As filed with the Securities and Exchange Commission on March 24, 1998
Securities Act File No. 333-00479
Investment Company Act File No. 811-07507
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
----
Pre-Effective Amendment No.
Post-Effective Amendment No. 6 X
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 8 X
BT Insurance Funds Trust
(Exact Name of Registrant as Specified in Charter)
One Exchange Place
Boston, Massachusetts 02109
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (617) 573-1531
Name and Address of Agent for Service: Copies to:
Elizabeth A. Russell, Esq. Burton M. Leibert, Esq.
First Data Investor Services Group, Inc. Willkie Farr & Gallagher
One Exchange Place One Citicorp Center
Boston, Massachusetts 02109 New York, NY 10022-4669
Approximate Date of Proposed Public Offering:
As soon as practicable after the effective date of the Registration Statement.
It is proposed that this filing will become effective:
X immediately upon filing pursuant to paragraph (b), or
on pursuant to paragraph (b)
60 days after filing pursuant to paragraph (a)(1), or on pursuant
to paragraph (a)(1) 75 days after filing pursuant to paragraph
(a)(2) on __________ pursuant to paragraph (a)(2) of Rule 485
<PAGE>
BT INSURANCE FUNDS TRUST
FORM N-1A
CROSS REFERENCE SHEET
FOR
(Small Cap Index Fund, EAFE(R) Equity Index Fund and Equity 500 Index Fund)
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Part A.
Item No. Prospectus Caption
Item 1. Cover Page............................................ Cover Page
Item 2. Synopsis.............................................. Not Applicable
Item 3. Condensed Financial Information....................... Not Applicable
Item 4. General Description of Registrant..................... Investment Objectives and Policies; Risk Factors and
Certain Securities and Investment Practices; Who May Want
to Invest; Investment Principles and Risks
Item 5. Management of the Fund................................ Management of the Trust; Purchase and Redemption of Shares
Item 5A. Management's Discussion of
Fund Performance...................................... Not Applicable
Item 6. Capital Stock and Other Securities.................... Dividends, Distributions and Taxes
Item 7. Purchase of Securities Being Offered.................. Net Asset Value; Purchase and Redemption of Shares
Item 8. Redemption or Repurchase.............................. Purchase and Redemption of Shares
Item 9. Pending Legal Proceedings............................. Not Applicable
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N-1A Statement of Additional
Item No. Information Caption
Item 10. Cover Page......................................... Cover Page
Item 11. Table of Contents.................................. Table of Contents
Item 12. General Information and History.................... Not Applicable
Item 13. Investment Objectives and Policies................. Risk Factors and Certain Securities and Investment
Practices
Item 14. Management of the Fund............................. Management of the Trust; Organization of the Trust
Item 15. Control Persons and Principal
Holders of Securities................................. Management of the Trust; Organization of the Trust
Item 16. Investment Advisory and
Other Services........................................ Management of the Trust
Item 17. Brokerage Allocation and
Other Practices....................................... Valuation of Securities; Redemption in Kind
Item 18. Capital Stock and Other Securities................. Risk Factors and Certain Securities and Investment
Practices
Item 19. Purchase, Redemption and
Pricing of Securities Being Offered................... Valuation of Securities; Redemption in Kind
Item 20. Tax Status......................................... Taxation
Item 21. Underwriters....................................... Valuation of Securities; Redemption in Kind
Item 22. Calculation of Performance Data.................... Performance Information
Item 23....Financial Statements............................... Not Applicable
</TABLE>
BT INSURANCE FUNDS TRUST
FORM N-1A
CROSS REFERENCE SHEET
FOR
(Small Cap Fund and International Equity Fund)
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Part A.
