information investors should know before investing and may be
obtained without charge by calling the Trust at the Customer
Service Center at the telephone number shown in the accompanying
prospectus. This Statement of Additional Information, which is
not a Prospectus, is intended to provide additional information
regarding the activities and operations of the Fund and should be
read in conjunction with the Fund's Prospectus. This Statement of
Additional Information is not an offer of any Fund for which an
investor has not received a Prospectus. Capitalized terms not
otherwise defined in this Statement of Additional Information have
the meanings accorded to them in the Fund's Prospectus.
bankers trust global investment management,
a unit of bankers trust company
Investment Manager of the Fund
The Trust's distributor is FIRST DATA distributors, inc., 4400
Computer Drive, Westborough, MA 01581.
RISK FACTORS AND CERTAIN SECURITIES AND INVESTMENT PRACTICES
Investment Objective
The investment objective of the Fund is described in the
Fund's Prospectus. There can, of course, be no assurance that the
Fund will achieve its investment objective.
Investment Practices
The following is a discussion of the various investments of
and techniques employed by the Fund:
Certificates of Deposit and Bankers' Acceptances.
Certificates of deposit are receipts issued by a depository
institution 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 acceptances have maturities of six months or less.
Commercial Paper. 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. A
variable amount master demand note (which is a type of commercial
paper) represents a direct borrowing arrangement involving
periodically fluctuating rates of interest under a letter
agreement between a commercial paper issuer and an institutional
lender pursuant to which the lender may determine to invest
varying amounts.
Illiquid Securities. Historically, illiquid securities have
included securities subject to contractual or legal restrictions
on resale because they have not been registered under the
Securities Act of 1933, as amended (the "1933 Act"), securities
which are otherwise not readily marketable and repurchase
agreements having a maturity of longer than seven days.
Securities which have not been registered under the 1933 Act are
referred to as private placements or restricted securities and are
purchased directly from the issuer or in the secondary market.
Mutual funds do not typically hold a significant amount of these
restricted or other illiquid securities because of the potential
for delays on resale and uncertainty in valuation. Limitations on
resale may have an adverse effect on the marketability of
portfolio securities and a mutual fund might be unable to dispose
of restricted or other illiquid securities promptly or at
reasonable prices and might thereby experience difficulty
satisfying redemptions within seven days. A mutual fund might
also have to register such restricted securities in order to
dispose of them resulting in additional expense and delay.
Adverse market conditions could impede such a public offering of
securities.
In recent years, however, a large institutional market has
developed for certain securities that are not registered under the
1933 Act, including repurchase agreements, commercial paper,
foreign securities, municipal securities and corporate bonds and
notes. Institutional investors depend on an efficient
institutional market in which the unregistered security can be
readily resold or on an issuer's ability to honor a demand for
repayment. The fact that there are contractual or legal
restrictions on resale of such investments to the general public
or to certain institutions may not be indicative of their
liquidity.
The Securities and Exchange Commission (the "SEC") has
adopted Rule 144A, which allows a broader institutional trading
market for securities otherwise subject to restriction on their
resale to the general public. Rule 144A establishes a "safe
harbor" from the registration requirements of the 1933 Act of
resales of certain securities to qualified institutional buyers.
The Manager anticipates that the market for certain restricted
securities such as institutional commercial paper will expand
further as a result of this regulation and the development of
automated systems for the trading, clearance and settlement of
unregistered securities of domestic and foreign issuers, such as
the PORTAL System sponsored by the National Association of
Securities Dealers, Inc.
The Manager will monitor the liquidity of Rule 144A
securities in the Fund's portfolio under the supervision of the
Trust's Board of Trustees. In reaching liquidity decisions, the
Manager will consider, among other things, the following factors:
(i) the frequency of trades and quotes for the security; (ii) the
number of dealers and other potential purchasers wishing to
purchase or sell the security; (iii) dealer undertakings to make a
market in the security and (iv) the nature of the security and of
the marketplace trades (e.g., the time needed to dispose of the
security, the method of soliciting offers and the mechanics of the
transfer).
Lending of Portfolio Securities. The Fund has the authority
to lend portfolio securities to brokers, dealers and other
financial organizations. The Fund will not lend securities to
Bankers Trust, the Distributor or their affiliates. By lending
its securities, the Fund can increase its income by continuing to
receive interest on the loaned securities as well as by either
investing the cash collateral in short-term securities or
obtaining yield in the form of interest paid by the borrower when
U.S. Government obligations are used as collateral. There may be
risks of delay in receiving additional collateral or risks of
delay in recovery of the securities or even loss of rights in the
collateral should the borrower of the securities fail financially.
The Fund will adhere to the following conditions whenever its
securities are loaned: (i) the Fund must receive at least 100
percent cash collateral or equivalent securities from the
borrower; (ii) the borrower must increase this collateral whenever
the market value of the securities including accrued interest
rises above the level of the collateral; (iii) the Fund must be
able to terminate the loan at any time; (iv) the Fund must receive
reasonable interest on the loan, as well as any dividends,
interest or other distributions on the loaned securities, and any
increase in market value; (v) the Fund may pay only reasonable
custodian fees in connection with the loan; and (vi) voting rights
on the loaned securities may pass to the borrower; provided,
however, that if a material event adversely affecting the
investment occurs, the Trust's Board of Trustees must terminate
the loan and regain the right to vote the securities.
Short-Term Instruments. When the Fund experiences large
cash inflows through the sale of securities and desirable equity
securities, that are consistent with the Fund's investment
objective, which are unavailable in sufficient quantities or at
attractive prices, the Fund may hold short-term investments for a
limited time pending availability of such equity securities.
Short-term instruments consist of foreign and domestic: (i)
short-term obligations of sovereign governments, their agencies,
instrumentalities, authorities or political subdivisions; (ii)
other short-term debt securities rated AA or higher by S&P or Aa
or higher by Moody's or, if unrated, of comparable quality in the
opinion of Bankers Trust; (iii) commercial paper; (iv) bank
obligations, including negotiable certificates of deposit, time
deposits and bankers' acceptances; and (v) repurchase agreements.
At the time the Fund invests in commercial paper, bank obligations
or repurchase agreements, the issuer of the issuer's parent must
have outstanding debt rated AA or higher by S&P or Aa or higher by
Moody's or outstanding commercial paper or bank obligations rated
A-1 by S&P or Prime-1 by Moody's; or, if no such ratings are
available, the instrument must be of comparable quality in the
opinion of Bankers Trust. These instruments may be denominated in
U.S dollars or in foreign currencies.
When-Issued and Delayed Delivery Securities. The Fund may
purchase securities on a when-issued or delayed delivery basis.
For example, delivery of and payment for these securities can take
place a month or more after the date of the purchase commitment.
The purchase price and the interest rate payable, if any, on the
securities are fixed on the purchase commitment date or at the
time the settlement date is fixed. The value of such securities
is subject to market fluctuation and no interest accrues to the
Fund until settlement takes place. At the time the Fund makes the
commitment to purchase securities on a when-issued or delayed
delivery basis, it will record the transaction, reflect the value
each day of such securities in determining its net asset value
and, if applicable, calculate the maturity for the purposes of
average maturity from that date. At the time of settlement a
when-issued security may be valued at less than the purchase
price. To facilitate such acquisitions, the Fund will maintain
with the Fund's custodian a segregated account with liquid assets,
consisting of cash, U.S. Government securities or other
appropriate securities, in an amount at least equal to such
commitments. On delivery dates for such transactions, the Fund
will meet its obligations from maturities or sales of the
securities held in the segregated account and/or from cash flow.
If the Fund chooses to dispose of the right to acquire a
when-issued security prior to its acquisition, it could, as with
the disposition of any other Fund obligation, incur a gain or loss
due to market fluctuation. It is the current policy of the Fund
not to enter into when-issued commitments exceeding in the
aggregate 15% of the market value of the Fund's total assets, less
liabilities other than the obligations created by when-issued
commitments.
Additional U.S. Government Obligations. The Fund may invest
in obligations issued or guaranteed by U.S. Government agencies or
instrumentalities. These obligations may or may not be backed by
the "full faith and credit" of the United States. In the case of
securities not backed by the full faith and credit of the United
States, the Fund must look principally to the federal agency
issuing or guaranteeing the obligation for ultimate repayment, and
may not be able to assert a claim against the United States itself
in the event the agency or instrumentality does not meet its
commitments. Securities in which the Fund may invest that are not
backed by the full faith and credit of the United States include,
but are not limited to, obligations of the Tennessee Valley
Authority, the Federal Home Loan Mortgage Corporation and the U.S.
Postal Service, each of which has the right to borrow from the
U.S. Treasury to meet its obligations, and obligations of the
Federal Farm Credit System and the Federal Home Loan Banks, both
of whose obligations may be satisfied only by the individual
credits of each issuing agency. Securities which are backed by
the full faith and credit of the United States include obligations
of the Government National Mortgage Association, the Farmers Home
Administration, and the export-import Bank.
Equity Investments. The Fund may invest in equity
securities listed on any domestic or foreign securities exchange
or traded in the over-the-counter market as well as certain
restricted or unlisted securities. They may or may not pay
dividends or carry voting rights. Common stock occupies the most
junior position in a company's capital structure.
Reverse Repurchase Agreements. The Fund may borrow funds
for temporary or emergency purposes, such as meeting larger than
anticipated redemption requests, and not for leverage, by among
other things, agreeing to sell portfolio securities to financial
institutions such as banks and broker-dealers and to repurchase
them at a mutually agreed date and price (a "reverse repurchase
agreement"). At the time the Fund enters into a reverse
repurchase agreement it will place in a segregated custodial cash
account, U.S. Government Obligations or high-grade debt
obligations having a value equal to the repurchase price,
including accrued interest. Reverse repurchase agreements involve
the risk that the market value of the securities sold by the Fund
may decline below the repurchase price of those securities.
Reverse repurchase agreements are considered to be borrowings by
the Fund.
Warrants. Warrants entitle the holder to buy common stock
from the issuer at a specific price (the strike price) for a
specific period of time. The strike price of warrants sometimes
is much lower than the current market price of the underlying
securities, yet warrants are subject to similar price
fluctuations. As a result, warrants may be more volatile
investments than the underlying securities.
Warrants do not entitle the holder to dividends or voting
rights with respect to the underlying securities and do not
represent any rights in the assets of the issuing company. Also,
the value of the warrant does not necessarily change with the
value of the underlying securities and a warrant ceases to have
value if it is not exercised prior to the expiration date.
Convertible Securities. Convertible securities may be a
debt security or preferred stock which may be converted into
common stock or carries the right to purchase common stock.
Convertible securities entitle the holder to exchange the
securities for a specified number of shares of common stock,
usually of the same company, at specified prices within a certain
period of time.
The terms of any convertible security determine its ranking
in a company's capital structure. In the case of subordinated
convertible debentures, the holders' claims on assets and earnings
are subordinated to the claims of other creditors, and are senior
to the claims of preferred and common shareholders. In the case
of convertible preferred stock, the holders' claims on assets and
earnings are subordinated to the claims of all creditors and are
senior to the claims of common shareholders.
Foreign Securities: Special Considerations Concerning Hong
Kong, Malaysia, Singapore and Japan. Many Asian countries may be
subject to a greater degree of social, political and economic
instability than is the case in the United States and European
countries. Such instability may result from (i) authoritarian
governments or military involvement in political and economic
decision-making; (ii) popular unrest associated with demands for
improved political, economic and social conditions; (iii) internal
insurgencies; (iv) hostile relations with neighboring countries;
and (v) ethnic, religious and racial disaffection.
The economies of most of the Asian countries are heavily
dependent upon international trade and are accordingly affected by
protective trade barriers and the economic conditions of their
trading partners, principally, the United States, Japan, China and
the European Community. The enactment by the United States or
other principal trading partners of protectionist trade
legislation, reduction of foreign investment in the local
economies and general declines in the international securities
markets could have a significant adverse effect upon the
securities markets of the Asian countries.
Hong Kong's impending return to Chinese dominion in 1997 has
not initially had a positive effect on its economic growth which
was vigorous in the 1980s. However, authorities in Beijing have
agreed to maintain a capitalist system for 50 years that, along
with Hong Kong's economic growth, continued to further strong
stock market returns. In preparation for 1997, Hong Kong has to
develop trade with China, where it is the largest foreign
investor, while also maintaining its long-standing export
relationship with the United States. Spending on infrastructure
improvements is a significant priority of the colonial government
while the private sector continues to diversify abroad based on
its position as an established international trade center in the
Far East.
The Hong Kong stock market is undergoing a period of growth
and change which may result in trading volatility and difficulties
in the settlement and recording of transactions, and in
interpreting and applying the relevant law and regulations.
The Malaysian economy continued to perform well, growing at
an average annual rate of 9% from 1987 through 1991. This placed
Malaysia as one of the fastest growing economies in the Asian-
Pacific region. Malaysia has become the world's third-largest
producer of semiconductor devices (after the US and Japan) and the
world's largest exporter of semiconductor devices. More
remarkable is the country's ability to achieve rapid economic
growth with relative price stability (2% inflation over the past
five years) as the government followed prudent fiscal/monetary
policies. Malaysia's high export dependence level leaves it
vulnerable to a recession in the Organization for Economic
Cooperation and Development countries or a fall in world commodity
prices.
Singapore has an open entrepreneurial economy with strong
service and manufacturing sectors and excellent international
trading links derived from its history. During the 1970s and
early 1980s, the economy expanded rapidly, achieving an average
annual growth rate of 9%. Per capita GDP is among the highest in
Asia. Singapore holds a position as a major oil refining and
services center.
Investing in Japanese securities may involve the risks
associated with investing in foreign securities generally. In
addition, because it invests in Japan, the Fund will be subject to
the general economic and political conditions in Japan.
Share prices of companies listed on Japanese stock exchanges
and on the Japanese OTC market reached historical peaks (which
were later referred to as the "bubble") as well as historically
high trading volumes in 1989 and 1990. Since then, stock prices in
both markets decreased significantly, with listed stock prices
reaching their lowest levels in the third quarter of 1992 and OTC
stock prices reaching their lowest levels in the fourth quarter of
1992. During the period from January 1, 1989 through December 31,
1994, the highest Nikkei stock average and Nikkei OTC average were
38,915.87 and 4,149.20, respectively, and the lowest for each were
14,309.41 and 1,099.32, respectively. There can be no assurance
that additional market corrections will not occur.
The common stocks of many Japanese companies continue to
trade at high price earnings ratios in comparison with those in
the United States, even after the recent market decline.
Differences in accounting methods make it difficult to compare the
earnings of Japanese companies with those of companies in other
countries, especially the United States.
Since the Fund invests in securities denominated in yen,
changes in exchange rates between the U.S. dollar and the yen
affect the U.S. dollar value of the Fund's assets. Such rate of
exchange is determined by forces of supply and demand on the
foreign exchange markets. These forces are in turn affected by the
international balance of payments and other economic, political
and financial conditions, government intervention, speculation and
other factors.
Japanese securities held by the Fund are not registered with
the SEC nor are the issuers thereof subject to its reporting
requirements. There may be less publicly available information
about issuers of Japanese securities than about U.S. companies and
such issuers may not be subject to accounting, auditing and
financial reporting standards and requirements comparable to those
to which U.S. companies are subject.
Although the Japanese economy has grown substantially over
the past four decades, recently the rate of growth had slowed
substantially. During 1991, 1992 and 1993, the Japanese economy
grew at rates of 4.3%, 1.1% and 0.1%, respectively, as measured by
real gross domestic product.
Japan's success in exporting its products has generated a
sizable trade surplus. Such trade surplus has caused tensions at
times between Japan and some of its trading partners. In
particular, Japan's trade relations with the United States have
recently been the subject of discussion and negotiation between
the two nations. The United States has imposed certain measures
designed to address trade issues in specific industries. These
measures and similar measures in the future may adversely affect
the performance of the Fund.
Japan's economy has typically exhibited low inflation and
low interest rates. There can be no assurance that low inflation
and low interest rates will continue, and it is likely that a
reversal of such factors would adversely affect the Japanese
economy. Moreover, the Japanese economy may differ, favorably or
unfavorably, from the U.S. economy in such respects as growth of
gross national product, rate of inflation, capital reinvestment,
resources, self-sufficiency and balance of payments position.
Japan has a parliamentary form of government. In 1993 a
coalition government was formed which, for the first time since
1955, did not include the Liberal Democratic Party. Since
mid-1993, there have been several changes in leadership in Japan.
What, if any, effect the current political situation will have on
prospective regulatory reforms of the economy in Japan cannot be
predicted. Recent and future developments in Japan and neighboring
Asian countries may lead to changes in policy that might adversely
affect the Fund.
Futures Contracts and Options on Futures Contracts
General. The successful use of such instruments draws upon
the Manager's skill and experience with respect to such
instruments. When futures are purchased to hedge against a
possible increase in the price of securities before the Fund is
able to invest its cash (or cash equivalents) in an orderly
fashion, it is possible that the market may decline instead; if
the Fund then concludes not to invest its cash at that time
because of concern as to possible further market decline or for
other reasons, the Fund will realize a loss on the futures
contract that is not offset by a reduction in the price of the
instruments that were to be purchased. Successful use of futures
to hedge against foreign exchange risk depends on the Manager's
ability to forecast currency exchange rate movements correctly.
Should exchange rates move in an unexpected manner, the Fund may
not achieve the anticipated benefits of futures contracts or
options on futures contracts or may realize losses and thus will
be in a worse position than if such strategies had not been used.
In addition, the correlation between movements in the price of
futures contracts or options on futures contracts and movements in
the price of the securities and currencies hedged or used for
cover will not be perfect and could produce unanticipated losses.