Item No. Prospectus Caption
Item 1. Cover Page............................................ Cover Page
Item 2. Synopsis.............................................. Not Applicable
Item 3. Condensed Financial Information....................... Not Applicable
Item 4. General Description of Registrant..................... Investment Objective, Policies and Risks; Risk Factors;
Matching the Fund to Your Investment Needs; Additional
Information
Item 5. Management of the Fund................................ Management of the Fund; Purchase of Shares; Additional
Information
Item 5A. Management's Discussion of
Fund Performance...................................... Not Applicable
Item 6. Capital Stock and Other Securities.................... Dividends, Distributions and Taxes; Additional Information
Item 7. Purchase of Securities Being Offered.................. Net Asset Value; Purchase and Redemption of Shares
Item 8. Redemption or Repurchase.............................. Purchase and Redemption of Shares
Item 9. Pending Legal Proceedings............................. Not Applicable
</TABLE>
<TABLE>
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N-1A Statement of Additional
Item No. Information Caption
Item 10. Cover Page......................................... Cover Page
Item 11. Table of Contents.................................. Table of Contents
Item 12. General Information and History.................... Not Applicable
Item 13. Investment Objectives and Policies................. Investment Objectives,
Policies and Restrictions
Item 14. Management of the Fund............................. Management of the Funds
Item 15. Control Persons and Principal
Holders of Securities................................. Management of the Funds
Item 16. Investment Advisory and
Other Services........................................ Management of the Funds
Item 17. Brokerage Allocation and
Other Practices....................................... Investment Objectives,
Policies and Restrictions;
Valuation of Securities;
Redemption in Kind
Item 18. Capital Stock and Other Securities................. Investment Objectives,
Policies and Restrictions
Item 19. Purchase, Redemption and
Pricing of Securities Being Offered................... Valuation of Securities;
Redemption in Kind
Item 20. Tax Status......................................... Taxation
Item 21. Underwriters....................................... Valuation of Securities;
Redemption in Kind
Item 22. Calculation of Performance Data.................... Performance Information
Item 23. Financial Statements............................... Not Applicable
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Part C
Information required to be included in Part C is set forth under the appropriate
Item, so numbered, in Part C of this Registration Statement.
<PAGE>
BT INSURANCE FUNDS TRUST
The purpose of this Post-Effective Amendment No. 6 is to (i) comply
with the undertaking set forth in Item 32(b) of Post-Effective Amendment No. 5
which contains financial statements within four to six months after commencement
of operations of the Equity 500 Index Fund; and (ii) to bring the financial
statements and other information up to date under Section 10(a)(3) of the
Securities Act of 1933, as amended, for the Small Cap Fund, International Equity
Fund, Small Cap Index Fund, EAFE(R) Equity Index Fund, Equity 500 Index Fund and
U.S. Bond Index Fund.
The Prospectus and Statement of Additional Information of the Managed
Assets Fund is hereby incorporated by reference in its entirety to Amendment No.
1 filed with the Securities and Exchange Commission via EDGAR on September 18,
1996.
<PAGE>
BT INSURANCE FUNDS TRUST
SMALL CAP FUND
PROSPECTUS
MARCH 24, 1998
This Prospectus offers shares of the Small Cap Fund (the "Fund"). The Fund is a
series of BT Insurance Funds Trust (the "Trust"), which is an open-end
management investment company having seven 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 long-term capital growth through investment in smaller sized
growth companies. There is no assurance, however, that the Fund will achieve its
stated objective. Bankers Trust Company ("Bankers Trust") is the investment
adviser (the "Adviser") 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
offering memorandum.
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 OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
BANKERS TRUST COMPANY
Investment Adviser of the Fund
FIRST DATA DISTRIBUTORS, INC.
Distributor
4400 Computer Drive
Westborough, MA 01581
<PAGE>
TABLE OF CONTENTS
Page
THE FUND................................................................ 3
Who May Want to Invest
THE FUND IN DETAIL...................................................... 3
Investment Objectives and Policies
Risk Factors: Matching the Fund to Your Investment Needs
Net Asset Value
Performance Information and Reports
Management of the Trust
Additional Information
SHAREHOLDER AND ACCOUNT POLICIES....................................... 18
Purchase and Redemption of Shares
Dividends, Distributions and Taxes
<PAGE>
THE FUND
The Fund's investment objective is long-term capital growth; the production of
any current income is secondary to this objective. The Fund seeks to provide
long-term capital growth by investing primarily in equity securities of
smaller-sized growth companies.
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.
THE FUND IN DETAIL
INVESTMENT OBJECTIVES AND POLICIES
The Fund's investment objective is long-term capital growth; the production of
any current income is secondary to this objective. 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.
The Fund seeks to provide long term capital growth by investing primarily in
equity securities of smaller companies that Bankers Trust Company, as the Fund's
investment adviser (the "Adviser" or "Bankers Trust"), believes are in an early
stage or transitional point in their development and have demonstrated or have
the potential for above average capital growth. Bankers Trust will select
companies which have the potential to gain market share in their industry,
achieve and maintain high and consistent profitability or produce increases in
earnings. Bankers Trust also seeks to invest in companies with strong company
management and superior fundamental strength.
Bankers Trust employs a flexible investment program in pursuit of the Fund's
investment objective. Bankers Trust takes advantage of its market access and the
research available to it to select investments in promising growth companies
that are involved in new technologies, new products, foreign markets, and
special developments, such as research discoveries, acquisitions,
recapitalizations, liquidations or management changes, and companies whose stock
may be undervalued by the market. These situations are only illustrative of the
types of investment, the Fund may make. The Fund is free to invest in any common
stock which, in the Adviser's judgment, provides above average potential for
long-term growth of capital and income.
Under normal market conditions, the Fund will invest at least 65% of its assets
in smaller companies (with market capitalizations less than $750 million at time
of purchase that offer strong potential for capital growth). Small
capitalization companies have the potential to show earnings growth over time
that is well above the growth rate of the overall economy. The Fund may also
invest in larger, more established companies that Bankers Trust believes may
offer the potential for strong capital growth due to their relative market
position, anticipated earnings growth, changes in management or other similar
opportunities. The Fund will follow a disciplined selling process to lessen
market risks.
For temporary defensive purposes, when in the opinion of Bankers Trust market
conditions so warrant, the Fund may invest all or a portion of its assets in
common stocks of larger, more established companies or in fixed-income
securities or short-term money market securities. To the extent the Fund is
engaged in temporary defensive investments, the Fund will not be pursuing its
investment objective.
The Fund may also invest up to 25% of its assets in similar securities of
foreign issuers. For further information on foreign investments and related
hedging techniques, see "Risk Factors: Matching the Fund to Your Investment
Needs" and "Additional Information" herein and in the SAI.
Equity Investments
The Fund invests primarily in common stock and other securities with equity
characteristics, such as trust or limited partnership interests, rights and
warrants. These investments may or may not pay dividends and may or may not
carry voting rights. The Fund may also invest in convertible securities when,
due to market conditions, it is more advantageous to obtain a position in an
attractive company by purchase of its convertible securities than by purchase of
its common stock. The convertible securities in which the Fund invests may
include any debt securities or preferred stock which may be converted into
common stock or which carry 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 and to receive interest or dividends until the
holder elects to exercise the conversion privilege. Since the Fund invests in
both common stock and convertible securities, the risks of the general equity
markets may be tempered to a degree by the Fund's investments in convertible
securities which are often not as volatile as equity securities.
<PAGE>
Short-Term Instruments
The Fund intends to stay invested in the securities described above to the
extent practical in light of its objective and long-term investment perspective.
However, the Fund's assets may be invested in short-term instruments with
remaining maturities of 397 days or less to meet anticipated redemptions and
expenses or for day-to-day operating purposes and when, in Bankers Trust's
opinion, it is advisable to adopt a temporary defensive position because of
unusual or adverse conditions affecting the equity markets. In addition, 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 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 Moody's Investors Service, Inc.
("Moody's") or AA or higher by Standard & Poor's ("S&P") 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 or the issuer's parent must have outstanding debt rated Aa or higher by
Moody's or AA or higher by S&P, or outstanding commercial paper or bank
obligations rated Prime-1 by Moody's or A-1 by S&P; 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.
Additional Investment Techniques
The Fund may also utilize the following investments and investment techniques
and practices: foreign investments, options on stocks, options on stock indices,
futures contracts on stock indices, options on futures contracts, foreign
currency exchange transactions, options on foreign currencies, Rule 144A
securities, when-issued and delayed delivery securities, securities lending, and
repurchase agreements. See "Additional Information" for further information.
Additional Investment Limitations
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. These are fundamental investment
policies of the Fund which may not be changed without investor approval.
As a non-fundamental investment policy, 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 maturing in more than seven
calendar days). Additional investment policies of the Fund are contained in the
SAI.
<PAGE>
RISK FACTORS: MATCHING THE FUND TO YOUR INVESTMENT NEEDS
By itself, the Fund does not constitute a balanced investment plan; the Fund
seeks to provide long-term capital growth, with the production of any current
income being incidental to this objective, by investments primarily in
growth-oriented common stocks of domestic corporations and, to a limited extent,
foreign corporations. The Fund is designed for those investors primarily
interested in capital growth from investments in smaller-sized growth companies.
In view of the long-term capital growth objective of the Fund and the smaller
size of the companies, the risks of investment in the Fund may be greater than
the general equity markets, and changes in domestic and foreign interest rates
may also affect the value of the Fund's investments, and rising interest rates
can be expected to reduce the Fund's share value. A description of a number of
investments and investment techniques available to the Fund, including foreign
investments and the use of options and futures, and certain risks associated
with these investments and techniques is included under "Additional
Information." The Fund's share price, yield and total return fluctuate and your
investment may be worth more or less than your original cost when you redeem
your shares.
Risks of Investing in Foreign Securities
In seeking to achieve its investment objective, the Fund may invest in
securities of foreign issuers. Foreign securities may involve a higher degree of
risk and may be less liquid or more volatile than domestic investments. Foreign
securities usually are denominated in foreign currencies, which means their
value will be affected by changes in the strength of foreign currencies relative
to the U.S. dollar as well as the other factors that affect security prices.