Successful use of the futures contract and related options
are subject to special risk considerations. A liquid secondary
market for any futures or options contract may not be available
when a futures or options position is sought to be closed. In
addition, there may be an imperfect correlation between movements
in the securities or currency in the Fund. Successful use of
futures or options contracts is further dependent on Bankers
Trust's ability to correctly predict movements in the securities
or foreign currency markets and no assurance can be given that its
judgment will be correct. Successful use of options on securities
or stock indices are subject to similar risk considerations. In
addition, by writing covered call options, the Fund gives up the
opportunity, while the option is in effect, to profit from any
price increase in the underlying securities above the options
exercise price.
Futures Contracts. The Fund may enter into contracts for
the purchase or sale for future delivery of foreign currencies or
contracts based on the EAFE Index. U.S. futures contracts have
been designed by exchanges which have been designated "contracts
markets" by the CFTC, and must be executed through a futures
commission merchant, or brokerage firm, which is a member of the
relevant contract market. Futures contracts trade on a number of
exchange markets, and, through their clearing corporations, the
exchanges guarantee performance of the contracts as between the
clearing members of the exchange.
At the same time a futures contract is purchased or sold,
the Fund must allocate cash or securities as a deposit payment
("initial deposit"). It is expected that the initial deposit
would be approximately 1 1/2% to 5% of a contract's face value.
Daily thereafter, the futures contract is valued and the payment
of "variation margin" may be required, since each day the Fund
would provide or receive cash that reflects any decline or
increase in the contract's value.
Although futures contracts by their terms call for the
actual delivery or acquisition of securities, in most cases the
contractual obligation is fulfilled before the date of the
contract without having to make or take delivery of the
securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a
commodities exchange an identical futures contract calling for
delivery in the same month. Such a transaction, which is effected
through a member of an exchange, cancels the obligation to make or
take delivery of the securities. Since all transactions in the
futures market are made, offset or fulfilled through a
clearinghouse associated with the exchange on which the contracts
are traded, the Fund will incur brokerage fees when it purchases
or sells futures contracts.
The ordinary spreads between prices in the cash and futures
market, due to differences in the nature of those markets, are
subject to distortions. First, all participants in the futures
market are subject to initial deposit and variation margin
requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through
offsetting transactions which could distort the normal
relationship between the cash and futures markets. Second, the
liquidity of the futures market depends on participants entering
into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take
delivery, liquidity in the futures market could be reduced, thus
producing distortion. Third, from the point of view of
speculators, the margin deposit requirements in the futures market
are less onerous than margin requirements in the securities
market. Therefore, increased participation by speculators in the
futures market may cause temporary price distortions.
In addition, futures contracts entail risks. The Manager
believes that use of such contracts will benefit the Fund. The
successful use of futures contracts, however, depends on the
degree of correlation between the futures and securities markets.
Options on Futures Contracts. A futures option gives the
holder, in return for the premium paid, the right to buy (call)
from or sell (put) to the writer of the option a futures contract
at a specified price at any time during the period of the option.
Upon exercise, the writer of the option is obligated to pay the
difference between the cash value of the futures contract the
exercise price. Like the buyer or seller of a futures contract,
the holder, or writer, of an option has the right to terminate its
position prior to the scheduled expiration of the option by
selling, or purchasing an option of the same series, at which time
the person entering into the closing transaction will realize a
gain or loss. The Fund will be required to deposit initial margin
and variation margin with respect to put and call options on
futures contracts written by its pursuant to brokers' requirements
similar to those described above. Net option premiums received
will be included as initial margin deposits. In anticipation of a
decline in interest rates, the Fund may purchase call options on
futures contracts as a substitute for the purchase of futures
contracts to hedge against a possible increase in the price of
securities which the Fund intends to purchase. Similarly, if the
value of the securities held by the Fund is expected to decline as
a result of an increase in interest rates, the Fund might purchase
put options or sell call options on futures contracts rather than
sell futures contracts.
Investments in futures options involve some of the same
considerations that are involved in connection with investments in
futures contracts (for example, the existence of a liquid
secondary market). In addition, the purchase or sale of an option
also entails the risk that changes in the value of the underlying
futures contract will not correspond to changes in the value of
the option purchased. Depending on the pricing of the option
compared to either the futures contract upon which it is based, or
upon the price of the securities being hedged, an option may or
may not be less risky than ownership of the futures contract or
such securities. In general, the market prices of options can be
expected to be more volatile than the market prices on the
underlying futures contract. Compared to the purchase or sale of
futures contracts, however, the purchase of call or put options on
futures contracts may frequently involved less potential risk to
the Fund because the maximum amount at risk is the premium paid
for the options (plus transaction costs). The writing of an
option on a futures contract involves risks similar to those risks
relating to the sale of futures contracts.
The Trust's Board of Trustees has adopted the requirement
for the Fund that futures contracts and options on futures
contracts be used as a hedge and may also use stock index futures
on a continual basis to equitize cash so that the Fund may
maintain 100% equity exposure. In addition to this requirement,
the Board of Trustees has also adopted a restriction that the Fund
will not enter into any futures contracts or options on futures
contracts if immediately thereafter the amount of margin deposits
on all the futures contracts of the Fund and premiums paid on
outstanding options on futures contracts owned by the Fund (other
than those entered into for bona fide hedging purposes) would
exceed 5% of the market value of the total assets of the Fund.
Additional Risks of Options on Futures Contracts and Forward
Contracts. Unlike transactions entered into by the Fund in
futures contracts, forward contracts are not traded on contract
markets regulated by the CFTC or (with the exception of certain
foreign currency options) by the SEC. To the contrary, such
instruments are traded through financial institutions acting as
market-makers.
The Fund's ability to terminate over-the-counter options
will be more limited than with exchange-traded options. It is
also possible that broker-dealers participating in over-the-
counter options transactions will not fulfill their obligations.
Until such time as the staff of the SEC changes its position, the
Fund will treat purchased over-the-counter options and assets used
to cover written over-the-counter options as illiquid securities.
With respect to options written with primary dealers in U.S.
Government securities pursuant to an agreement requiring a closing
purchase transaction at a formula price, the amount of illiquid
securities may be calculated with reference to the repurchase
formula.
Futures contracts, options on futures contracts and forward
contracts may be traded on foreign exchanges. Such transactions
are subject to the risk of governmental actions affecting trading
in or the prices of foreign currencies or securities. The value
of such positions also could be adversely affected by: (i) other
complex foreign political and economic factors; (ii) lesser
availability than in the United States of data on which to make
trading decisions; (iii) delays in the Fund's ability to act upon
economic events occurring in foreign markets during nonbusiness
hours in the United States; (iv) the imposition of different
exercise and settlement terms and procedures and margin
requirements than in the United States; and (v) lesser trading
volume.
Options on Securities Indices. The Fund may purchase and
write (sell) call and put options on securities indices. Such
options give the holder the right to receive a cash settlement
during the term of the option based upon the difference between
the exercise price and the value of the index.
Options on securities indices entail certain risks. The
absence of a liquid secondary market to close out options
positions on securities indices may occur, although the Fund
generally will only purchase or write such an option if the
Manager believes the option can be closed out.
Use of options on securities indices also entails the risk
that trading in such options may be interrupted if trading in
certain securities included in the index is interrupted. The Fund
will not purchase such options unless the Manager believes the
market is sufficiently developed such that the risk of trading in
such options is no greater than the risk of trading in options on
securities.
Price movements in the Fund's portfolio may not correlate
precisely with movements in the level of an index and, therefore,
the use of options on indices cannot serve as a complete hedge.
Because options on securities indices require settlement in cash,
the Manager may be forced to liquidate portfolio securities to
meet settlement obligations.
Forward Foreign Currency Exchange Contracts. Because the
Fund may buy and sell securities denominated in currencies other
than the U.S. dollar and receives interest, dividends and sale
proceeds in currencies other than the U.S. dollar, the Fund from
time to time may enter into foreign currency exchange transactions
to convert to and from different foreign currencies and to convert
foreign currencies to and from the U.S. dollar. The Fund either
enters into these transactions on a spot (i.e., cash) basis at the
spot rate prevailing in the foreign currency exchange market or
uses forward contracts to purchase or sell foreign currencies.
A forward foreign currency exchange contract is an
obligation by a fund to purchase or sell a specific currency at a
future date, which may be any fixed number of days from the date
of the contract. Forward foreign currency exchange contracts
establish an exchange rate at a future date. These contracts are
transferable in the interbank market conducted directly between
currency traders (usually large commercial banks) and their
customers. A forward foreign currency exchange contract generally
has no deposit requirement and is traded at a net price without
commission. The Fund maintains with its custodian a segregated
account of cash and liquid portfolio assets in an amount at least
equal to its obligations under each forward foreign currency
exchange contract. Neither spot transactions nor forward foreign
currency exchange contracts eliminate fluctuations in the prices
of the Fund's securities or in foreign exchange rates, or prevent
loss if the prices of these securities should decline.
The Fund may enter into foreign currency hedging
transactions in an attempt to protect against changes in foreign
currency exchange rates that would adversely affect the portfolio
position or an anticipated investment position. Since
consideration of the prospect for currency parities will be
incorporated into Bankers Trust's long-term investment decisions,
the Fund will not routinely enter into foreign currency hedging
transactions with respect to security transactions; however,
Bankers Trust believes that it is important to have the
flexibility to enter into foreign currency hedging transactions
when it determines that the transactions would be in the Fund's
best interest. Although these transactions tend to minimize the
risk of loss due to a decline in the value of the hedged currency,
at the same time they tend to limit any potential gain that might
be realized should the value of the hedged currency increase. The
precise matching of the forward contract amounts and the value of
the securities involved will not generally be possible because the
future value of such securities in foreign currencies will change
as a consequence of market movements in the value of such
securities between the date the forward contract is entered into
and the date it matures. The projection of currency market
movements is extremely difficult, and the successful execution of
a hedging strategy is highly uncertain.
While these contracts are not presently regulated by the
CFTC, the CFTC may in the future assert authority to regulate
forward contracts. In such event the Fund's ability to utilize
forward contracts in the manner set forth in the Prospectus may be
restricted. Forward contracts may reduce the potential gain from
a positive change in the relationship between the U.S. dollar and
foreign currencies. Unanticipated changes in currency prices may
result in poorer overall performance for the Fund than if it had
not entered into such contracts. The use of foreign currency
forward contracts may not eliminate fluctuations in the underlying
U.S. dollar equivalent value of the prices of or rates of return
on the Fund's foreign currency denominated portfolio securities
and the use of such techniques will subject the Fund to certain
risks.
The matching of the increase in value of a forward contract
and the decline in the U.S. dollar equivalent value of the foreign
currency denominated asset that is the subject of the hedge
generally will not be precise. In addition, the Fund may not
always be able to enter into foreign currency forward contracts at
attractive prices and this will limit the Fund's ability to use
such contracts to hedge its assets.
Investment Restrictions
The following investment restrictions are "fundamental
policies" of the Fund and may not be changed without the approval
of a "majority of the outstanding voting securities" of the Fund.
"Majority of the outstanding voting securities" under the 1940
Act, and as used in this Statement of Additional Information and
the Prospectus, means, with respect to the Fund, the lesser of (i)
67% or more of the outstanding voting securities of the Fund
present at a meeting, if the holders of more than 50% of the
outstanding voting securities of the Fund are present or
represented by proxy or (ii) more than 50% of the outstanding
voting securities of the Fund.
As a matter of fundamental policy, the Fund may not:
(1) borrow money or mortgage or hypothecate assets of the Fund,
except that in an amount not to exceed 1/3 of the current value of
the Fund's assets, it may borrow money as a temporary measure for
extraordinary or emergency purposes and enter into reverse
repurchase agreements or dollar roll transactions, and except that
it may pledge, mortgage or hypothecate not more than 1/3 of such
assets to secure such borrowings (it is intended that money would
be borrowed only from banks and only either to accommodate
requests for the withdrawal of beneficial interests (redemption of
shares) while effecting an orderly liquidation of portfolio
securities or to maintain liquidity in the event of an
unanticipated failure to complete a portfolio security transaction
or other similar situations) or reverse repurchase agreements,
provided that collateral arrangements with respect to options and
futures, including deposits of initial deposit and variation
margin, are not considered a pledge of assets for purposes of this
restriction (as an operating policy, the Funds may not engage in
dollar roll transactions);
(2) underwrite securities issued by other persons except insofar
as the Trust or the Funds may technically be deemed an underwriter
under the 1933 Act in selling a portfolio security;
(3) make loans to other persons except: (a) through the lending
of the Fund's portfolio securities and provided that any such
loans not exceed 30% of the Fund's total assets (taken at market
value); or (b) through the use of repurchase agreements or the
purchase of short-term obligations;
(4) purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or
interests therein), in the ordinary course of business (except
that the Trust may hold and sell, for the Fund's portfolio, real
estate acquired as a result of the Fund's ownership of
securities);
(5) concentrate its investments in any particular industry
(excluding U.S. Government securities), but if it is deemed
appropriate for the achievement of the Fund's investment
objective(s), up to 25% of its total assets may be invested in any
one industry;
(6) issue any senior security (as that term is defined in the
1940 Act) if such issuance is specifically prohibited by the
1940 Act or the rules and regulations promulgated thereunder,
(except to the extent permitted in investment restriction No. 1),
the provided that collateral arrangements with respect to options
and futures, including deposits of initial deposit and variation
margin, are not considered to be the issuance of a senior security
for purposes of this restriction; and
(7) purchase the securities of any one issuer if as a result more
than 5% of the value of its total assets would be invested in the
securities of such issuer or the Fund would own more than 10% of
the outstanding voting securities of such issuer, except that up
to 25% of the value of its total assets may be invested without
regard to these 5% limitation and provided that there is no
limitation with respect to investments in U.S. Government
Securities.
Additional investment restrictions adopted by the Fund,
which may be changed by the Board of Trustees, provide that the
Fund may not:
(i) purchase any security or evidence of interest
therein on margin, except that such short-term credit as may be
necessary for the clearance of purchases and sales of securities
may be obtained and except that deposits of initial deposit and
variation margin may be made in connection with the purchase,
ownership, holding or sale of futures;
(ii) invest for the purpose of exercising control or
management;
(iii) purchase for the Fund securities of any
investment company if such purchase at the time thereof would
cause: (a) more than 10% of the Fund's total assets (taken at the
greater of cost or market value) to be invested in the securities
of such issuers; (b) more than 5% of the Fund's total assets
(taken at the greater of cost or market value) to be invested in
any one investment company; or (c) more than 3% of the outstanding
voting securities of any such issuer to be held for the Fund (as
an operating policy, the Fund will not invest in another open-end
registered investment company); or
(iv) invest more than 15% of the Fund's net assets
(taken at the greater of cost or market value) in securities that
are illiquid or not readily marketable not including (a) Rule 144A
securities that have been determined to be liquid by the Board of
Trustees; and (b) commercial paper that is sold under section 4(2)
of the 1933 Act which is not traded flat or in default as to
interest or principal.
There will be no violation of any investment restriction if
that restriction is complied with at the time the relevant action
is taken notwithstanding a later change in market value of an
investment, in net or total assets, in the securities rating of
the investment, or any other later change.
The Fund will comply with the state securities laws and
regulations of all states in which it is registered.
Portfolio Transactions and Brokerage Commissions
The Manager is responsible for decisions to buy and sell
securities, futures contracts and options on such securities and
futures for the Fund, the selection of brokers, dealers and
futures commission merchants to effect transactions and the
negotiation of brokerage commissions, if any. Broker-dealers may
receive brokerage commissions on fund transactions, including
options, futures and options on futures transactions and the
purchase and sale of underlying securities upon the exercise of
options. Orders may be directed to any broker-dealer or futures
commission merchant, including to the extent and in the manner
permitted by applicable law, Bankers Trust or its subsidiaries or
affiliates. Purchases and sales of certain fund securities on
behalf of the Fund are frequently placed by the Manager with the
issuer or a primary or secondary market-maker for these securities
on a net basis, without any brokerage commission being paid by the
Fund. Trading does, however, involve transaction costs.
Transactions with dealers serving as market-makers reflect the
spread between the bid and asked prices. Transaction costs may
also include fees paid to third parties for information as to
potential purchasers or sellers of securities. Purchases of
underwritten issues may be made which will include an underwriting
fee paid to the underwriter.
The Manager seeks to evaluate the overall reasonableness of
the brokerage commissions paid (to the extent applicable) in
placing orders for the purchase and sale of securities for the
Fund taking into account such factors as price, commission
(negotiable in the case of national securities exchange
transactions), if any, size of order, difficulty of execution and
skill required of the executing broker-dealer through familiarity
with commissions charged on comparable transactions, as well as by
comparing commissions paid by the Fund to reported commissions
paid by others. The Manager reviews on a routine basis commission
rates, execution and settlement services performed, making
internal and external comparisons.
The Manager is authorized, consistent with Section 28(e) of
the Securities Exchange Act of 1934, as amended, when placing
portfolio transactions for the Fund with a broker to pay a
brokerage commission (to the extent applicable) in excess of that
which another broker might have charged for effecting the same
transaction on account of the receipt of research, market or
statistical information. The term "research, market or
statistical information" includes advice as to the value of
securities; the advisability of investing in, purchasing or
selling securities; the availability of securities or purchasers
or sellers of securities; and furnishing analyses and reports
concerning issuers, industries, securities, economic factors and
trends, portfolio strategy and the performance of accounts.
Consistent with the policy stated above, the Rules of Fair
Practice of the National Association of Securities Dealers, Inc.
and such other policies as the Trustees of the Trust may
determine, the Manager may consider sales of shares of a Fund as a
factor in the selection of broker-dealers to execute portfolio
transactions. Bankers Trust will make such allocations if
commissions are comparable to those charged by nonaffiliated,
qualified broker-dealers for similar services.
Higher commissions may be paid to firms that provide
research services to the extent permitted by law. Bankers Trust
may use this research information in managing the Fund's assets,
as well as the assets of other clients.