Foreign companies may not be subject to accounting standards or governmental
supervision comparable to U.S. companies, and there often is less publicly
available information about their operations. Generally, there is less
governmental regulation of foreign securities markets, and security trading
practices abroad may offer less protection to investors. The value of such
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 those foreign countries.
Additional risks of foreign securities include settlement delays and costs,
difficulties in obtaining and enforcing judgments, and taxation of dividends at
the source of payment. The Fund will not invest more than 5% of the value of its
total assets in the securities of issuers based in developing countries,
including Eastern Europe.
The Fund intends to manage its holdings actively to pursue its investment
objective. Since the Fund has a long-term investment perspective, it does not
intend to respond to short-term market fluctuations or to acquire securities for
the purpose of short-term trading; however, it may take advantage of short-term
trading opportunities that are consistent with its objective.
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 the use of derivatives. Futures
and options are commonly used for traditional hedging purposes in an attempt to
protect a fund from exposure to changing interest rates, securities prices, or
currency exchange rates and for cash management purposes as a low cost method of
gaining exposure to a particular securities market without investing directly in
those securities. However, some derivatives are used for leverage, which tends
to magnify the effects of an instrument's price changes as market conditions
change. Leverage involves the use of a small amount of money to control a large
amount of financial assets, and can in some circumstances, lead to significant
losses. Bankers Trust will use derivatives only in circumstances where Bankers
Trust believes they offer the most economic means of improving the risk/reward
profile of the Fund. Derivatives will not be used to increase portfolio risk
above the level that could 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. The use of derivatives
for non-hedging purposes may be considered speculative. A description of the
derivatives that the Fund may use and some of their associated risks is found
under "Additional Information."
Year 2000
The investment management services provided to the Fund by Bankers Trust and the
services provided to shareholders by the Fund's other service providers depend
on the smooth functioning of their computer systems. Many computer software
systems in use today cannot recognize the year 2000, but revert to 1900 or some
other date, due to the manner in which dates were encoded and calculated. That
failure could have a negative impact on the Fund's operations, including the
handling of securities trades, pricing and account services. Bankers Trust and
the Fund's other service providers have advised the Fund that they have been
reviewing all of their computer systems and actively working on necessary
changes to their systems to prepare for the year 2000. There can be, however, no
assurance that Bankers Trust or any other service provider will be successful,
or that interaction with other non-complying computer systems will not impair
Fund services at that time. Portfolio Turnover Bankers Trust intends to
manage the Fund actively in pursuit of its investment objective. 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 net asset value ("NAV") per share of the Fund is calculated on each day
on which the New York Stock Exchange Inc. (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, Martin Luther King Day, 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 NAV per share of the Fund is calculated once on each Valuation Day as of
the close of regular trading on the NYSE (the "Valuation Time"), which under
normal circumstances is 4:00 p.m., Eastern time or in the event that the NYSE
closes early, at the time of such early closing. The NAV 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 as of the Valuation Time. 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
Trust's Board of Trustees believes accurately reflects fair value.
A NAV for a Fund later determined to have been inaccurate for any reason
will be recalculated. Purchases and redemptions made at a NAV determined to have
been inaccurate will be adjusted, although in certain circumstances, such as
where the difference between the original NAV and the recalculated NAV divided
by the recalculated NAV is 0.005 (1/2 of 1%) or less or shareholder transactions
are otherwise in substantially affected, further action is not required.
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 such as the Russell 2000 Index or Lipper Small Company Growth
Funds Average 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 may have voluntarily
agreed to waive portions of their fees 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 semi-annual financial reports and audited financial
reports that are audited by independent accountants. These reports include the
Fund's financial statements, including listings of investment securities held by
the Fund at those dates. For current Fund performance or a free copy of the
Fund's financial report, please contact the relevant Company or Bankers Trust.
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 their 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 Funds" in the SAI.
Investment Adviser
Bankers Trust Company, a New York banking corporation with principal 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
wholesale supplier of financial services to the international and domestic
institutional markets. As of December 31, 1997, Bankers Trust New York
Corporation was the seventh largest bank holding company in the United States
with total assets of over $100 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 90 offices in
more than 50 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 over $300 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. 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 of the Trust, 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 and
employs professional investment managers and securities analysts who provide
research services to the Fund. Bankers Trust may utilize the expertise of any of
its worldwide subsidiaries and affiliates to assist it in its role as Adviser.
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 is entitled to
receive a fee from the Fund computed daily and paid monthly at the annual rate
of 0.80% of the average daily net assets of the Fund. 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.
Fund Adviser
Ms. Mary P. Dugan (CFA), Vice President of Bankers Trust, and Mr. Timothy Woods
(CFA), Vice President of Bankers Trust, share senior portfolio management
responsibilities of the Small Cap Fund. Ms. Dugan joined Bankers Trust in 1994.