Except for implementing the policies stated above, there is
no intention to place portfolio transactions with particular
brokers or dealers or groups thereof. In effecting transactions
in over-the-counter securities, orders are placed with the
principal market-makers for the security being traded unless,
after exercising care, it appears that more favorable results are
available otherwise.
Although certain research, market and statistical
information from brokers and dealers can be useful to the Fund and
to the Manager, it is the opinion of the management of the Trust
that such information is only supplementary to the Manager's own
research effort, since the information must still be analyzed,
weighed and reviewed by the Manager's staff. Such information may
be useful to the Manager in providing services to clients other
than the Fund, and not all such information is used by the Manager
in connection with the Fund. Conversely, such information
provided to the Manager by brokers and dealers through whom other
clients of the Manager effect securities transactions may be
useful to the Manager in providing services to the Fund.
In certain instances there may be securities which are
suitable for the Fund as well as for one or more of the Manager's
other clients. Investment decisions for the Fund and for the
Manager's other clients are made with a view to achieving their
respective investment objectives. It may develop that a
particular security is bought or sold for only one client even
though it might be held by, or bought or sold for, other clients.
Likewise, a particular security may be bought for one or more
clients when one or more clients are selling that same security.
Some simultaneous transactions are inevitable when several clients
receive investment advice from the same investment adviser,
particularly when the same security is suitable for the investment
objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same
security, the securities are allocated among clients in a manner
believed to be equitable to each. It is recognized that in some
cases this system could have a detrimental effect on the price or
volume of the security as far as the Fund is concerned. However,
it is believed that the ability of the Fund to participate in
volume transactions will produce better executions for the Fund.
PERFORMANCE INFORMATION
Standard Performance Information
From time to time, quotations of the Fund's performance may
be included in advertisements, sales literature or shareholder
reports. These performance figures are calculated in the
following manner:
Total Return: The Fund's average annual total return is
calculated for certain periods by determining the average annual
compounded rates of return over those periods that would cause an
investment of $1,000 (made at the maximum public offering price
with all distributions reinvested) to reach the value of that
investment at the end of the periods. The Fund may also calculate
total return figures which represent aggregate performance over a
period or year-by-year performance.
Performance Results: Any total return quotation provided
for the Fund should not be considered as representative of the
performance of the Fund in the future since the net asset value
and offering price of shares of the Fund will vary based not only
on the type, quality and maturities of the securities held in the
Fund, but also on changes in the current value of such securities
and on changes in the expenses of the Fund. These factors and
possible differences in the methods used to calculate total return
should be considered when comparing the total return of the Fund
to total returns published for other investment companies or other
investment vehicles. Total return reflects the performance of
both principal and income.
Comparison of Fund Performance
Comparison of the quoted nonstandardized performance of
various investments is valid only if performance is calculated in
the same manner. Since there are different methods of calculating
performance, investors should consider the effect of the methods
used to calculate performance when comparing performance of the
Fund with performance quoted with respect to other investment
companies or types of investments.
In connection with communicating its performance to current
or prospective shareholders, the Fund also may compare these
figures to the performance of other mutual funds tracked by mutual
fund rating services or to unmanaged indices which may assume
reinvestment of dividends but generally do not reflect deductions
for administrative and management costs.
Evaluations of the Fund's performance made by independent
sources may also be used in advertisements concerning the Fund.
Sources for the Fund's performance information could include the
following: Asian Wall Street Journal, Barron's, Business Week,
Changing Times, The Kiplinger Magazine, Consumer Digest, Financial
Times, Financial World, Forbes, Fortune, Global Investor,
Investor's Daily, Lipper Analytical Services, Inc.'s Mutual Fund
Performance Analysis, Money, Morningstar Inc., New York Times,
Personal Investing News, Personal Investor, Success, U.S. News and
World Report, Value Line, Wall Street Journal, Weisenberger
Investment Companies Services and Working Women.
VALUATION OF SECURITIES; REDEMPTION IN KIND
Equity and debt securities (other than short-term debt
obligations maturing in 60 days or less), including listed
securities and securities for which price quotations are
available, will normally be valued on the basis of market
valuations furnished by a pricing service. Short-term debt
obligations and money market securities maturing in 60 days or
less are valued at amortized cost, which approximates market.
Securities for which market quotations are not available are
valued by Bankers Trust pursuant to procedures adopted by the
Trust's Board of Trustees. It is generally agreed that securities
for which market quotations are not readily available should not
be valued at the same value as that carried by an equivalent
security which is readily marketable.
The problems inherent in making a good faith determination
of value are recognized in the codification effected by SEC
Financial Reporting Release No. 1 ("FRR 1" (formerly Accounting
Series Release No. 113)) which concludes that there is "no
automatic formula" for calculating the value of restricted
securities. It recommends that the best method simply is to
consider all relevant factors before making any calculation.
According to FRR 1 such factors would include consideration of
the:
type of security involved, financial statements, cost
at date of purchase, size of holding, discount from market value
of unrestricted securities of the same class at the time of
purchase, special reports prepared by analysts, information as to
any transactions or offers with respect to the security, existence
of merger proposals or tender offers affecting the security, price
and extent of public trading in similar securities of the issuer
or comparable companies, and other relevant matters.
To the extent that the Fund purchases securities which are
restricted as to resale or for which current market quotations are
not available, the Manager of the Fund will value such securities
based upon all relevant factors as outlined in FRR 1.
The Trust, on behalf of the Fund, reserves the right, if
conditions exist which make cash payments undesirable, to honor
any request for redemption or repurchase order by making payment
in whole or in part in readily marketable securities chosen by the
Trust, and valued as they are for purposes of computing the Fund's
net asset value (a redemption in kind). If payment is made to a
Fund shareholder in securities, the shareholder may incur
transaction expenses in converting these securities into cash.
The Trust, on behalf of the Fund, and the Fund have elected,
however, to be governed by Rule 18f-1 under the 1940 Act as a
result of which the Fund is obligated to redeem shares with
respect to any one investor during any 90-day period, solely in
cash up to the lesser of $250,000 or 1% of the net asset value of
the Fund at the beginning of the period.
MANAGEMENT OF THE TRUST
The Board of Trustees of the Trust is composed of persons
experienced in financial matters who meet throughout the year to
oversee the activities of the Fund. In addition, the Trustees
review contractual arrangements with companies that provide
services to the Fund and review the Fund's performance.
The Trustees and officers of the Trust and their principal
occupations during the past five years are set forth below. Their
titles may have varied during that period. Asterisks indicate
those Trustees who are "interested persons" (as defined in the
1940 Act) of the Trust. Unless otherwise indicated, the address
of each Trustee and officer is One Exchange Place, Boston,
Massachusetts.
Trustees and Officers
Name, Address
and Age
Position
Held with
the Trust
Principal
Occupations
During
Past 5 Years
Robert R.
Coby, 45
118 North
Drive
North
Massapequa,
NY 11758
Trustee
President of
Leadership
Capital Inc.
since 1995;
Chief
Operating
Officer of CS
First Boston
Investment
Management
(1994-1995);
President of
Blackhawk L.P.
(1993-1994);
Chief
Financial
Officer of
Equitable
Capital prior
to February
1993.
Desmond G.
FitzGerald,
52
2015 West
Main Street
Stamford, CT
06902
Trustee
Chairman of
North American
Properties
Group since
January 1987.
James S.
Pasman, Jr.,
65
29 The
Trillium
Pittsburgh,
PA 15238
Trustee
Retired;
President and
Chief
Operations
Officer of
National
Intergroup
Inc. (1989-
1991).
Name, Address
and Age
Position
Held with
the Trust
Principal
Occupations
During
Past 5 Years
*William E.
Small, 55
Trustee
and
President
Executive Vice
President of
First Data
Investor
Services Group
Inc. ("First
Data") since
1994; Senior
Vice President
of The
Shareholder
Services
Group, Inc.
(1993-1994);
independent
consultant
(1990-1993).
Michael
Kardok, 37
Vice
President
and
Treasurer
Vice President
of First Data
since May
1994; Vice
President of
The Boston
Company
Advisors Inc.
prior to May
1994.
Julie A.
Tedesco, 39
Vice
President
and
Secretary
Counsel of
First Data
since May
1994; Counsel
of The Boston
Company
Advisors Inc.
(1992-1994);
Associate at
Hutchins,
Wheeler &
Dittmar prior
to July 1992.
Mr. Kardok and Ms. Tedesco also hold similar positions for
other investment companies for which First Data Distributors or an
affiliate serves as the principal underwriter.
No person who is an officer or director of Bankers Trust is
an officer or Trustee of the Trust. No director, officer or
employee of First Data Distributors or any of its affiliates will
receive any compensation from the Trust for serving as an officer
or Trustee of the Trust.
As of September 1, 1996 the Trustees and officers of the
Trust owned in the aggregate less than 1% of the shares of the
Fund or the Trust (all series taken together).
Investment Manager
Under the terms of the Fund's investment management
agreement with Bankers Trust (the "Management Agreement"), Bankers
Trust manages the Fund subject to the supervision and direction of
the Board of Trustees of the Trust. Bankers Trust will: (i) act
in strict conformity with the Trust's Declaration of Trust, the
1940 Act and the Investment Advisers Act of 1940, as the same may
from time to time be amended; (ii) manage the Fund in accordance
with the Fund's investment objectives, restrictions and policies;
(iii) make investment decisions for the Fund; (iv) place purchase
and sale orders for securities and other financial instruments on
behalf of the Fund; (v) oversee the administration of all aspects
of the Trust's business and affairs; and (vi) supervise the
performance of professional services provided by others.
Bankers Trust bears all expenses in connection with the
performance of services under the Management Agreement. The Fund
bears certain other expenses incurred in its operation, including:
taxes, interest, brokerage fees and commissions, if any; fees of
Trustees of the Trust who are not officers, directors or employees
of Bankers Trust, First Data Distributors or any of their
affiliates; SEC fees and state Blue Sky qualification fees;
charges of custodians and transfer and dividend disbursing agents;
certain insurance premiums; outside auditing and legal expenses;
cost of maintenance of corporate existence; costs attributable to
investor services, including, without limitation, telephone and
personnel expenses; costs of preparing and printing prospectuses
and statements of additional information for regulatory purposes
and for distribution to existing shareholders; costs of
shareholders' reports and meetings of shareholders, officers and
Trustees of the Trust; and any extraordinary expenses.
Bankers Trust may have deposit, loan and other commercial
banking relationships with the issuers of obligations which may be
purchased on behalf of the Fund, including outstanding loans to
such issuers which could be repaid in whole or in part with the
proceeds of securities so purchased. Such affiliates deal, trade
and invest for their own accounts in such obligations and are
among the leading dealers of various types of such obligations.
Bankers Trust, in making its investment decisions, does not obtain
or use material inside information in its possession or in the
possession of any of its affiliates. In making investment
recommendations for the Fund, Bankers Trust will not inquire or
take into consideration whether an issuer of securities proposed
for purchase or sale by the Fund is a customer of Bankers Trust,
its parent or its subsidiaries or affiliates and in dealing with
its customers, Bankers Trust, its parent, subsidiaries and
affiliates will not inquire or take into consideration whether
securities of such customers are held by any fund managed by
Bankers Trust or any such affiliate.
The Fund's prospectus contains disclosure as to the amount
of Bankers Trust's investment advisory and administration and
services fees.
Bankers Trust has agreed that if in any fiscal year the
aggregate expenses of the Fund (including fees pursuant to the
Management Agreement, but excluding interest, taxes, brokerage
and, if permitted by the relevant state securities commissions,
extraordinary expenses) exceed the expense limitation of any state
having jurisdiction over the Fund, Bankers Trust will reimburse
the Fund for the excess expense to the extent required by state
law. As of the date of this Statement of Additional Information,
the most restrictive annual expense limitation applicable to the
Fund is 2.50% of the Fund's first $30 million of average annual
net assets, 2.00% of the next $70 million of average annual assets
and 1.50% of the remaining average annual net assets.
Administrator
First Data, One Exchange Place, Boston, Massachusetts 02109,
serves as administrator of the Fund. As administrator, First Data
is obligated on a continuous basis to provide such administrative
services as the Board of Trustees of the Trust reasonably deems
necessary for the proper administration of the Fund. First Data
will generally assist in all aspects of the Fund's operations;
supply and maintain office facilities (which may be in First
Data's own offices), statistical and research data, data
processing services, clerical, accounting, bookkeeping and
recordkeeping services (including without limitation the
maintenance of such books and records as are required under the
1940 Act and the rules thereunder, except as maintained by other
agents), internal auditing, executive and administrative services,
and stationery and office supplies; prepare reports to
shareholders or investors; prepare and file tax returns; supply
financial information and supporting data for reports to and
filings with the SEC and various state Blue Sky authorities;
supply supporting documentation for meetings of the Board of
Trustees; provide monitoring reports and assistance regarding
compliance with the Declaration of Trust, by-laws, investment
objectives and policies and with Federal and state securities
laws; arrange for appropriate insurance coverage; calculate net
asset values, net income and realized capital gains or losses, and
negotiate arrangements with, and supervise and coordinate the
activities of, agents and others to supply services.
Custodian and Transfer Agent
Bankers Trust, 130 Liberty Stree (One Bankers Trust Plaza),
New York, New York 10006, serves as custodian for the Fund. As
custodian, it holds the Fund's assets. Bankers Trust will comply
with the self-custodian provisions of Rule 17f-2 under the 1940
Act.
First Data serves as transfer agent of the Trust. Under its
transfer agency agreement with the Trust, First Data maintains the
shareholder account records for the Fund, handles certain
communications between shareholders and the Fund and causes to be
distributed any dividends and distributions payable by the Fund.
Bankers Trust and First Data may be reimbursed by the Fund
for out-of-pocket expenses.
Use of Name
The Trust and Bankers Trust have agreed that the Trust may
use "BT" as part of its name for so long as Bankers Trust serves
as investment manager to the Fund. The Trust has acknowledged
that the term "BT" is used by and is a property right of certain
subsidiaries of Bankers Trust and that those subsidiaries and/or
Bankers Trust may at any time permit others to use that term.
The Trust may be required, on 60 days' notice from Bankers
Trust at any time, to abandon use of the acronym "BT" as part of
its name. If this were to occur, the Trustees would select an
appropriate new name for the Trust, but there would be no other
material effect on the Trust, its shareholders or activities.
Banking Regulatory Matters
Bankers Trust has been advised by its counsel that in its
opinion Bankers Trust may perform the services for the Fund
contemplated by the Management Agreement and other activities for
the Fund described in the Prospectus and this Statement of
Additional Information without violation of the Glass-Steagall Act
or other applicable banking laws or regulations. However, counsel
has pointed out that future changes in either Federal or state
statutes and regulations concerning the permissible activities of
banks or trust companies, as well as future judicial or
administrative decisions or interpretations of present and future
statutes and regulations, might prevent Bankers Trust from
continuing to perform those services for the Trust and the Fund.
State laws on this issue may differ from the interpretations of
relevant Federal law and banks and financial institutions may be
required to register as dealers pursuant to state securities law.
If the circumstances described above should change, the Boards of
Trustees would review the relationships with Bankers Trust and
consider taking all actions necessary in the circumstances.
Counsel and Independent Accountants
Willkie Farr & Gallagher, One Citicorp Center, 153 East 53rd
Street, New York, New York 10022-4669, serves as Counsel to the
Trust and the Fund. Ernst & Young L.L.P., 787 Seventh Avenue, New
York, New York 10019, acts as independent accountants of the Trust
and the Fund.
ORGANIZATION OF THE TRUST
Shares of the Trust do not have cumulative voting rights,
which means that holders of more than 50% of the shares voting for
the election of Trustees can elect all Trustees. Shares are
transferable but have no preemptive, conversion or subscription
rights. Shareholders generally vote by Fund, except with respect
to the election of Trustees and the ratification of the selection
of independent accountants.
Through its separate accounts the Companies are the Fund's
sole stockholders of record, so under the 1940 Act, the Companies
are deemed to be in control of the Fund. Nevertheless, when a
shareholders' meeting occurs, each Company solicits and accepts
voting instructions from its Contractowners who have allocated or
transferred monies for a investment in the Fund as of the record
date of the meeting. Each Company then votes the Fund's shares
that are attributable to its Contractowners' interest in the Fund
in proportion to the voting instructions received. Each Company
will vote any share that it is entitled to vote directly due to
amounts it has contributed or accumulated in its separate accounts
in the manner described in the offering memoranda for its variable
annuities and variable life insurance policies.
Massachusetts law provides that shareholders could under
certain circumstances be held personally liable for the
obligations of the Trust. However, the Trust's Declaration of
Trust disclaims shareholder liability for acts or obligations of
the Trust and requires that notice of this disclaimer be given in
each agreement, obligation or instrument entered into or executed
by the Trust or a Trustee. The Declaration of Trust provides for
indemnification from the Trust's property for all losses and
expenses of any shareholder held personally liable for the
obligations of the Trust. Thus, the risk of a shareholder's
incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust itself would be unable
to meet its obligations, a possibility that the Trust believes is
remote. Upon payment of any liability incurred by a Trust, the
shareholder paying the liability will be entitled to reimbursement
from the general assets of the Trust. The Trustees intend to
conduct the operations of the Trust in a manner so as to avoid, as
far as possible, ultimate liability of the shareholders for
liabilities of the Trust.
The Trust was organized on January 19, 1996.
TAXATION
Taxation of the Funds
The Trust intends to qualify annually and to elect the Fund
to be treated as a regulated investment company under the Code.