She has 13 years of investment analysis experience. Previously, she worked at
Fred Alger Management, Dean Witter, Integrated Resources and Equitable
Investment Management Corporation. Mr. Woods joined Bankers Trust in 1992. He
has 12 years of investment and financial experience. Previously, he worked at
Prudential Securities, Chase Manhattan Bank and Bank of Boston.
Expenses of the Fund
In addition to the fees of Bankers Trust, 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, accounting costs
for reports sent to 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. 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. ("Investor Services Group"), a
subsidiary of First Data Corporation, One Exchange Place, Boston, Massachusetts
02109, serves as each Fund's administrator pursuant to an Administration
Agreement with the Trust. Under the terms of the Administration Agreement,
Investor Services Group generally assists in all aspects of a 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, the Trust has agreed to pay Investor Services Group 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 $5 billion; and 0.0075% of the Trust's
monthly average net assets exceeding $5 billion, in addition to a flat fee of
$70,000 per year for each fund of the Trust and a one-time start-up fee for each
fund of the Trust.
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. Investor Services
Group serves as the transfer agent for the Fund. The principal business address
of the Transfer Agent is 4400 Computer Drive, Westborough, Massachusetts 01581.
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. Therefore, under the 1940 Act, Companies owning 25% or
more of the outstanding securities of the Fund 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 investments in the
Fund. This could 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.
ADDITIONAL INFORMATION
Rule 144A Securities
The Fund may purchase securities in the United States that are not registered
for sale under federal securities laws but which can be resold to institutions
under SEC Rule 144A. Provided that a dealer or institutional trading market in
such securities exists, these restricted securities are treated as exempt from
the Fund's 15% limit on illiquid securities. Under the supervision of the Board
of Trustees of the Fund, Bankers Trust determines the liquidity of restricted
securities and, through reports from Bankers Trust, the Board will monitor
trading activity in restricted securities. If institutional trading in
restricted securities were to decline, the liquidity of the Fund could be
adversely affected.
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 the custodian a
segregated account containing high grade liquid securities in an amount at least
equal to these commitments. When entering into a when-issued or delayed delivery
transaction, the Fund will rely on the other party to consummate the
transaction; if the other party fails to do so, the Fund may be disadvantaged.
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 securities
issued or guaranteed by the United States Government, its agencies or
instrumentalities 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
may increase its income by the opportunity to receive interest on the
collateral. During the term of the loan, the Fund continues to bear the risk of
fluctuations in the price of the loaned securities. 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
receiving additional collateral, in recovery should the borrower fail
financially and possible loss of the collateral. Upon receipt of appropriate
regulatory approval, cash collateral may be invested in a money market fund
managed by Bankers Trust or its affiliates and Bankers Trust may serve as the
Fund's lending agent and may share in revenue received from securities lending
transactions as compensated for this service.
Foreign Investments
The Fund may invest in securities of foreign issuers directly or in the form of
American Depositary Receipts ("ADRs"), Global Depositary Receipts ("GDRs") and
European Depositary Receipts ("EDRs") or other similar securities representing
securities of foreign issuers. These securities may not necessarily be
denominated in the same currency as the securities they represent. ADRs and GDRs
are receipts typically issued by a U.S. bank or trust company evidencing
ownership of the underlying securities. EDRs are receipts issued by a European
financial institution evidencing a similar arrangement. Generally, ADRs and
GDRs, in registered form, are designed for use in the U.S. securities markets,
and EDRs, in bearer form, are designed for use in European securities markets.
With respect to certain countries in which capital markets are either less
developed or not easily accessed, investments by the Fund may be made through
investment in other investment companies that in turn are authorized to invest
in the securities of such countries. Investment in other investment companies is
limited in amount by the 1940 Act, will involve the indirect payment of a
portion of the expenses, including advisory fees, of such other investment
companies and may result in a duplication of fees and expenses.
Options on Stocks
The Fund may write and purchase put and call options on stocks. A call option
gives the purchaser of the option the right to buy, and obligates the writer to
sell, the underlying stock at the exercise price at any time during the option
period. Similarly, a put option gives the purchaser of the option the right to
sell, and obligates the writer to buy, the underlying stock at the exercise
price at any time during the option period. A covered call option, which is a
call option with respect to which the Fund owns the underlying stock, sold by
the Fund exposes the Fund during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying stock
or to possible continued holding of a stock which might otherwise have been sold
to protect against depreciation in the market price of the stock. A covered put
option sold by the Fund exposes the Fund during the term of the option to a
decline in price of the underlying stock. A put option sold by the Fund is
covered when, among other things, cash or liquid securities are placed in a
segregated account to fulfill the obligations undertaken.