As a regulated investment company, the Fund will not be
subject to U.S. Federal income tax on its investment company
taxable income and net capital gains (the excess of net long-term
capital gains over net short-term capital losses), if any, that it
distributes to its shareholders, that is, the Companies' separate
accounts. The Fund intends to distribute to its shareholders, at
least annually, substantially all of its investment company
taxable income and net capital gains and, therefore, does not
anticipate incurring Federal income tax liability.
The Code and Treasury Department regulations promulgated
thereunder require that mutual funds that are offered through
insurance company separate accounts must meet certain
diversification requirements to preserve the tax-deferred benefits
provided by the variable contracts which are offered in connection
with such separate accounts. The Manager intends to diversify the
Fund's investments in accordance with those requirements. The
offering memoranda for each Company's variable annuities and
variable life insurance policies describe the federal income tax
treatment of distributions from such contracts.
To comply with regulations under Section 817(h) of the Code,
the Fund will be required to diversify its investments so that on
the last day of each calendar quarter no more than 55% of the
value of its assets is represented by any one investment, no more
than 70% is represented by any two investments, no more than 80%
is represented by any three investments and no more than 90% is
represented by any four investments. Generally, all securities of
the same issuer are treated as a single investment. For the
purposes of Section 817(h) of the Code, obligations of the U.S.
Treasury and each U.S. Government instrumentality are treated as
securities of separate issuers. The Treasury Department has
indicated that it may issue future pronouncements addressing the
circumstances in which a variable annuity contract owner's control
of the investments of a separate account may cause the variable
contract owner, rather than the separate account's sponsoring
insurance company, to be treated as the owner of the assets held
by the separate account. If the variable annuity contract owner
is considered the owner of the securities underlying the separate
account, income and gains produced by those securities would be
included currently in the variable annuity contract owner's gross
income. It is not known what standards will be set forth in such
pronouncements or when, if at all, these pronouncements may be
issued. In the event that rules or regulations are adopted, there
can be no assurance that the Fund will be able to operate as
described currently in the Prospectus or that the Fund will not
have to change its investment policies or goals.
The foregoing is only a brief summary of important tax law
provisions that affect the Fund. Other Federal, state or local
tax law provisions may also affect the Fund and its operations.
Anyone who is considering allocating, transferring or withdrawing
monies held under a variable contract to or from the Fund should
consult a qualified tax adviser.
Distributions
All dividends and capital gains distributions paid by the
Fund will be automatically reinvested, at net asset value, by the
Companies' separate accounts in additional shares of the Fund.
There is no fixed dividend rate, and there can be no assurance
that the Fund will pay any dividends to realize any capital gains.
However, the Fund currently intents to pay dividends and capital
gains distributions, if any, on an annual basis. The offering
memorandum for a Company's variable annuity or variable life
insurance policies describes the frequency of distributions to
Contractowners and the Federal income tax treatment of
distributions from such contracts to Contractowners.
Sale of Shares
Any gain or loss realized by a shareholder upon the sale or
other disposition of shares of the Fund, or upon receipt of a
distribution in complete liquidation of the Fund, generally will
be a capital gain or loss which will be long-term or short-term,
generally depending upon the shareholder's holding period for the
shares. Any loss realized on a sale or exchange will be
disallowed to the extent the shares disposed of are replaced
(including shares acquired pursuant to a dividend reinvestment
plan) within a period of 61 days beginning 30 days before and
ending 30 days after disposition of the shares. In such a case,
the basis of the shares acquired will be adjusted to reflect the
disallowed loss. Any loss realized by a shareholder on a
disposition of fund shares held by the shareholder for six months
or less will be treated as a long-term capital loss to the extent
of any distributions of net capital gains received by the
shareholder with respect to such shares.
Shareholders will be notified annually as to the U.S.
Federal tax status of distributions.
Foreign Withholding Taxes
Income received by the Fund from sources within foreign
countries may be subject to withholding and other taxes imposed by
such countries.
Backup Withholding
The Fund may be required to withhold U.S. Federal income tax
at the rate of 31% of all taxable distributions payable to
shareholders who fail to provide the Fund with their correct
taxpayer identification number or to make required certifications,
or who have been notified by the Internal Revenue Service that
they are subject to backup withholding. Corporate shareholders
and certain other shareholders specified in the Code generally are
exempt from such backup withholding. Backup withholding is not an
additional tax. Any amounts withheld may be credited against the
shareholder's U.S. Federal income tax liability.
Other Taxation
The Trust is organized as a Massachusetts business trust
and, under current law, neither the Trust nor the Fund is viable
for any income or franchise tax in the Commonwealth of
Massachusetts, provided that the Fund continues to qualify as a
regulated investment company under Subchapter M of the Code.
Fund shareholders may be subject to state and local taxes on
their fund distributions. Shareholders are advised to consult
their own tax advisers with respect to the particular tax
consequences to them of an investment in the Fund.
Investment Manager of the Fund
bankers trust global investment management
a unit of
BANKERS TRUST COMPANY
Administrator
first data investor services group, inc.
Distributor
FIRST DATA distributors, inc.
Custodian
BANKERS TRUST COMPANY
Transfer Agent
first data investor services group, inC.
Independent Accountants
ERNST & YOUNG LLP
Counsel
WILLKIE FARR & GALLAGHER
No person has been authorized to give any information
or to make any representations other than those contained in
the Fund's Prospectuses, the Statement of Additional
Information or the Trust's official sales literature in
connection with the offering of the Fund's shares and, if
given or made, such other information or representations
must not be relied on as having been authorized by the
Trust. Neither the Prospectus nor this Statement of
Additional Information constitutes an offer in any state in
which, or to any person to whom, such offer may not lawfully
be made.
BT insurance funds trust
prospectus: February 5, 1997 as supplemented june 16, 1997
Equity 500 Index Fund
This Prospectus offers shares of the Equity 500 Index Fund
(the "Fund"). The Fund is a series of BT Insurance Funds
Trust (the "Trust"), which is an open-end management
investment company currently having six series. Shares of
the Fund are available to the public only through the
purchase of certain variable annuity and variable life
insurance contracts ("Contract(s)") issued by various
insurance companies (the "Companies").
The Fund seeks to replicate as closely as possible the
performance of the Standard & Poor's 500 Composite Stock
Price Index before the deduction of Fund expenses (the
"Expenses"). There is no assurance, however, that the Fund
will achieve its stated objective.
Bankers Trust Company ("Bankers Trust") is the investment
manager (the "Manager") of the Fund.
Please read this Prospectus carefully before investing and
retain it for future reference. It contains important
information about the Fund that you should know and can
refer to in deciding whether the Fund's goals match your
own.
A Statement of Additional Information ("SAI") with the same
date has been filed with the Securities and Exchange
Commission (SEC), and is incorporated herein by reference.
You may request a free copy of the SAI by calling the Trust
at the Customer Service Center at the telephone number shown
in the accompanying prospectus.
Fund shares are not deposits or obligations of, or
guaranteed by, Bankers Trust or any depository institution.
Shares are not insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board or any other agency.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
bankers trust global investment management
a unit of bankers trust company
Investment Manager of the Fund
FIRST DATA distributors, inc.
Distributor
4400 Computer Drive
Westborough, MA 01581
TABLE OF CONTENTS
Page
THE FUND 3
Who May Want to Invest
Investment Principles and Risks
THE FUND IN DETAIL 4
Investment Objectives and Policies
Risk Factors and Certain Securities and Investment
Practices
Net Asset Value
Performance Information and Reports
Management of the Trust
SHAREHOLDER AND ACCOUNT POLICIES 13
Purchase and Redemption of Shares
Dividends, Distributions and Taxes
THE FUND
The Fund seeks to replicate as closely as possible (before
deduction of Expenses) the total return of the Standard &
Poor's 500 Composite Stock Price Index (the "S&P 500"), an
index emphasizing large-capitalization stocks. The Fund
will include the common stock of those companies included in
the S&P 500, other than Bankers Trust New York Corporation,
selected on the basis of computer generated statistical
data, that are deemed representative of the industry
diversification of the entire S&P 500.
WHO MAY WANT TO INVEST
Shares of the Fund are available to the public only through
the purchase of Contracts issued by the Companies.
The Fund is not managed according to traditional methods of
"active" investment management, which involve the buying and
selling of securities based upon economic, financial and
market analysis and investment judgment. Instead, the Fund
utilizes a "passive" or "indexing" investment approach and
attempts to replicate the investment performance of the S&P
500 through statistical procedures.
The Fund may be appropriate for investors who are willing to
endure stock market fluctuations in pursuit of potentially
higher long-term returns. The Fund invests for growth and
does not pursue income. Over time, stocks, although more
volatile, have shown greater growth potential than other
types of securities. In the shorter term, however, stock
prices can fluctuate dramatically in response to market
factors.
The Fund is intended to be a long-term investment vehicle
and is not designated to provide investors with a means of
speculating on short-term market movements. The Fund is not
in itself a balanced investment plan. Investors should
consider their investment objective and tolerance for risk
when making an investment decision. When an investor sells
his or her Fund shares, they may be worth more or less than
what the investor paid for them.
INVESTMENT PRINCIPLES AND RISKS
The Fund's investments vary based on many factors. Stock
values fluctuate, sometimes dramatically, in response to the
activities of individual companies and general market and
economic conditions. Over time, however, stocks have shown
greater long-term growth potential than other types of
securities. Lower quality securities offer higher yields,
but also carry more risk.
General economic factors in the various world markets can
also impact the value of an investors investment. When
investors sell Fund shares, they may be worth more or less
than what the investors paid for them. See "Risk Factors
and Certain Securities and Investment Practices" for more
information.
THE FUND IN DETAIL
INVESTMENT OBJECTIVES AND POLICIES
The following is a discussion of the various investments of
and techniques employed by the Fund. Additional information
about the investment policies of the Fund appears in "Risk
Factors and Certain Securities and Investment Practices"
herein and in the Fund's SAI. There can be no assurance
that the investment objective of the Fund will be achieved.
The Fund seeks to replicate as closely as possible (before
deduction of Expenses) the total return of the S&P 500.
The S&P 500 is an index of 500 common stocks, most of which
trade on the New York Stock Exchange Inc. (the "NYSE").
Bankers Trust believes that the S&P 500 is representative of
the performance of publicly traded common stocks in the U.S.
in general.
In seeking to replicate the performance of the S&P 500,
before deduction of Expenses, Bankers Trust will attempt
over time to allocate the Fund's investment among common
stocks in approximately the same proportions as they are
represented in the S&P 500, beginning with the heaviest
weighted stocks that make up a larger portion of the Index's
value.
The Manager utilizes a two-stage sampling approach in
seeking to obtain its objective. Stage one, which
encompasses large capitalization stocks, maintains the stock
holdings at or near their benchmark weights. Large
capitalization stocks are defined as those securities which
represent 0.10% or more of the S&P 500. In stage two,
smaller stocks are analyzed and selected using risk
characteristics and industry weights in order to match the
sector and risk characteristics of the smaller companies in
the S&P 500. This approach helps to maximize Fund liquidity
while minimizing costs.
Bankers Trust generally will seek to match the composition
of the S&P 500 but usually will not invest the Fund's stock
portfolio to mirror the S&P 500 exactly. Because of the
difficulty and cost of executing relatively small stock
transactions, the Fund may not always be invested in the
less heavily weighted S&P 500 stocks, and may at times have
its portfolio weighted differently than the S&P 500,
particularly if the Fund has a low level of assets. In
addition, the Fund may omit or remove any S&P 500 stock from
the Fund if, following objective criteria, Bankers Trust
judges the stock to be insufficiently liquid or believes the
merit of the investment has been substantially impaired by
extraordinary events or financial conditions. Bankers Trust
will not purchase the stock of Bankers Trust New York
Corporation, which is included in the S&P 500, and instead
will overweight its holdings of companies engaged in similar
businesses.
About the S&P 500. The S&P 500 is composed of 500 common
stocks, which are chosen by Standard & Poor's Corporation
("S&P") on a statistical basis to be included in the S&P
500. The inclusion of a stock in the S&P 500 in no way
implies that S&P believes the stock to be an attractive
investment. The 500 securities, most of which trade on the
NYSE, represented, as of December 31, 1996, approximately
79% of the market value of all U.S. common stocks. Each
stock in the S&P 500 is weighted by its market value.
Bankers Trust believes that the performance of the S&P 500
is representative of the performance of publicly traded
common stocks in general. The composition of the S&P 500 is
determined by S&P and is based on such factors as the market
capitalization and trading activity of each stock and its
adequacy as a representation of stocks in a particular
industry group, and may be changed from time to time.
The Fund is not sponsored, endorsed, sold or promoted by
S&P. S&P makes no representation or warranty, express or
implied, to the shareholders of the Fund or any member of
the public regarding the advisability of investing in
securities generally or in the Fund particularly or the
ability of the S&P 500 to track general stock market
performance.
S&P does not guarantee the accuracy and/or the completeness
of the S&P 500 or any data included therein.
S&P makes no warranty, express or implied, as to the results
to be obtained by the Fund, owners of the Fund, or any other
person or entity from the use of the S&P 500 or any data
included therein. S&P makes no express or implied
warranties and hereby expressly disclaims all such
warranties of merchantability or fitness for a particular
purpose or use with respect to the S&P 500 or any data
included therein.
For more information about the performance of the S&P 500,
see the SAI.
General
Over time, the correlation between the performance of the
Fund and the S&P 500 is expected to be 0.95 or higher before
deduction of Fund expenses. A correlation of 1.00 would
indicate perfect correlation, which would be achieved when
the net asset value of the Fund, including the value of its
dividend and any capital gain distributions, increases or
decreases in exact proportion to changes in the S&P 500.
The Fund's ability to track the S&P 500 may be affected by,
among other things, transaction costs, administration and
other expenses incurred by the Fund, changes in either the
composition of the S&P 500 or the assets of the Fund, and
the timing and amount of Fund investor contributions and
withdrawals, if any. In the unlikely event that a high
correlation is not achieved, the Trust's Board of Trustees
will consider alternatives. Because the Fund seeks to track
the S&P 500, Bankers Trust will not attempt to judge the
merits of any particular stock as an investment.
Under normal circumstances, the Fund will invest at least
80% of its assets in the securities of the S&P 500.
As a diversified fund, no more than 5% of the assets of the
Fund may be invested in the securities of one issuer (other
than U.S. Government Securities), except that up to 25% of
the Fund's assets may be invested without regard to this
limitation. The Fund will not invest more than 25% of its
assets in the securities of issuers in any one industry. In
the unlikely event that the S&P 500 should concentrate to an
extent greater than that amount, the Funds ability to
achieve its objective may be impaired. These are
fundamental investment policies of the Fund which may not be
changed without shareholder approval. No more than 15% of
the Fund's net assets may be invested in illiquid or not
readily marketable securities (including repurchase
agreements and time deposits with maturities of more than
seven days). Additional investment policies of the Fund are
contained in the SAI.
The Fund may maintain up to 25% of its assets in short-term
debt securities and money market instruments to meet
redemption requests or to facilitate investment in the
securities of the S&P 500. Securities index futures
contracts and related options, warrants and convertible
securities may be used for several reasons: to simulate
full investment in the S&P 500 while retaining a cash
balance for fund management purposes, to facilitate trading,
to reduce transaction costs or to seek higher investment
returns when a futures contract, option, warrant or
convertible security is priced more attractively than the
underlying equity security or S&P 500. These instruments
may be considered derivatives. See "Risk Factors and
Certain Securities and Investment Practices -- Derivatives."
The use of derivatives for non-hedging purposes may be
considered speculative. While each of these securities can
be used as leveraged investments, the Fund may not use them
to leverage its net assets. No Fund will invest in such
instruments as part of a temporary defensive strategy (in
anticipation of declining stock prices) to protect the Fund
against potential market declines.
The Fund may lend its investment securities and purchase
securities on a when-issued and a delayed delivery basis.
See "Risk Factors and Certain Securities and Investment
Practices" for more information about the investment
practices of the Fund.
RISK FACTORS AND CERTAIN SECURITIES AND INVESTMENT PRACTICES
The following pages contain more detailed information about
types of instruments in which the Fund may invest and
strategies Bankers Trust may employ in pursuit of the Fund's
investment objective. A summary of risks and restrictions
associated with these instrument types and investment
practices is included as well.
Bankers Trust may not buy all of these instruments or use
all of these techniques to the full extent permitted unless
it believes that doing so will help the Fund achieve its
goal. Holdings and recent investment strategies are
described in the financial reports of the Fund, which are
sent to Fund shareholders on a semi-annual and annual basis.
Market Risk
As a mutual fund investing primarily in common stocks, the
Fund is subject to market risk --- i.e., the possibility
that common stock prices will decline over short or even
extended periods. The U.S. stock market tends to be
cyclical, with periods when stock prices generally rise and
periods when prices generally decline.
The Fund's investment objective is not a fundamental policy
and may be changed upon notice to, but without the approval
of, the Fund's shareholders. If there is a change in the
Fund's investment objective, the Fund's shareholders should
consider whether the Fund remains an appropriate investment
in light of their then-current needs. Shareholders of the
Fund will receive 30 days prior written notice with respect
to any change in the investment objective of the Fund. See
"Risk Factors and Certain Securities and Investment
Practices" in the SAI for a description of the fundamental
policies of the Fund that cannot be changed without approval
by "the vote of a majority of the outstanding voting
securities" (as defined in the Investment Company Act of
1940, as amended (the "1940 Act")) of the Fund.
For descriptions of the investment objective, policies and
restrictions of the Fund, see "The Fund in Detail" herein
and "Risk Factors and Certain Securities and Investment
Practices" herein and in the SAI. For descriptions of the
management and expenses of the Fund, see "Management of the
Trust" herein and in the SAI.
Short-Term Investments. The Fund may invest in certain
short-term fixed income securities. Such securities may be
used to invest uncommitted cash balances, to maintain
liquidity to meet shareholder redemptions or to serve as
collateral for the obligations underlying the Fund's
investment in securities index futures or related options or
warrants. These securities include: obligations issued or
guaranteed by the U.S. Government or any of its agencies or
instrumentalities or by any of the states, repurchase
agreements, time deposits, certificates of deposit, bankers'
acceptances and commercial paper.
U.S. Government Securities are obligations of, or guaranteed
by, the U.S. Government, its agencies or instrumentalities.
Some U.S. Government securities, such as Treasury bills,
notes and bonds, are supported by the full faith and credit
of the United States; others, such as those of the Federal
Home Loan Banks, are supported by the right of the issuer to
borrow from the Treasury; others, such as those of the
Federal National Mortgage Association, are supported by the
discretionary authority of the U.S. Government to purchase
the agency's obligations; and still others, such as those of
the Student Loan Marketing Association, are supported only
by the credit of the instrumentality.
Securities Lending. The Fund is permitted to lend up to 30%
of the total value of its securities. These loans must be
secured continuously by cash or equivalent collateral or by
a letter of credit at least equal to the market value of the
securities loaned plus accrued income. By lending its
securities, the Fund can increase its income by continuing
to receive income on the loaned securities as well as by the
opportunity to receive interest on the collateral. Any gain
or loss in the market price of the borrowed securities which
occurs during the term of the loan inures to the Fund and
its investors. In lending securities to brokers, dealers
and other organizations, the Fund is subject to risks which,
like those associated with other extensions of credit,
include delays in recovery and possible loss of rights in
the collateral should the borrower fail financially.
When Issued and Delayed Delivery Securities. The Fund may
purchase securities on a when-issued or delayed delivery
basis. Delivery of and payment for these securities may take
place as long as a month or more after the date of the
purchase commitment. The value of these securities is
subject to market fluctuation during this period and no
income accrues to the Fund until settlement takes place.
The Fund maintains with its custodian a segregated account
containing cash or liquid portfolio securities in an amount
at least equal to these commitments.
Derivatives
The Fund may invest in various instruments that are commonly
known as derivatives. Generally, a derivative is a financial
arrangement, the value of which is based on, or "derived"
from, a traditional security, asset, or market index. Some
"derivatives" such as mortgage-related and other asset-
backed securities are in many respects like any other
investment, although they may be more volatile or less
liquid than more traditional debt securities. There are, in
fact, many different types of derivatives and many different
ways to use them. There are a range of risks associated with
those uses. Futures and options are commonly used for
traditional hedging purposes to attempt to protect a fund
from exposure to changing interest rates, securities prices
or currency exchange rates and as a low cost method of
gaining exposure to a particular securities market without
investing directly in those securities. The Manager will
only use derivatives for cash management purposes.
Derivatives will not be used to increase portfolio risk
above the level that would be achieved using only
traditional investment securities or to acquire exposure to
changes in the value of assets or indices that by themselves
would not be purchased for the Fund.
Securities Index Futures and Related Options. The Fund may
enter into securities index futures contracts and related
options provided that not more than 5% of its assets are
required as a margin deposit for futures contracts or
options and provided that not more than 20% of the Fund's
assets are invested in futures and options at any time.
When the Fund has cash from new investments in the Fund or
holds a portion of its assets in money market instruments,
it may enter into index futures or options to attempt to
increase its exposure to the market. Strategies the Fund
could use to accomplish this include purchasing futures
contracts, writing put options and purchasing call options.
When the Fund wishes to sell securities, because of
shareholder redemptions or otherwise, it may use index
futures or options to hedge against market risk until the
sale can be completed. These strategies could include
selling futures contracts, writing call options and
purchasing put options.
Warrants. Warrants are instruments which entitle the holder
to buy underlying equity securities at a specific price for
a specific period of time. A warrant tends to be more
volatile than its underlying securities and ceases to have
value if it is not exercised prior to its expiration date.
In addition, changes in the value of a warrant do not
necessarily correspond to changes in the value of its
underlying securities.
Convertible Securities. The Fund may invest in convertible
securities which are a bond or preferred stock which may be
converted at a stated price within a specific period of time
into a specified number of shares of common stock of the
same or different issuer. Convertible securities are senior
to common stock in a corporation's capital structure, but
usually are subordinated to non-convertible debt securities.
While providing a fixed income stream -- generally higher in
yield than the income derived from a common stock but lower
than that afforded by a non-convertible debt security -- a
convertible security also affords an investor the
opportunity, through its conversion feature, to participate
in the capital appreciation of common stock into which it is
convertible.
In general, the market value of a convertible security is
the higher of its investment value (its value as a fixed
income security) or its conversion value (the value of the
underlying shares of common stock if the security is
converted). As a fixed income security, the market value of
a convertible security generally increases when interest
rates decline and generally decreases when interest rates
rise; however, the price of a convertible security generally
increases as the market value of the underlying stock
increases, and generally decreases as the market value of
the underlying stock declines. Investments in convertible
securities generally entail less risk than investments in
the common stock of the same issuer.
Further risks associated with the use of futures contracts,
options, warrants and convertible securities. The risk of
loss associated with futures contracts in some strategies
can be substantial due to both the low margin deposits
required and the extremely high degree of leverage involved
in futures pricing. As a result, a relatively small price
movement in a futures contract may result in an immediate
and substantial loss or gain. However, the Fund will not
use futures contracts, options, warrants and convertible
securities for speculative purposes or to leverage their net
assets. Accordingly, the primary risks associated with the
use of futures contracts, options, warrants and convertible
securities by the Fund are: (i) imperfect correlation
between the change in market value of the securities held by
the Fund and the prices of futures contracts, options,
warrants and convertible securities; and (ii) possible lack
of a liquid secondary market for a futures contract and the
resulting inability to close a futures position prior to its
maturity date. The risk of imperfect correlation will be
minimized by investing only in those contracts whose
behavior is expected to resemble that of the Fund's
underlying securities. The risk that the Fund will be
unable to close out a futures position will be minimized by
entering into stock transactions on an exchange with an
active and liquid secondary market. However, options,
warrants and convertible securities purchased or sold over-
the-counter may be less liquid than exchange-traded
securities. Illiquid securities, in general, may not
represent more than 15% of the net assets of the Fund.
Asset Coverage. To assure that futures and related options,
as well as when-issued and delayed-delivery securities, are
not used by the Fund to achieve excessive investment
leverage, the Fund will cover such transactions, as required
under applicable interpretations of the SEC, either by
owning the underlying securities, entering into an off-
setting transaction, or by establishing a segregated account
with the Fund's custodian containing cash or liquid
portfolio securities in an amount at all times equal to or
exceeding the Fund's commitment with respect to these
instruments or contracts.
Portfolio Turnover
The frequency of Fund transactions - the Fund's turnover
rate - will vary from year to year depending on market
conditions and the Fund's cash flows. The Fund's annual
portfolio turnover rate is not expected to exceed 100%.
NET ASSET VALUE
The Fund is open for business each day the NYSE is open
(each such day being a "Valuation Day"). The NYSE is
currently open on each day, Monday through Friday, except:
(a) January 1st, Presidents' Day (the third Monday in
February), Good Friday, Memorial Day (the last Monday in
May), July 4th, Labor Day (the first Monday in September),
Thanksgiving Day (the last Thursday in November) and
December 25th; and (b) the preceding Friday or the
subsequent Monday when one of the calendar-determined
holidays falls on a Saturday or Sunday, respectively.
The net asset value per share of the Fund is calculated once
on each Valuation Day as of the close of regular trading on
the NYSE, which under normal circumstances is 4:00 p.m., New
York time. The net asset value per share of the Fund is
computed by dividing the value of the Fund's assets, less
all liabilities, by the total number of its shares
outstanding. The Fund's securities and other assets are
valued primarily on the basis of market quotations or, if
quotations are not readily available, by a method which the
Fund's Board of Trustees believes accurately reflects fair
value.
PERFORMANCE INFORMATION AND REPORTS
The Fund's performance may be used from time to time in
advertisements, shareholder reports or other communications
to existing or prospective owners of the Companies' variable
contracts. When performance information is provided in
advertisements, it will include the effect of all charges
deducted under the terms of the specified contract, as well
as all recurring and non-recurring charges incurred by the
Fund. Performance information may include the Fund's
investment results and/or comparisons of its investment
results to various unmanaged indices or results of other
mutual funds or investment or savings vehicles. The Fund's
investment results as used in such communications will be
calculated on a total rate of return basis in the manner set
forth below. From time to time, fund rankings may be quoted
from various sources, such as Lipper Analytical Services,
Inc., Value Line and Morningstar Inc.
The Trust may provide period and average annualized "total
return" quotations for the Fund. The Fund's "total return"
refers to the change in the value of an investment in the
Fund over a stated period based on any change in net asset
value per share and including the value of any shares
purchasable with any dividends or capital gains distributed
during such period. Period total return may be annualized.
An annualized total return is a compounded total return
which assumes that the period total return is generated over
a one-year period, and that all dividends and capital gain
distributions are reinvested. An annualized total return
will be higher than a period total return if the period is
shorter than one year, because of the compounding effect.
Unlike some bank deposits or other investments which pay a
fixed yield for a stated period of time, the total return of
the Fund will vary depending upon interest rates, the
current market value of the securities held by the Fund and
changes in the Fund's expenses. In addition, during certain
periods for which total return quotations may be provided,
Bankers Trust and/or the Trust's other service providers may
have voluntarily agreed to waive portions of their
respective fees, or reimburse certain operating expenses of
the Fund, on a month-to-month basis. Such waivers will have
the effect of increasing the Fund's net income (and
therefore its total return) during the period such waivers
are in effect.
Total returns are based on past results and are not an
indication of future performance.
Shareholders will receive unaudited financial reports
semiannually that include the Fund's financial statements,
including listings of investment securities held by the Fund
at those dates. Annual reports are audited by independent
accountants.
MANAGEMENT OF THE TRUST
Board of Trustees
The affairs of the Fund are managed under the supervision of
the Board of Trustees of the Trust, of which the Fund is a
series. By virtue of the responsibilities assumed by
Bankers Trust, neither the Trust nor the Fund require
employees other than the Trust's officers. None of the
Trust's officers devotes full time to the affairs of the
Trust or the Fund.
For more information with respect to the Trustees of the
Trust, see "Management of the Trust" in the SAI.
Investment Manager
The Fund has retained the services of Bankers Trust Global
Investment Management, a unit of Bankers Trust, as
investment manager. Bankers Trust, a New York banking
corporation with executive offices at 130 Liberty Street
(One Bankers Trust Plaza), New York, New York 10006, is a
wholly-owned subsidiary of Bankers Trust New York
Corporation. Bankers Trust conducts a variety of general
banking and trust activities and is a major wholesaler
supplier of financial services to the international and
domestic institutional markets.
As of March 31, 1997 Bankers Trust New York Corporation was
the seventh largest bank holding company in the United
States with total assets of approximately $122 billion.
Bankers Trust is a worldwide merchant bank dedicated to
servicing the needs of corporations, governments, financial
institutions and private clients through a global network of
over 80 offices in more than 48 countries. Investment
management is a core business of Bankers Trust, built on a
tradition of excellence from its roots as a trust bank
founded in 1903. The scope of Bankers Trust's investment
management capability is unique due to its leadership
positions in both active and passive quantitative management
and its presence in major equity and fixed income markets
around the world. Bankers Trust is one of the nation's
largest and most experienced investment managers with
approximately $233 billion in assets under management
globally.
Bankers Trust, subject to the supervision and direction of
the Board of Trustees, manages the Fund in accordance with
the Fund's investment objective and stated investment
policies, makes investment decisions for the Fund, places
orders to purchase and sell securities and other financial
instruments on behalf of the Fund, employs professional
investment managers and securities analysts who provide
research services to the Fund, oversees the administration
of all aspects of the Trust's business and affairs and
supervises the performance of professional services provided
by other vendors. Bankers Trust may utilize the expertise
of any of its world wide subsidiaries and affiliates to
assist it in its role as investment manager. All orders for
investment transactions on behalf of the Fund are placed by
Bankers Trust with broker-dealers and other financial
intermediaries that it selects, including those affiliated
with Bankers Trust. A Bankers Trust affiliate will be used
in connection with a purchase or sale of an investment for
the Fund only if Bankers Trust believes that the affiliate's
charge for the transaction does not exceed usual and
customary levels. The Fund will not invest in obligations
for which Bankers Trust or any of its affiliates is the
ultimate obligor or accepting bank. The Fund may, however,
invest in the obligations of correspondents and customers of
Bankers Trust.
As compensation for its services to the Fund, Bankers Trust
receives a fee from the Fund, accrued daily and paid
monthly, equal on an annual basis to 0.20% of the average
daily net assets of the Fund for its then-current fiscal
year.
Bankers Trust has been advised by its counsel that, in
counsel's opinion, Bankers Trust currently may perform the
services for the Trust and the Fund described in this
Prospectus and the SAI without violation of the Glass-
Steagall Act or other applicable banking laws or
regulations. State laws on this issue may differ from the
interpretations of relevant Federal law, and banks and
financial institutions may be required to register as
dealers pursuant to state securities law.
Fund Manager
Frank Salerno, Managing Director of Bankers Trust, is
responsible for the day-to-day management of the Fund. Mr.
Salerno oversees administration, management and trading of
international and domestic equity index strategies. He has
been employed by Bankers Trust since 1981.
Expenses
In addition to the fees of the Manager, the Fund is
responsible for the payment of all its other expenses
incurred in the operation of the Fund, which include, among
other things, expenses for legal and independent auditor's
services, charges of the Fund's custodian and transfer
agent, SEC fees, a pro rata portion of the fees of the
Trust's unaffiliated trustees and officers, accounting costs
for reports sent to owners of the Contracts which provide
for investment in the Fund ("Contractowners"), the Fund's
pro rata portion of membership fees in trade organizations,
a pro rata portion of the fidelity bond coverage for the
Trust's officers, interest, brokerage and other trading
costs, taxes, all expenses of computing the Fund's net asset
value per share, expenses involved in registering and
maintaining the registration of the Fund's shares with the
SEC and qualifying the Fund for sale in various
jurisdictions and maintaining such qualification, litigation
and other extraordinary or non-recurring expenses. However,
other typical Fund expenses such as Contractowner servicing,
distribution of reports to Contractowners and prospectus
printing and postage will be borne by the relevant Company.
Administrator
First Data Investor Services Group, Inc. ("First Data"), a
subsidiary of First Data Corporation, One Exchange Place,
Boston, Massachusetts 02109, serves as the Fund's
administrator pursuant to an Administration Agreement with
the Trust. Under the terms of the Administration Agreement,
First Data generally assists in all aspects of the Fund's
operations, other than providing investment advice, subject
to the overall authority of the Trust's Board of Trustees.
Pursuant to the terms of the Administration Agreement, dated
April 16, 1996, the Trust has agreed to pay First Data a
monthly fee at the annual rate of 0.02% of the value of the
Trust's average monthly net assets not exceeding $2 billion;
0.01% of the Trust's monthly average net assets exceeding $2
billion but not exceeding $3 billion; and 0.0075% of the
Trust's monthly average net assets exceeding $3 billion, in
addition to a flat fee of $70,000 per year per Fund.
Distributor
First Data Distributors, Inc. (the "Distributor") serves as
distributor of the Fund's shares to separate accounts of the
Companies for which it receives no separate fee from the
Fund. The principal business address of the Distributor is
4400 Computer Drive, Westborough, Massachusetts 01581.
Custodian and Transfer Agent
Bankers Trust acts as custodian of the assets of the Fund
and First Data serves as the transfer agent for the Fund.
Organization of the Trust
The Trust was organized on January 19, 1996, under the laws
of the Commonwealth of Massachusetts. The Fund is a
separate series of the Trust. The Trust offers shares of
beneficial interest of the Fund and the Trust's other
series, par value $0.001 per share. The shares of the other
series of the Trust are offered through separate
Prospectuses. No series of shares has any preference over
any other series. All shares, when issued, will be fully
paid and nonassessable. The Trust's Board of Trustees has
the authority to create additional series without obtaining
shareholder approval.
The Trust is an entity of the type commonly known as a
"Massachusetts business trust." Under Massachusetts law,
shareholders of such a business trust may, under certain
circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder incurring
financial loss on account of shareholder liability is
limited to circumstances in which both inadequate insurance
existed and the Trust itself was unable to meet its
obligations.
Through its separate accounts, the Companies are the Fund's
sole stockholders of record, so under the 1940 Act, such
Companies are deemed to be in control of the Fund.
Nevertheless, when a shareholders' meeting occurs, each
Company solicits and accepts voting instructions from its
Contractowners who have allocated or transferred monies for
an investment in the Fund as of the record date of the
meeting. Each Company then votes the Fund's shares that are
attributable to its Contractowners' interests in the Fund in
proportion to the voting instructions received. Each
Company will vote any share that it is entitled to vote
directly due to amounts it has contributed or accumulated in
its separate accounts in the manner described in the
prospectuses for its variable annuities and variable life
insurance policies.
Each share of the Fund is entitled to one vote, and
fractional shares are entitled to fractional votes. Fund
shares have non-cumulative voting rights, so the vote of
more than 50% of the shares can elect 100% of the Trustees.
The Trust is not required, and does not intend, to hold
regular annual shareholder meetings, but may hold special
meetings for consideration of proposals requiring
shareholder approval.
The Fund is only available to owners of variable annuities
or variable life insurance policies issued by the Companies
through their respective separate accounts. The Fund does
not currently foresee any disadvantages to Contractowners
arising from offering its shares to variable annuity and
variable life insurance policy separate accounts
simultaneously, and the Board of Trustees monitors events
for the existence of any material irreconcilable conflict
between or among Contractowners. If a material
irreconcilable conflict arises, one or more separate
accounts may withdraw their investment in the Fund. This
could possibly force the Fund to sell portfolio securities
at disadvantageous prices. Each Company will bear the
expenses of establishing separate portfolios for its
variable annuity and variable life insurance separate
accounts if such action becomes necessary; however, ongoing
expenses that are ultimately borne by Contractowners will
likely increase due to the loss of economies of scale
benefits that can be provided to mutual funds with
substantial assets.