To close out a position when writing covered options, the Fund may make a
"closing purchase transaction," which involves purchasing an option on the same
stock with the same exercise price and expiration date as the option which it
has previously written on the stock. The Fund will realize a profit or loss for
a closing purchase transaction if the amount paid to purchase an option is less
or more, as the case may be, than the amount received from the sale thereof. To
close out a position as a purchaser of an option, the Fund may make a "closing
sale transaction," which involves liquidating the Fund's position by selling the
option previously purchased.
The Fund intends to treat OTC Options purchased and the assets used to "cover"
OTC Options written as not readily marketable and therefore subject to the
limitations described in "Investment Restrictions" in the SAI.
Options on Stock Indices
The Fund may purchase and write put and call options on stock indices listed on
stock exchanges. A stock index fluctuates with changes in the market values of
the stocks included in the index.
Options on stock indices are generally similar to options on stock except that
the delivery requirements are different. Instead of giving the right to take or
make delivery of stock at a specified price, an option on a stock index gives
the holder the right to receive a cash "exercise settlement amount" equal to (a)
the amount, if any, by which the fixed exercise price of the option exceeds (in
the case of a put) or is less than (in the case of a call) the closing value of
the underlying index on the date of exercise, multiplied by (b) a fixed "index
multiplier." Receipt of this cash amount will depend upon the closing level of
the stock index upon which the option is based being greater than, in the case
of a call, or less than, in the case of a put, the exercise price of the option.
The amount of cash received will be equal to such difference between the closing
price of the index and the exercise price of the option expressed in dollars
times a specified multiple. The writer of the option is obligated, in return for
the premium received, to make delivery of this amount. The writer may offset its
position in stock index options prior to expiration by entering into a closing
transaction on an exchange or the option may expire unexercised.
Because the value of an index option depends upon movements in the level of the
index rather than the price of a particular stock, whether the Fund will realize
a gain or loss from the purchase or writing of options on an index depends upon
movements in the level of stock prices in the stock market generally or, in the
case of certain indices, in an industry or market segment, rather than movements
in the price of a particular stock. Accordingly, successful use by the Fund of
options on stock indices will be subject to the Adviser's ability to predict
correctly movements in the direction of the stock market generally or of a
particular industry. This requires different skills and techniques than
predicting changes in the price of individual stocks.
Futures Contracts on Stock Indices
The Fund may enter into contracts providing for the making and acceptance of a
cash settlement based upon changes in the value of an index of securities
("futures contracts"). This investment technique is designed only to hedge
against anticipated future change in general market prices which otherwise might
either adversely affect the value of securities held by the Fund or adversely
affect the prices of securities which are intended to be purchased at a later
date for the Fund. A futures contract may also be entered into to close out or
offset an existing futures position.
In general, each transaction in futures contracts involves the establishment of
a position which will move in a direction opposite to that of the investment
being hedged. If these hedging transactions are successful, the futures
positions taken for the Fund will rise in value by an amount which approximately
offsets the decline in value of the portion of the Fund's investments that are
being hedged. Should general market prices move in an unexpected manner, the
full anticipated benefits of futures contracts may not be achieved or a loss may
be realized.
Although futures contracts would be entered into for hedging purposes only, such
transactions do involve certain risks. These risks could include a lack of
correlation between the futures contract and the equity market being hedged, a
potential lack of liquidity in the secondary market and incorrect assessments of
market trends which may result in poorer overall performance than if a futures
contract had not been entered into.
Brokerage costs will be incurred and "margin" will be required to be posted and
maintained as a good-faith deposit against performance of obligations under
futures contracts written for the Fund. The Fund may not purchase or sell a
futures contract if immediately thereafter its margin deposits on its
outstanding futures contracts would exceed 5% of the market value of the Fund's
total assets.
Options on Futures Contracts
The Fund may invest in options on such futures contracts for similar purposes.
Foreign Currency Exchange Transactions
Because the Fund buys and sells 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 the 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 high grade liquid 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 between the trade and
settlement dates of specific securities transactions or changes in foreign
currency exchange rates that would adversely affect a portfolio position or an
anticipated investment position. Since consideration of the prospect for
currency parities will be incorporated into the Adviser's long-term investment
decisions, the Fund will not routinely enter into foreign currency hedging
transactions with respect to security transactions; however, the Adviser
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.
Options on Foreign Currencies
The Fund may write covered put and call options and purchase put and call
options on foreign currencies for the purpose of protecting against declines in
the dollar value of portfolio securities and against increases in the dollar
cost of securities to be acquired. The Fund may use options on currency to
cross-hedge, which involves writing or purchasing options on one currency to
hedge against changes in exchange rates for a different, but related currency.