SHAREHOLDER AND ACCOUNT POLICIES
PURCHASE AND REDEMPTION OF SHARES
Shares of the Fund will be continuously offered to each
Company's separate accounts at the net asset value per share
next determined after a proper purchase request has been
received by the Company. The Company then offers to
Contractowners units in its separate accounts which directly
correspond to shares in the Fund. Each Company submits
purchase and redemption orders to the Fund based on
allocation instructions for premium payments, transfer
instructions and surrender or partial withdrawal requests
which are furnished to the Company by such Contractowners.
Contractowners can send such instructions and requests to
the Companies by first class mail, overnight mail or express
mail sent to the address set forth in the relevant Company's
offering memorandum included with this prospectus. The Fund
and the Distributor reserve the right to reject any purchase
order for shares of the Fund.
Payment for redeemed shares will ordinarily be made within
seven (7) business days after the Fund receives a redemption
order from the relevant Company. The redemption price will
be the net asset value per share next determined after the
Company receives the Contractowner's request in proper form.
The Fund may suspend the right of redemption or postpone the
date of payment during any period when trading on the NYSE
is restricted, or the NYSE is closed for other than weekends
and holidays; when an emergency makes it not reasonably
practicable for the Fund to dispose of assets or calculate
its net asset value; or as permitted by the SEC.
The accompanying offering memorandum for the Company's
variable annuity or variable life insurance policy describes
the allocation, transfer and withdrawal provisions of such
annuity or policy.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The Fund distributes substantially all of its net income and
capital gains to shareholders each year. The Fund
distributes capital gains and income dividends annually.
All dividends and capital gains distributions paid by the
Fund will be automatically reinvested, at net asset value,
by the Companies' separate accounts in additional shares of
the Fund, unless an election is made by a Contractowner to
receive distributions in cash.
The Fund will be treated as a separate entity for federal
income tax purposes. The Fund intends to qualify as a
"regulated investment company" under the Internal Revenue
Code of 1986, as amended (the "Code"). As a regulated
investment company the Fund will not be subject to U.S.
Federal income tax on its investment company taxable income
and net capital gains (the excess of net long-term capital
gains over net short-term capital losses), if any, that it
distributes to shareholders. The Fund intends to distribute
to its shareholders, at least annually, substantially all of
its investment company taxable income and net capital gains,
and therefore does not anticipate incurring a Federal income
tax liability.
The Code and Treasury Department regulations promulgated
thereunder require that mutual funds that are offered
through insurance company separate accounts must meet
certain diversification requirements to preserve the tax-
deferral benefits provided by the variable contracts which
are offered in connection with such separate accounts. The
Manager intends to diversify the Fund's investments in
accordance with those requirements. The enclosed offering
memorandum for a Company's variable annuity or variable life
insurance policies describes the federal income tax
treatment of distributions from such contracts to
Contractowners.
The foregoing is only a brief summary of important tax law
provisions that affect the Fund. Other Federal, state or
local tax law provisions may also affect the Fund and its
operations. Anyone who is considering allocating,
transferring or withdrawing monies held under a variable
contract to or from the Fund should contact a qualified tax
adviser.
Investment Manager of the Fund
bankers trust global investment management
a unit of
bankers trust company
Administrator
first data investor services group, inc.
Distributor
FIRST DATA DISTRIBUTORS, INC.
Custodian
BANKERS TRUST COMPANY
Transfer Agent
first data investor services group, inc.
Independent Accountants
COOPERS & LYBRAND LLP
Counsel
WILLKIE FARR & GALLAGHER
..................................................................
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No person has been authorized to give any information or to make
any representation other than those contained in the Fund's
Prospectus, its SAI or the Fund's official sales literature in
connection with the offering of the Fund's shares and, if given or
made, such other information or representations must not be relied
on as having been authorized by the Fund. This Prospectus does not
constitute an offer in any state in which, or to any person to
whom, such offer may not lawfully be made.
..................................................................
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STATEMENT OF
ADDITIONAL INFORMATION
FEBRUARY 5, 1997 AS SUPPLEMENTED JUNE 16, 1997
BT INSURANCE FUNDS TRUST
Equity 500 Index Fund
BT Insurance Funds Trust (the "Trust") is currently
comprised of six series: the Equity 500 Index Fund (the "Fund")
and five other series. The shares of the Fund are described
herein. Capitalized terms not otherwise defined herein shall have
the same meaning as in the Prospectus.
Table of Contents
Risk Factors and Certain Securities and Investment Practices
2
Performance Information 12
Valuation of Securities; Redemption in Kind 13
Management of the Trust 14
Organization of the Trust 17
Taxation 18
Shares of the Fund are available to the public only through the
purchase of certain variable annuity and variable life insurance
contracts ("Contract(s)") issued by various insurance companies
(the "Companies"). The investment adviser of the Fund is Bankers
Trust Global Investment Management, a unit of Bankers Trust
Company (the "Manager" or "Bankers Trust"). The distributor of
the Fund shares is First Data Distributors, Inc. (the
"Distributor" or "First Data Distributors").
The Prospectus for the Fund is dated February 5, 1997 as
supplemented June 16, 1997. The Prospectus provides the basic
information investors should know before investing and may be
obtained without charge by calling the Trust at the Customer
Service Center at the telephone number shown in the accompanying
prospectus. This Statement of Additional Information, which is
not a Prospectus, is intended to provide additional information
regarding the activities and operations of the Fund and should be
read in conjunction with the Fund's Prospectus. This Statement of
Additional Information is not an offer of any Fund for which an
investor has not received a Prospectus. Capitalized terms not
otherwise defined in this Statement of Additional Information have
the meanings accorded to them in the Fund's Prospectus.
bankers trust global investment management,
a unit of bankers trust company
Investment Manager of the Fund
The Trust's distributor is FIRST DATA distributors, inc., 4400
Computer Drive, Westborough, MA 01581.
RISK FACTORS AND CERTAIN SECURITIES AND INVESTMENT PRACTICES
Investment Objective
The investment objective of the Fund is described in the
Fund's Prospectus. There can, of course, be no assurance that the
Fund will achieve its investment objective.
Investment Practices
The following is a discussion of the various investments of
and techniques employed by the Fund:
Certificates of Deposit and Bankers' Acceptances.
Certificates of deposit are receipts issued by a depository
institution 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 acceptances have maturities of six months or less.
Commercial Paper. 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. A
variable amount master demand note (which is a type of commercial
paper) represents a direct borrowing arrangement involving
periodically fluctuating rates of interest under a letter
agreement between a commercial paper issuer and an institutional
lender pursuant to which the lender may determine to invest
varying amounts.
Illiquid Securities. Historically, illiquid securities have
included securities subject to contractual or legal restrictions
on resale because they have not been registered under the
Securities Act of 1933, as amended (the "1933 Act"), securities
which are otherwise not readily marketable and repurchase
agreements having a maturity of longer than seven days.
Securities which have not been registered under the 1933 Act are
referred to as private placements or restricted securities and are
purchased directly from the issuer or in the secondary market.
Mutual funds do not typically hold a significant amount of these
restricted or other illiquid securities because of the potential
for delays on resale and uncertainty in valuation. Limitations on
resale may have an adverse effect on the marketability of
portfolio securities and a mutual fund might be unable to dispose
of restricted or other illiquid securities promptly or at
reasonable prices and might thereby experience difficulty
satisfying redemptions within seven days. A mutual fund might
also have to register such restricted securities in order to
dispose of them resulting in additional expense and delay.
Adverse market conditions could impede such a public offering of
securities.
In recent years, however, a large institutional market has
developed for certain securities that are not registered under the
1933 Act, including repurchase agreements, commercial paper,
foreign securities, municipal securities and corporate bonds and
notes. Institutional investors depend on an efficient
institutional market in which the unregistered security can be
readily resold or on an issuer's ability to honor a demand for
repayment. The fact that there are contractual or legal
restrictions on resale of such investments to the general public
or to certain institutions may not be indicative of their
liquidity.
The Securities and Exchange Commission (the "SEC") has
adopted Rule 144A, which allows a broader institutional trading
market for securities otherwise subject to restriction on their
resale to the general public. Rule 144A establishes a "safe
harbor" from the registration requirements of the 1933 Act of
resales of certain securities to qualified institutional buyers.
The Manager anticipates that the market for certain restricted
securities such as institutional commercial paper will expand
further as a result of this regulation and the development of
automated systems for the trading, clearance and settlement of
unregistered securities of domestic and foreign issuers, such as
the PORTAL System sponsored by the National Association of
Securities Dealers, Inc.
The Manager will monitor the liquidity of Rule 144A
securities in the Fund's portfolio under the supervision of the
Trust's Board of Trustees. In reaching liquidity decisions, the
Manager will consider, among other things, the following factors:
(i) the frequency of trades and quotes for the security; (ii) the
number of dealers and other potential purchasers wishing to
purchase or sell the security; (iii) dealer undertakings to make a
market in the security and (iv) the nature of the security and of
the marketplace trades (e.g., the time needed to dispose of the
security, the method of soliciting offers and the mechanics of the
transfer).
Lending of Portfolio Securities. The Fund has the authority
to lend portfolio securities to brokers, dealers and other
financial organizations. The Fund will not lend securities to
Bankers Trust, the Distributor or their affiliates. By lending
its securities, the Fund can increase its income by continuing to
receive interest on the loaned securities as well as by either
investing the cash collateral in short-term securities or
obtaining yield in the form of interest paid by the borrower when
U.S. Government obligations are used as collateral. There may be
risks of delay in receiving additional collateral or risks of
delay in recovery of the securities or even loss of rights in the
collateral should the borrower of the securities fail financially.
The Fund will adhere to the following conditions whenever its
securities are loaned: (i) the Fund must receive at least 100
percent cash collateral or equivalent securities from the
borrower; (ii) the borrower must increase this collateral whenever
the market value of the securities including accrued interest
rises above the level of the collateral; (iii) the Fund must be
able to terminate the loan at any time; (iv) the Fund must receive
reasonable interest on the loan, as well as any dividends,
interest or other distributions on the loaned securities, and any
increase in market value; (v) the Fund may pay only reasonable
custodian fees in connection with the loan; and (vi) voting rights
on the loaned securities may pass to the borrower; provided,
however, that if a material event adversely affecting the
investment occurs, the Trust's Board of Trustees must terminate
the loan and regain the right to vote the securities.
Short-Term Instruments. When the Fund experiences large
cash inflows through the sale of securities and desirable equity
securities, that are consistent with the Fund's investment
objective, which are unavailable in sufficient quantities or at
attractive prices, the Fund may hold short-term investments for a
limited time pending availability of such equity securities.
Short-term instruments consist of: (i) short-term obligations
issued or guaranteed by the U.S. government or any of its agencies
or instrumentalities or by any of the states; (ii) other
short-term debt securities rated AA or higher by S&P or Aa or
higher by Moody's or, if unrated, of comparable quality in the
opinion of Bankers Trust; (iii) commercial paper; (iv) bank
obligations, including negotiable certificates of deposit, time
deposits and bankers' acceptances; and (v) repurchase agreements.
At the time the Fund invests in commercial paper, bank obligations
or repurchase agreements, the issuer of the issuer's parent must
have outstanding debt rated AA or higher by S&P or Aa or higher by
Moody's or outstanding commercial paper or bank obligations rated
A-1 by S&P or Prime-1 by Moody's; or, if no such ratings are
available, the instrument must be of comparable quality in the
opinion of Bankers Trust.
When-Issued and Delayed Delivery Securities. The Fund may
purchase securities on a when-issued or delayed delivery basis.
For example, delivery of and payment for these securities can take
place a month or more after the date of the purchase commitment.
The purchase price and the interest rate payable, if any, on the
securities are fixed on the purchase commitment date or at the
time the settlement date is fixed. The value of such securities
is subject to market fluctuation and no interest accrues to the
Fund until settlement takes place. At the time the Fund makes the
commitment to purchase securities on a when-issued or delayed
delivery basis, it will record the transaction, reflect the value
each day of such securities in determining its net asset value
and, if applicable, calculate the maturity for the purposes of
average maturity from that date. At the time of settlement a
when-issued security may be valued at less than the purchase
price. To facilitate such acquisitions, the Fund will maintain
with the Fund's custodian a segregated account with liquid assets,
consisting of cash, U.S. Government securities or other
appropriate securities, in an amount at least equal to such
commitments. On delivery dates for such transactions, the Fund
will meet its obligations from maturities or sales of the
securities held in the segregated account and/or from cash flow.
If the Fund chooses to dispose of the right to acquire a
when-issued security prior to its acquisition, it could, as with
the disposition of any other Fund obligation, incur a gain or loss
due to market fluctuation. It is the current policy of the Fund
not to enter into when-issued commitments exceeding in the
aggregate 15% of the market value of the Fund's total assets, less
liabilities other than the obligations created by when-issued
commitments.
Additional U.S. Government Obligations. The Fund may invest
in obligations issued or guaranteed by U.S. Government agencies or
instrumentalities. These obligations may or may not be backed by
the "full faith and credit" of the United States. In the case of
securities not backed by the full faith and credit of the United
States, the Fund must look principally to the federal agency
issuing or guaranteeing the obligation for ultimate repayment, and
may not be able to assert a claim against the United States itself
in the event the agency or instrumentality does not meet its
commitments. Securities in which the Fund may invest that are not
backed by the full faith and credit of the United States include,
but are not limited to, obligations of the Tennessee Valley
Authority, the Federal Home Loan Mortgage Corporation and the U.S.
Postal Service, each of which has the right to borrow from the
U.S. Treasury to meet its obligations, and obligations of the
Federal Farm Credit System and the Federal Home Loan Banks, both
of whose obligations may be satisfied only by the individual
credits of each issuing agency. Securities which are backed by
the full faith and credit of the United States include obligations
of the Government National Mortgage Association, the Farmers Home
Administration, and the export-import Bank.
Equity Investments. The Fund may invest in equity
securities listed on any domestic securities exchange or traded in
the over-the-counter market as well as certain restricted or
unlisted securities. They may or may not pay dividends or carry
voting rights. Common stock occupies the most junior position in
a company's capital structure.
Reverse Repurchase Agreements. The Fund may borrow funds
for temporary or emergency purposes, such as meeting larger than
anticipated redemption requests, and not for leverage, by among
other things, agreeing to sell portfolio securities to financial
institutions such as banks and broker-dealers and to repurchase
them at a mutually agreed date and price (a "reverse repurchase
agreement"). At the time the Fund enters into a reverse
repurchase agreement it will place in a segregated custodial cash
account, U.S. Government Obligations or high-grade debt
obligations having a value equal to the repurchase price,
including accrued interest. Reverse repurchase agreements involve
the risk that the market value of the securities sold by the Fund
may decline below the repurchase price of those securities.
Reverse repurchase agreements are considered to be borrowings by
the Fund.
Warrants. Warrants entitle the holder to buy common stock
from the issuer at a specific price (the strike price) for a
specific period of time. The strike price of warrants sometimes
is much lower than the current market price of the underlying
securities, yet warrants are subject to similar price
fluctuations. As a result, warrants may be more volatile
investments than the underlying securities.
Warrants do not entitle the holder to dividends or voting
rights with respect to the underlying securities and do not
represent any rights in the assets of the issuing company. Also,
the value of the warrant does not necessarily change with the
value of the underlying securities and a warrant ceases to have
value if it is not exercised prior to the expiration date.
Convertible Securities. Convertible securities may be a
debt security or preferred stock which may be converted into
common stock or carries the right to purchase common stock.
Convertible securities entitle the holder to exchange the
securities for a specified number of shares of common stock,
usually of the same company, at specified prices within a certain
period of time.
The terms of any convertible security determine its ranking
in a company's capital structure. In the case of subordinated
convertible debentures, the holders' claims on assets and earnings
are subordinated to the claims of other creditors, and are senior
to the claims of preferred and common shareholders. In the case
of convertible preferred stock, the holders' claims on assets and
earnings are subordinated to the claims of all creditors and are
senior to the claims of common shareholders.
Futures Contracts and Options on Futures Contracts
General. The successful use of such instruments draws upon
the Manager's skill and experience with respect to such
instruments. When futures are purchased to hedge against a
possible increase in the price of securities before the Fund is
able to invest its cash (or cash equivalents) in an orderly
fashion, it is possible that the market may decline instead; if
the Fund then concludes not to invest its cash at that time
because of concern as to possible further market decline or for
other reasons, the Fund will realize a loss on the futures
contract that is not offset by a reduction in the price of the
instruments that were to be purchased. In addition, the
correlation between movements in the price of futures contracts or
options on futures contracts and movements in the price of the
securities hedged or used for cover will not be perfect and could
produce unanticipated losses.
Successful use of the futures contract and related options
are subject to special risk considerations. A liquid secondary
market for any futures or options contract may not be available
when a futures or options position is sought to be closed. In
addition, there may be an imperfect correlation between movements
in the securities in the Fund. Successful use of futures or
options contracts is further dependent on Bankers Trust's ability
to correctly predict movements in the securities markets and no
assurance can be given that its judgment will be correct.
Successful use of options on securities or stock indices are
subject to similar risk considerations. In addition, by writing
covered call options, the Fund gives up the opportunity, while the
option is in effect, to profit from any price increase in the
underlying securities above the options exercise price.