As with other types of options, however, the writing of an option on foreign
currency will constitute only a partial hedge up to the amount of the premium
received, and the Fund could be required to purchase or sell foreign currencies
at disadvantageous exchange rates, thereby incurring losses. The purchase of an
option on foreign currency may be used to hedge against fluctuations in exchange
rates although, in the event of exchange rate movements adverse to the Fund's
position, it may forfeit the entire amount of the premium plus related
transaction costs. In addition, the Fund may purchase call options on currency
when the Adviser anticipates that the currency will appreciate in value.
There is no assurance that a liquid secondary market on an options exchange will
exist for any particular option, or at any particular time. If the Fund is
unable to effect a closing purchase transaction with respect to covered options
it has written, the Fund will not be able to sell the underlying currency or
dispose of assets held in a segregated account until the options expire or are
exercised. Similarly, if the Fund is unable to effect a closing sale transaction
with respect to options it has purchased, it would have to exercise the options
in order to realize any profit and will incur transaction costs upon the
purchase or sale of underlying currency. The Fund pays brokerage commissions or
spreads in connection with its options transactions.
As in the case of forward contracts, certain options on foreign currencies are
traded over-the-counter and involve liquidity and credit risks which may not be
present in the case of exchange-traded currency options. The Fund's ability to
terminate OTC Options will be more limited than with exchange-traded options. It
is also possible that broker-dealers participating in OTC Options transactions
will not fulfill their obligations. Until such time as the staff of the SEC
changes its position, the Fund will treat purchased OTC Options and assets used
to cover written OTC 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.
The Fund will write and purchase options only to the extent permitted by the
policies of state securities authorities in states where shares of the Fund are
qualified for offer and sale.
There can be no assurance that the use of these Fund strategies will be
successful.
Repurchase Agreements
In a repurchase agreement the Fund buys a security and simultaneously agrees to
sell it back at a higher price. In the event of the bankruptcy of the other
party to either a repurchase agreement or a securities loan, the Fund could
experience delays in recovering either its cash or the securities it lent. To
the extent that, in the meantime, the value of the securities repurchased had
decreased or the value of the securities lent had increased, the Fund could
experience a loss. In all cases, the Adviser must find the creditworthiness of
the other party to the transaction satisfactory. A repurchase agreement is
considered a collateralized loan under the 1940 Act.
Asset Coverage
To assure that the Fund's use of futures and related options, as well as
when-issued and delayed-delivery securities and foreign currency exchange
transactions, are not used to achieve investment leverage, the Fund will cover
such transactions, as required under applicable interpretations of the SEC,
either by owning the underlying securities or by establishing a segregated
account with the Fund's custodian containing high grade liquid debt securities
in an amount at all times equal to or exceeding the Fund's commitment with
respect to these instruments or contracts.
SHAREHOLDER AND ACCOUNT POLICIES
PURCHASE AND REDEMPTION OF SHARES
Fund shares are continuously offered to each Company's separate accounts at the
net asset value per share next determined after a completed and signed purchase
request has been received by the Company. The Company then offers to owners of
the Contracts, which provide for investment in the Fund ("Contractowner(s)"),
units in its separate accounts which directly correspond to shares in the Fund.
Each Company will process a purchase order from a prospective Contractowner
within two business days of its receipt or its completion. If an initial
purchase request remains incomplete after five business days, the prospective
Contractowner will be informed by the Company as to the reasons for delay and
the initial purchase payment will be returned, unless the prospective
Contractowner consents to the Company's retaining the purchase payment until the
purchase request is completed.
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 First Data Distributors, Inc. the Fund's
distributor ("FDDI" or the "Distributor"), reserve the right to reject any
purchase order.
Payment for redeemed shares will ordinarily be made within three (3) 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 completed and signed redemption order.
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 a 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 investment income and capital
gains each year. 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. Contractowners who own units in
a separate account which corresponds to shares in the Fund will be notified when
distributions are made.
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"), in order to be relieved
of federal income tax on that part of its net investment income and realized
capital gains which it distributes to the Companies' separate accounts.
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. Bankers Trust 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.
<PAGE>
Investment Adviser of the Fund
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
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
<PAGE>
BT INSURANCE FUNDS TRUST
INTERNATIONAL EQUITY FUND
PROSPECTUS
MARCH 24, 1998
Seeks long term capital appreciation primarily from foreign equity securities,
or other securities with equity characteristics.
This Prospectus offers shares of the International Equity 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 seven 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").
Bankers Trust Company ("Bankers Trust") is the investment adviser(the "Adviser")
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
offering memorandum.