Futures Contracts. The Fund may enter into securities index
futures contracts. U.S. futures contracts have been designed by
exchanges which have been designated "contracts markets" by the
CFTC, and must be executed through a futures commission merchant,
or brokerage firm, which is a member of the relevant contract
market. Futures contracts trade on a number of exchange markets,
and, through their clearing corporations, the exchanges guarantee
performance of the contracts as between the clearing members of
the exchange. These investments will be made by the Fund solely
for cash management purposes. Such investments will be made only
if they are economically appropriate to the reduction of risks
involved in the management of the Fund. In this regard, the Fund
may enter into futures contracts or options on futures related to
the Standard & Poor's 500 Composite Stock Price Index.
At the same time a futures contract is purchased or sold,
the Fund must allocate cash or securities as a deposit payment
("initial deposit"). It is expected that the initial deposit
would be approximately 1 1/2% to 5% of a contract's face value.
Daily thereafter, the futures contract is valued and the payment
of "variation margin" may be required, since each day the Fund
would provide or receive cash that reflects any decline or
increase in the contract's value.
Although futures contracts by their terms call for the
actual delivery or acquisition of securities, in most cases the
contractual obligation is fulfilled before the date of the
contract without having to make or take delivery of the
securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a
commodities exchange an identical futures contract calling for
delivery in the same month. Such a transaction, which is effected
through a member of an exchange, cancels the obligation to make or
take delivery of the securities. Since all transactions in the
futures market are made, offset or fulfilled through a
clearinghouse associated with the exchange on which the contracts
are traded, the Fund will incur brokerage fees when it purchases
or sells futures contracts.
The ordinary spreads between prices in the cash and futures
market, due to differences in the nature of those markets, are
subject to distortions. First, all participants in the futures
market are subject to initial deposit and variation margin
requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through
offsetting transactions which could distort the normal
relationship between the cash and futures markets. Second, the
liquidity of the futures market depends on participants entering
into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take
delivery, liquidity in the futures market could be reduced, thus
producing distortion. Third, from the point of view of
speculators, the margin deposit requirements in the futures market
are less onerous than margin requirements in the securities
market. Therefore, increased participation by speculators in the
futures market may cause temporary price distortions. Due to the
possibility of distortion, a correct forecast of general interest
rate trends by the Manager may still not result in a successful
transaction.
In addition, futures contracts entail risks. The Manager
believes that use of such contracts will benefit the Fund. The
successful use of futures contracts, however, depends on the
degree of correlation between the futures and securities markets.
Options on Futures Contracts. The Fund may use stock index
futures on a continual basis to equitize cash so that the Fund may
maintain 100% equity exposure. The Board of Trustees has adopted
a restriction that the Fund will not enter into any futures
contracts or options on futures contracts if immediately
thereafter the amount of margin deposits on all the futures
contracts of the Fund and premiums paid on outstanding options on
futures contracts owned by the Fund (other than those entered into
for bona fide hedging purposes) would exceed 5% of the market
value of the total assets of the Fund.
A futures option gives the holder, in return for the premium
paid, the right to buy (call) from or sell (put) to the writer of
the option a futures contract at a specified price at any time
during the period of the option. Upon exercise, the writer of the
option is obligated to pay the difference between the cash value
of the futures contract and the exercise price. Like the buyer or
seller of a futures contract, the holder, or writer, of an option
has the right to terminate its position prior to the scheduled
expiration of the option by selling, or purchasing an option of
the same series, at which time the person entering into the
closing transaction will realize a gain or loss. The Fund will be
required to deposit initial margin and variation margin with
respect to put and call options on futures contracts written by it
pursuant to brokers' requirements similar to those described
above. Net option premiums received will be included as initial
margin deposits. In anticipation of a decline in interest rates,
the Fund may purchase call options on futures contracts as a
substitute for the purchase of futures contracts to hedge against
a possible increase in the price of securities which the Fund
intends to purchase. Similarly, if the value of the securities
held by the Fund is expected to decline as a result of an increase
in interest rates, the Fund might purchase put options or sell
call options on futures contracts rather than sell futures
contracts.
Investments in futures options involve some of the same
considerations that are involved in connection with investments in
futures contracts (for example, the existence of a liquid
secondary market). In addition, the purchase or sale of an option
also entails the risk that changes in the value of the underlying
futures contract will not correspond to changes in the value of
the option purchased. Depending on the pricing of the option
compared to either the futures contract upon which it is based, or
upon the price of the securities being hedged, an option may or
may not be less risky than ownership of the futures contract or
such securities. In general, the market prices of options can be
expected to be more volatile than the market prices on the
underlying futures contract. Compared to the purchase or sale of
futures contracts, however, the purchase of call or put options on
futures contracts may frequently involve less potential risk to
the Fund because the maximum amount at risk is the premium paid
for the options (plus transaction costs). The writing of an
option on a futures contact involves risks similar to those risks
relating to the sale of futures contracts.
Options on Securities Indices. The Fund may purchase and
write (sell) call and put options on securities indices. Such
options give the holder the right to receive a cash settlement
during the term of the option based upon the difference between
the exercise price and the value of the index.
Options on securities indices entail certain risks. The
absence of a liquid secondary market to close out options
positions on securities indices may occur, although the Fund
generally will only purchase or write such an option if the
Manager believes the option can be closed out.
Use of options on securities indices also entails the risk
that trading in such options may be interrupted if trading in
certain securities included in the index is interrupted. The Fund
will not purchase such options unless the Manager believes the
market is sufficiently developed such that the risk of trading in
such options is no greater than the risk of trading in options on
securities.
Price movements in the Fund's portfolio may not correlate
precisely with movements in the level of an index and, therefore,
the use of options on indices cannot serve as a complete hedge.
Because options on securities indices require settlement in cash,
the Manager may be forced to liquidate portfolio securities to
meet settlement obligations.
Investment Restrictions
The following investment restrictions are "fundamental
policies" of the Fund and may not be changed without the approval
of a "majority of the outstanding voting securities" of the Fund.
"Majority of the outstanding voting securities" under the 1940
Act, and as used in this Statement of Additional Information and
the Prospectus, means, with respect to the Fund, the lesser of (i)
67% or more of the outstanding voting securities of the Fund
present at a meeting, if the holders of more than 50% of the
outstanding voting securities of the Fund are present or
represented by proxy or (ii) more than 50% of the outstanding
voting securities of the Fund.
As a matter of fundamental policy, the Fund may not:
(1) borrow money or mortgage or hypothecate assets of the Fund,
except that in an amount not to exceed 1/3 of the current value of
the Fund's assets, it may borrow money as a temporary measure for
extraordinary or emergency purposes and enter into reverse
repurchase agreements or dollar roll transactions, and except that
it may pledge, mortgage or hypothecate not more than 1/3 of such
assets to secure such borrowings (it is intended that money would
be borrowed only from banks and only either to accommodate
requests for the withdrawal of beneficial interests (redemption of
shares) while effecting an orderly liquidation of portfolio
securities or to maintain liquidity in the event of an
unanticipated failure to complete a portfolio security transaction
or other similar situations) or reverse repurchase agreements,
provided that collateral arrangements with respect to options and
futures, including deposits of initial deposit and variation
margin, are not considered a pledge of assets for purposes of this
restriction (as an operating policy, the Funds may not engage in
dollar roll transactions);
(2) underwrite securities issued by other persons except insofar
as the Trust or the Funds may technically be deemed an underwriter
under the 1933 Act in selling a portfolio security;
(3) make loans to other persons except: (a) through the lending
of the Fund's portfolio securities and provided that any such
loans not exceed 30% of the Fund's total assets (taken at market
value); or (b) through the use of repurchase agreements or the
purchase of short-term obligations;
(4) purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or
interests therein), in the ordinary course of business (except
that the Trust may hold and sell, for the Fund's portfolio, real
estate acquired as a result of the Fund's ownership of
securities);
(5) concentrate its investments in any particular industry
(excluding U.S. Government securities), but if it is deemed
appropriate for the achievement of the Fund's investment
objective(s), up to 25% of its total assets may be invested in any
one industry;
(6) issue any senior security (as that term is defined in the
1940 Act) if such issuance is specifically prohibited by the
1940 Act or the rules and regulations promulgated thereunder
(except to the extent permitted in investment restriction No. 1),
provided that collateral arrangements with respect to options and
futures, including deposits of initial deposit and variation
margin, are not considered to be the issuance of a senior security
for purposes of this restriction; and
(7) purchase the securities of any one issuer if as a result more
than 5% of the value of its total assets would be invested in the
securities of such issuer or the Fund would own more than 10% of
the outstanding voting securities of such issuer, except that up
to 25% of the value of its total assets may be invested without
regard to these 5% limitation and provided that there is no
limitation with respect to investments in U.S. Government
Securities.
Additional investment restrictions adopted by the Fund,
which may be changed by the Board of Trustees, provide that the
Fund may not:
(i) purchase any security or evidence of interest
therein on margin, except that such short-term credit as may be
necessary for the clearance of purchases and sales of securities
may be obtained and except that deposits of initial deposit and
variation margin may be made in connection with the purchase,
ownership, holding or sale of futures;
(ii) invest for the purpose of exercising control or
management;
(iii) purchase for the Fund securities of any
investment company if such purchase at the time thereof would
cause: (a) more than 10% of the Fund's total assets (taken at the
greater of cost or market value) to be invested in the securities
of such issuers; (b) more than 5% of the Fund's total assets
(taken at the greater of cost or market value) to be invested in
any one investment company; or (c) more than 3% of the outstanding
voting securities of any such issuer to be held for the Fund (as
an operating policy, the Fund will not invest in another open-end
registered investment company); or
(iv) invest more than 15% of the Fund's net assets
(taken at the greater of cost or market value) in securities that
are illiquid or not readily marketable not including (a) Rule 144A
securities that have been determined to be liquid by the Board of
Trustees; and (b) commercial paper that is sold under section 4(2)
of the 1933 Act which is not traded flat or in default as to
interest or principal.
There will be no violation of any investment restriction if
that restriction is complied with at the time the relevant action
is taken notwithstanding a later change in market value of an
investment, in net or total assets, in the securities rating of
the investment, or any other later change.
The Fund will comply with the state securities laws and
regulations of all states in which it is registered.
Portfolio Transactions and Brokerage Commissions
The Manager is responsible for decisions to buy and sell
securities, futures contracts and options on such securities and
futures for the Fund, the selection of brokers, dealers and
futures commission merchants to effect transactions and the
negotiation of brokerage commissions, if any. Broker-dealers may
receive brokerage commissions on fund transactions, including
options, futures and options on futures transactions and the
purchase and sale of underlying securities upon the exercise of
options. Orders may be directed to any broker-dealer or futures
commission merchant, including to the extent and in the manner
permitted by applicable law, Bankers Trust or its subsidiaries or
affiliates. Purchases and sales of certain fund securities on
behalf of the Fund are frequently placed by the Manager with the
issuer or a primary or secondary market-maker for these securities
on a net basis, without any brokerage commission being paid by the
Fund. Trading does, however, involve transaction costs.
Transactions with dealers serving as market-makers reflect the
spread between the bid and asked prices. Transaction costs may
also include fees paid to third parties for information as to
potential purchasers or sellers of securities. Purchases of
underwritten issues may be made which will include an underwriting
fee paid to the underwriter.
The Manager seeks to evaluate the overall reasonableness of
the brokerage commissions paid (to the extent applicable) in
placing orders for the purchase and sale of securities for the
Fund taking into account such factors as price, commission
(negotiable in the case of national securities exchange
transactions), if any, size of order, difficulty of execution and
skill required of the executing broker-dealer through familiarity
with commissions charged on comparable transactions, as well as by
comparing commissions paid by the Fund to reported commissions
paid by others. The Manager reviews on a routine basis commission
rates, execution and settlement services performed, making
internal and external comparisons.
The Manager is authorized, consistent with Section 28(e) of
the Securities Exchange Act of 1934, as amended, when placing
portfolio transactions for the Fund with a broker to pay a
brokerage commission (to the extent applicable) in excess of that
which another broker might have charged for effecting the same
transaction on account of the receipt of research, market or
statistical information. The term "research, market or
statistical information" includes advice as to the value of
securities; the advisability of investing in, purchasing or
selling securities; the availability of securities or purchasers
or sellers of securities; and furnishing analyses and reports
concerning issuers, industries, securities, economic factors and
trends, portfolio strategy and the performance of accounts.
Consistent with the policy stated above, the Rules of Fair
Practice of the National Association of Securities Dealers, Inc.
and such other policies as the Trustees of the Trust may
determine, the Manager may consider sales of shares of a Fund as a
factor in the selection of broker-dealers to execute portfolio
transactions. Bankers Trust will make such allocations if
commissions are comparable to those charged by nonaffiliated,
qualified broker-dealers for similar services.
Higher commissions may be paid to firms that provide
research services to the extent permitted by law. Bankers Trust
may use this research information in managing the Fund's assets,
as well as the assets of other clients.
Except for implementing the policies stated above, there is
no intention to place portfolio transactions with particular
brokers or dealers or groups thereof. In effecting transactions
in over-the-counter securities, orders are placed with the
principal market-makers for the security being traded unless,
after exercising care, it appears that more favorable results are
available otherwise.
Although certain research, market and statistical
information from brokers and dealers can be useful to the Fund and
to the Manager, it is the opinion of the management of the Trust
that such information is only supplementary to the Manager's own
research effort, since the information must still be analyzed,
weighed and reviewed by the Manager's staff. Such information may
be useful to the Manager in providing services to clients other
than the Fund, and not all such information is used by the Manager
in connection with the Fund. Conversely, such information
provided to the Manager by brokers and dealers through whom other
clients of the Manager effect securities transactions may be
useful to the Manager in providing services to the Fund.
In certain instances there may be securities which are
suitable for the Fund as well as for one or more of the Manager's
other clients. Investment decisions for the Fund and for the
Manager's other clients are made with a view to achieving their
respective investment objectives. It may develop that a
particular security is bought or sold for only one client even
though it might be held by, or bought or sold for, other clients.
Likewise, a particular security may be bought for one or more
clients when one or more clients are selling that same security.
Some simultaneous transactions are inevitable when several clients
receive investment advice from the same investment adviser,
particularly when the same security is suitable for the investment
objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same
security, the securities are allocated among clients in a manner
believed to be equitable to each. It is recognized that in some
cases this system could have a detrimental effect on the price or
volume of the security as far as the Fund is concerned. However,
it is believed that the ability of the Fund to participate in
volume transactions will produce better executions for the Fund.
PERFORMANCE INFORMATION
Standard Performance Information
From time to time, quotations of the Fund's performance may
be included in advertisements, sales literature or shareholder
reports. These performance figures are calculated in the
following manner:
Total return: The Fund's average annual total return is
calculated for certain periods by determining the average annual
compounded rates of return over those periods that would cause an
investment of $1,000 (made at the maximum public offering price
with all distributions reinvested) to reach the value of that
investment at the end of the periods. The Fund may also calculate
total return figures which represent aggregate performance over a
period or year-by-year performance.
Performance Results: Any total return quotation provided
for the Fund should not be considered as representative of the
performance of the Fund in the future since the net asset value
and offering price of shares of the Fund will vary based not only
on the type, quality and maturities of the securities held in the
Fund, but also on changes in the current value of such securities
and on changes in the expenses of the Fund. These factors and
possible differences in the methods used to calculate total return
should be considered when comparing the total return of the Fund
to total returns published for other investment companies or other
investment vehicles. Total return reflects the performance of
both principal and income.
Comparison of Fund Performance
Comparison of the quoted nonstandardized performance of
various investments is valid only if performance is calculated in
the same manner. Since there are different methods of calculating
performance, investors should consider the effect of the methods
used to calculate performance when comparing performance of the
Fund with performance quoted with respect to other investment
companies or types of investments.
In connection with communicating its performance to current
or prospective shareholders, the Fund also may compare these
figures to the performance of other mutual funds tracked by mutual
fund rating services or to unmanaged indices which may assume
reinvestment of dividends but generally do not reflect deductions
for administrative and management costs.
Evaluations of the Fund's performance made by independent
sources may also be used in advertisements concerning the Fund.
Sources for the Fund's performance information could include the
following: Barron's, Business Week, Changing Times, The
Kiplinger's Magazine, Consumer Digest, Financial Times, Financial
World, Forbes, Fortune, Investor's Daily, Lipper Analytical
Services, Inc.'s Mutual Fund Performance Analysis, Money,
Morningstar Inc., New York Times, Personal Investing News,
Personal Investor, Success, U.S. News and World Report, Value
Line, Wall Street Journal, Weisenberger Investment Companies
Services and Working Women.
VALUATION OF SECURITIES; REDEMPTION IN KIND
Equity and debt securities (other than short-term debt
obligations maturing in 60 days or less), including listed
securities and securities for which price quotations are
available, will normally be valued on the basis of market
valuations furnished by a pricing service. Short-term debt
obligations and money market securities maturing in 60 days or
less are valued at amortized cost, which approximates market.
Securities for which market quotations are not available are
valued by Bankers Trust pursuant to procedures adopted by the
Trust's Board of Trustees. It is generally agreed that securities
for which market quotations are not readily available should not
be valued at the same value as that carried by an equivalent
security which is readily marketable.
The problems inherent in making a good faith determination
of value are recognized in the codification effected by SEC
Financial Reporting Release No. 1 ("FRR 1" (formerly Accounting
Series Release No. 113)) which concludes that there is "no
automatic formula" for calculating the value of restricted
securities. It recommends that the best method simply is to
consider all relevant factors before making any calculation.
According to FRR 1 such factors would include consideration of
the:
type of security involved, financial statements, cost
at date of purchase, size of holding, discount from market value
of unrestricted securities of the same class at the time of
purchase, special reports prepared by analysts, information as to
any transactions or offers with respect to the security, existence
of merger proposals or tender offers affecting the security, price
and extent of public trading in similar securities of the issuer
or comparable companies, and other relevant matters.
To the extent that the Fund purchases securities which are
restricted as to resale or for which current market quotations are
not available, the Manager of the Fund will value such securities
based upon all relevant factors as outlined in FRR 1.
The Trust, on behalf of the Fund, reserves the right, if
conditions exist which make cash payments undesirable, to honor
any request for redemption or repurchase order by making payment
in whole or in part in readily marketable securities chosen by the
Trust, and valued as they are for purposes of computing the Fund's
net asset value (a redemption in kind). If payment is made to a
Fund shareholder in securities, the shareholder may incur
transaction expenses in converting these securities into cash.
The Trust, on behalf of the Fund, and the Fund have elected,
however, to be governed by Rule 18f-1 under the 1940 Act as a
result of which the Fund is obligated to redeem shares with
respect to any one investor during any 90-day period, solely in
cash up to the lesser of $250,000 or 1% of the net asset value of
the Fund at the beginning of the period.
MANAGEMENT OF THE TRUST
The Board of Trustees of the Trust is composed of persons
experienced in financial matters who meet throughout the year to
oversee the activities of the Fund. In addition, the Trustees
review contractual arrangements with companies that provide
services to the Fund and review the Fund's performance.
The Trustees and officers of the Trust and their principal
occupations during the past five years are set forth below. Their
titles may have varied during that period. Asterisks indicate
those Trustees who are "interested persons" (as defined in the
1940 Act) of the Trust. Unless otherwise indicated, the address
of each Trustee and officer is One Exchange Place, Boston,
Massachusetts.
Trustees and Officers
Name, Address
and Age
Position
Held with
the Trust
Principal
Occupations
During
Past 5 Years
Robert R.
Coby, 45
118 North
Drive
North
Massapequa,
NY 11758
Trustee
President of
Leadership
Capital Inc.
since 1995;
Chief
Operating
Officer of CS
First Boston
Investment
Management
(1994-1995);
President of
Blackhawk L.P.
(1993-1994);
Chief
Financial
Officer of
Equitable
Capital prior
to February
1993.
Desmond G.
FitzGerald,
52
2015 West
Main Street
Stamford, CT
06902
Trustee
Chairman of
North American
Properties
Group since
January 1987.
Name, Address
and Age
Position
Held with
the Trust
Principal
Occupations
During
Past 5 Years
James S.
Pasman, Jr.,
65
29 The
Trillium
Pittsburgh,
PA 15238
Trustee
Retired;
President and
Chief
Operations
Officer of
National
Intergroup
Inc. (1989-
1991).
*William E.
Small, 55
Trustee
and
President
Executive Vice
President of
First Data
Investor
Services Group
Inc. ("First
Data") since
1994; Senior
Vice President
of The
Shareholder
Services
Group, Inc.
(1993-1994);
independent
consultant
(1990-1993).
Michael
Kardok, 37
Vice
President
and
Treasurer
Vice President
of First Data
since May
1994; Vice
President of
The Boston
Company
Advisors Inc.
prior to May
1994.
Julie A.
Tedesco, 39
Vice
President
and
Secretary
Counsel of
First Data
since May
1994; Counsel
of The Boston
Company
Advisors Inc.
(1992-1994);
Associate at
Hutchins,
Wheeler &
Dittmar prior
to July 1992.
Mr. Kardok and Ms. Tedesco also hold similar positions for
other investment companies for which First Data Distributors or an
affiliate serves as the principal underwriter.
No person who is an officer or director of Bankers Trust is
an officer or Trustee of the Trust. No director, officer or
employee of First Data Distributors or any of its affiliates will
receive any compensation from the Trust for serving as an officer
or Trustee of the Trust.
As of September 1, 1996 the Trustees and officers of the
Trust owned in the aggregate less than 1% of the shares of the
Fund or the Trust (all series taken together).
Investment Manager
Under the terms of the Fund's investment management
agreement with Bankers Trust (the "Management Agreement"), Bankers
Trust manages the Fund subject to the supervision and direction of
the Board of Trustees of the Trust. Bankers Trust will: (i) act
in strict conformity with the Trust's Declaration of Trust, the
1940 Act and the Investment Advisers Act of 1940, as the same may
from time to time be amended; (ii) manage the Fund in accordance
with the Fund's investment objectives, restrictions and policies;
(iii) make investment decisions for the Fund; (iv) place purchase
and sale orders for securities and other financial instruments on
behalf of the Fund; (v) oversee the administration of all aspects
of the Trust's business and affairs; and (vi) supervise the
performance of professional services provided by others.
Bankers Trust bears all expenses in connection with the
performance of services under the Management Agreement. The Fund
bears certain other expenses incurred in its operation, including:
taxes, interest, brokerage fees and commissions, if any; fees of
Trustees of the Trust who are not officers, directors or employees
of Bankers Trust, First Data Distributors or any of their
affiliates; SEC fees and state Blue Sky qualification fees;
charges of custodians and transfer and dividend disbursing agents;
certain insurance premiums; outside auditing and legal expenses;
cost of maintenance of corporate existence; costs attributable to
investor services, including, without limitation, telephone and
personnel expenses; costs of preparing and printing prospectuses
and statements of additional information for regulatory purposes
and for distribution to existing shareholders; costs of
shareholders' reports and meetings of shareholders, officers and
Trustees of the Trust; and any extraordinary expenses.
Bankers Trust may have deposit, loan and other commercial
banking relationships with the issuers of obligations which may be
purchased on behalf of the Fund, including outstanding loans to
such issuers which could be repaid in whole or in part with the
proceeds of securities so purchased. Such affiliates deal, trade
and invest for their own accounts in such obligations and are
among the leading dealers of various types of such obligations.
Bankers Trust, in making its investment decisions, does not obtain
or use material inside information in its possession or in the
possession of any of its affiliates. In making investment
recommendations for the Fund, Bankers Trust will not inquire or
take into consideration whether an issuer of securities proposed
for purchase or sale by the Fund is a customer of Bankers Trust,
its parent or its subsidiaries or affiliates and in dealing with
its customers, Bankers Trust, its parent, subsidiaries and
affiliates will not inquire or take into consideration whether
securities of such customers are held by any fund managed by
Bankers Trust or any such affiliate.
The Fund's prospectus contains disclosure as to the amount
of Bankers Trust's investment advisory and administration and
services fees.
Bankers Trust has agreed that if in any fiscal year the
aggregate expenses of the Fund (including fees pursuant to the
Management Agreement, but excluding interest, taxes, brokerage
and, if permitted by the relevant state securities commissions,
extraordinary expenses) exceed the expense limitation of any state
having jurisdiction over the Fund, Bankers Trust will reimburse
the Fund for the excess expense to the extent required by state
law. As of the date of this Statement of Additional Information,
the most restrictive annual expense limitation applicable to the
Fund is 2.50% of the Fund's first $30 million of average annual
net assets, 2.00% of the next $70 million of average annual assets
and 1.50% of the remaining average annual net assets.
Administrator
First Data, One Exchange Place, Boston, Massachusetts 02109,
serves as administrator of the Fund. As administrator, First Data
is obligated on a continuous basis to provide such administrative
services as the Board of Trustees of the Trust reasonably deems
necessary for the proper administration of the Fund. First Data
will generally assist in all aspects of the Fund's operations;
supply and maintain office facilities (which may be in First
Data's own offices), statistical and research data, data
processing services, clerical, accounting, bookkeeping and
recordkeeping services (including without limitation the
maintenance of such books and records as are required under the
1940 Act and the rules thereunder, except as maintained by other
agents), internal auditing, executive and administrative services,
and stationery and office supplies; prepare reports to
shareholders or investors; prepare and file tax returns; supply
financial information and supporting data for reports to and
filings with the SEC and various state Blue Sky authorities;
supply supporting documentation for meetings of the Board of
Trustees; provide monitoring reports and assistance regarding
compliance with the Declaration of Trust, by-laws, investment
objectives and policies and with Federal and state securities
laws; arrange for appropriate insurance coverage; calculate net
asset values, net income and realized capital gains or losses, and
negotiate arrangements with, and supervise and coordinate the
activities of, agents and others to supply services.
Custodian and Transfer Agent
Bankers Trust, 130 Liberty Stree (One Bankers Trust Plaza),
New York, New York 10006, serves as custodian for the Fund. As
custodian, it holds the Fund's assets. Bankers Trust will comply
with the self-custodian provisions of Rule 17f-2 under the 1940
Act.
First Data serves as transfer agent of the Trust. Under its
transfer agency agreement with the Trust, First Data maintains the
shareholder account records for the Fund, handles certain
communications between shareholders and the Fund and causes to be
distributed any dividends and distributions payable by the Fund.
Bankers Trust and First Data may be reimbursed by the Fund
for out-of-pocket expenses.
Use of Name
The Trust and Bankers Trust have agreed that the Trust may
use "BT" as part of its name for so long as Bankers Trust serves
as investment manager to the Fund. The Trust has acknowledged
that the term "BT" is used by and is a property right of certain
subsidiaries of Bankers Trust and that those subsidiaries and/or
Bankers Trust may at any time permit others to use that term.
The Trust may be required, on 60 days' notice from Bankers
Trust at any time, to abandon use of the acronym "BT" as part of
its name. If this were to occur, the Trustees would select an
appropriate new name for the Trust, but there would be no other
material effect on the Trust, its shareholders or activities.
Banking Regulatory Matters
Bankers Trust has been advised by its counsel that in its
opinion Bankers Trust may perform the services for the Fund
contemplated by the Management Agreement and other activities for
the Fund described in the Prospectus and this Statement of
Additional Information without violation of the Glass-Steagall Act
or other applicable banking laws or regulations. However, counsel
has pointed out that future changes in either Federal or state
statutes and regulations concerning the permissible activities of
banks or trust companies, as well as future judicial or
administrative decisions or interpretations of present and future
statutes and regulations, might prevent Bankers Trust from
continuing to perform those services for the Trust and the Fund.
State laws on this issue may differ from the interpretations of
relevant Federal law and banks and financial institutions may be
required to register as dealers pursuant to state securities law.
If the circumstances described above should change, the Boards of
Trustees would review the relationships with Bankers Trust and
consider taking all actions necessary in the circumstances.
Counsel and Independent Accountants
Willkie Farr & Gallagher, One Citicorp Center, 153 East 53rd
Street, New York, New York 10022-4669, serves as Counsel to the
Trust and the Fund. Ernst & Young L.L.P., 787 Seventh Avenue, New
York, New York 10019, acts as independent accountants of the Trust
and the Fund.
ORGANIZATION OF THE TRUST
Shares of the Trust do not have cumulative voting rights,
which means that holders of more than 50% of the shares voting for
the election of Trustees can elect all Trustees. Shares are
transferable but have no preemptive, conversion or subscription
rights. Shareholders generally vote by Fund, except with respect
to the election of Trustees and the ratification of the selection
of independent accountants.
Through its separate accounts the Companies are the Fund's
sole stockholders of record, so under the 1940 Act, the Companies
are deemed to be in control of the Fund. Nevertheless, when a
shareholders' meeting occurs, each Company solicits and accepts
voting instructions from its Contractowners who have allocated or
transferred monies for a investment in the Fund as of the record
date of the meeting. Each Company then votes the Fund's shares
that are attributable to its Contractowners' interest in the Fund
in proportion to the voting instructions received. Each Company
will vote any share that it is entitled to vote directly due to
amounts it has contributed or accumulated in its separate accounts
in the manner described in the offering memoranda for its variable
annuities and variable life insurance policies.
Massachusetts law provides that shareholders could under
certain circumstances be held personally liable for the
obligations of the Trust. However, the Trust's Declaration of
Trust disclaims shareholder liability for acts or obligations of
the Trust and requires that notice of this disclaimer be given in
each agreement, obligation or instrument entered into or executed
by the Trust or a Trustee. The Declaration of Trust provides for
indemnification from the Trust's property for all losses and
expenses of any shareholder held personally liable for the
obligations of the Trust. Thus, the risk of a shareholder's
incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust itself would be unable
to meet its obligations, a possibility that the Trust believes is
remote. Upon payment of any liability incurred by a Trust, the
shareholder paying the liability will be entitled to reimbursement
from the general assets of the Trust. The Trustees intend to
conduct the operations of the Trust in a manner so as to avoid, as
far as possible, ultimate liability of the shareholders for
liabilities of the Trust.
The Trust was organized on January 19, 1996.
TAXATION
Taxation of the Funds
The Trust intends to qualify annually and to elect the Fund
to be treated as a regulated investment company under the Internal
Revenue Code of 1986, as amended.
As a regulated investment company, the Fund will not be
subject to U.S. Federal income tax on its investment company
taxable income and net capital gains (the excess of net long-term
capital gains over net short-term capital losses), if any, that it
distributes to its shareholders, that is, the Companies' separate
accounts. The Fund intends to distribute to its shareholders, at
least annually, substantially all of its investment company
taxable income and net capital gains and, therefore, does not
anticipate incurring Federal income tax liability.
The Code and Treasury Department regulations promulgated
thereunder require that mutual funds that are offered through
insurance company separate accounts must meet certain
diversification requirements to preserve the tax-deferred benefits
provided by the variable contracts which are offered in connection
with such separate accounts. The Manager intends to diversify the
Fund's investments in accordance with those requirements. The
offering memoranda for each Company's variable annuities and
variable life insurance policies describe the federal income tax
treatment of distributions from such contracts.
To comply with regulations under Section 817(h) of the Code,
the Fund will be required to diversify its investments so that on
the last day of each calendar quarter no more than 55% of the
value of its assets is represented by any one investment, no more
than 70% is represented by any two investments, no more than 80%
is represented by any three investments and no more than 90% is
represented by any four investments. Generally, all securities of
the same issuer are treated as a single investment. For the
purposes of Section 817(h) of the Code, obligations of the U.S.
Treasury and each U.S. Government instrumentality are treated as
securities of separate issuers. The Treasury Department has
indicated that it may issue future pronouncements addressing the
circumstances in which a variable annuity contract owner's control
of the investments of a separate account may cause the variable
contract owner, rather than the separate account's sponsoring
insurance company, to be treated as the owner of the assets held
by the separate account. If the variable annuity contract owner
is considered the owner of the securities underlying the separate
account, income and gains produced by those securities would be
included currently in the variable annuity contract owner's gross
income. It is not known what standards will be set forth in such
pronouncements or when, if at all, these pronouncements may be
issued. In the event that rules or regulations are adopted, there
can be no assurance that the Fund will be able to operate as
described currently in the Prospectus or that the Fund will not
have to change its investment policies or goals.
The foregoing is only a brief summary of important tax law
provisions that affect the Fund. Other Federal, state or local
tax law provisions may also affect the Fund and its operations.
Anyone who is considering allocating, transferring or withdrawing
monies held under a variable contract to or from the Fund should
consult a qualified tax adviser.
Distributions
All dividends and capital distributions paid by the Fund
will be automatically reinvested, at net asset value, by the
Companies' separate accounts in additional shares of the Fund.
There is no fixed dividend rate, and there can be no assurance
that the Fund will pay any dividends or realize any capital gains.
However, the Fund currently intends to pay dividends and capital
gains distributions, if any, on an annual basis. The offering
memorandum for a Company's variable annuity or variable life
insurance policies describes the frequency of distributions to
Contractowners and the Federal income tax treatment of
distributions from such contracts to Contractowners.
Sale of Shares
Any gain or loss realized by a shareholder upon the sale or
other disposition of shares of the Fund, or upon receipt of a
distribution in complete liquidation of the Fund, generally will
be a capital gain or loss which will be long-term or short-term,
generally depending upon the shareholder's holding period for the
shares. Any loss realized on a sale or exchange will be
disallowed to the extent the shares disposed of are replaced
(including shares acquired pursuant to a dividend reinvestment
plan) within a period of 61 days beginning 30 days before and
ending 30 days after disposition of the shares. In such a case,
the basis of the shares acquired will be adjusted to reflect the
disallowed loss. Any loss realized by a shareholder on a
disposition of fund shares held by the shareholder for six months
or less will be treated as a long-term capital loss to the extent
of any distributions of net capital gains received by the
shareholder with respect to such shares.
Shareholders will be notified annually as to the U.S.
Federal tax status of distributions.
Backup Withholding
The Fund may be required to withhold U.S. Federal income tax
at the rate of 31% of all taxable distributions payable to
shareholders who fail to provide the Fund with their correct
taxpayer identification number or to make required certifications,
or who have been notified by the Internal Revenue Service that
they are subject to backup withholding. Corporate shareholders
and certain other shareholders specified in the Code generally are
exempt from such backup withholding. Backup withholding is not an
additional tax. Any amounts withheld may be credited against the
shareholder's U.S. Federal income tax liability.
Other Taxation
The Trust is organized as a Massachusetts business trust
and, under current law, neither the Trust nor the Fund is viable
for any income or franchise tax in the Commonwealth of
Massachusetts, provided that the Fund continues to qualify as a
regulated investment company under Subchapter M of the Code.
Fund shareholders may be subject to state and local taxes on
their fund distributions. Shareholders are advised to consult
their own tax advisers with respect to the particular tax
consequences to them of an investment in the Fund.
Investment Manager of the Fund
bankers trust global investment management
a unit of
BANKERS TRUST COMPANY
Administrator
first data investor services group, inc.
Distributor
FIRST DATA distributors, inc.
Custodian
BANKERS TRUST COMPANY
Transfer Agent
first data investor services group, inC.
Independent Accountants
ERNST & YOUNG LLP
Counsel
WILLKIE FARR & GALLAGHER
No person has been authorized to give any information or to
make any representations other than those contained in the Fund's
Prospectuses, the Statement of Additional Information or the
Trust's official sales literature in connection with the offering
of the Fund's shares and, if given or made, such other information
or representations must not be relied on as having been authorized
by the Trust. Neither the Prospectus nor this Statement of
Additional Information constitutes an offer in any state in which,
or to any person to whom, such offer may not lawfully be made.
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