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 OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
BANKERS TRUST COMPANY
Investment Adviser of the Fund
FIRST DATA DISTRIBUTORS, INC.
Distributor
4400 Computer Drive
Westborough, MA 01581
<PAGE>
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: Matching the Fund to Your Investment Needs
Net Asset Value
Performance Information and Reports
Management of the Trust
Additional Information
SHAREHOLDER AND ACCOUNT POLICIES........................................ 20
Purchase and Redemption of Shares
Dividends, Distributions and Taxes
<PAGE>
THE FUND
The Fund's investment objective is long-term capital appreciation from
investment in foreign equity securities (or other securities with equity
characteristics); the production of any current income is incidental to this
objective. The Fund invests primarily in established companies based in
developed countries outside the United States, but the Fund may also invest in
emerging market securities. 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 designed for investors who
are willing to accept short-term domestic and/or foreign stock market
fluctuations in pursuit of potentially higher long-term returns. The Fund
invests for growth and does not pursue income.
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 investors sell their Fund shares, they may be worth more or less
than what they originally 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 investor's investment. When an investor sells his or her Fund
shares, they may be worth more or less than what the investors paid for them.
See "Risk Factors: Matching the Fund to Your Investment Needs" for more
information.
<PAGE>
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: Matching the Fund to Your Investment Needs"
in this Prospectus and in the Fund's SAI.
The Fund's investment objective is long-term capital appreciation from
investment in foreign equity securities (or other securities with equity
characteristics); the production of any current income is incidental to this
objective. There can be no assurance that the investment objective of the Fund
will be achieved. 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.
Under normal circumstances, the Fund will invest at least 65% of the value
of its total assets in the equity securities of foreign issuers, consisting of
common stock and other securities with equity characteristics. These issuers are
primarily established companies based in developed countries outside the United
States. However, the Fund may also invest in securities of issuers in
underdeveloped countries. Investments in these countries will be based on what
the Adviser believes to be an acceptable degree of risk in anticipation of
superior returns. The Fund will at all times be invested in the securities of
issuers based in at least three countries other than the United States. For
further discussion of the unique risks associated with investing in foreign
securities in both developed and underdeveloped countries, see "Risk Factors:
Matching the Fund to Your Investment Needs" and "Additional Information" herein
and in the SAI.
The Fund's investments will generally be diversified among several geographic
regions and countries. Criteria for determining the appropriate distribution of
investments among various countries and regions include the prospects for
relative growth among foreign countries, expected levels of inflation,
government policies influencing business conditions, the outlook for currency
relationships and the range of alternative opportunities available to
international investors.
In countries and regions with well-developed capital markets where more
information is available, Bankers Trust will seek to select individual
investments for the Fund. Criteria for selection of individual securities
include the issuer's competitive position, prospects for growth, adviserial
strength, earnings quality, underlying asset value, relative market value and
overall marketability. The Fund may invest in securities of companies having
various levels of net worth, including smaller companies whose securities may be
more volatile than securities offered by larger companies with higher levels of
net worth.
In other countries and regions where capital markets are underdeveloped or not
easily accessed and information is difficult to obtain, the Fund may choose to
invest only at the market level. Here, the Fund may seek to achieve country
exposure through use of options or futures based on an established local index.
Similarly, country exposure may also be achieved through investments in other
registered investment companies. Restrictions on both these types of investments
are fully explained herein and in the SAI.
The remainder of the Fund's assets will be invested in dollar and non-dollar
denominated short-term instruments. These investments are subject to the
conditions described in "Short-term Instruments" below.
Equity Investments
The Fund invests primarily in common stocks and other securities with equity
characteristics. For purposes of the Fund's policy of investing at least 65% of
the value of its total assets in the equity securities of foreign issuers,
"equity securities" are defined as common stock, preferred stock, trust or
limited partnership interests, rights and warrants, and convertible securities
(consisting of debt securities or preferred stock that may be converted into
common stock or that carry the right to purchase common stock). The Fund invests
in securities listed on foreign or domestic securities exchanges and securities
traded in foreign or domestic over-the-counter markets and may invest in
restricted or unlisted securities.
With respect to certain countries in which capital markets are either less
developed or not easily accessed, investments by the Fund may be made through
investment in other investment companies that in turn are authorized to invest
in the securities of such countries. Investment in other investment companies is
limited in amount by the Investment Company Act of 1940, as amended (the "1940
Act"), will involve the indirect payment of a portion of the expenses, including
advisory fees, of such other investment companies and may result in the
duplication of fees and expenses.
Short-term Instruments
The Fund intends to stay invested in the securities described above to the
extent practical in light of its objective and long-term investment perspective.
However, the Fund's assets may be invested in short-term instruments with
remaining maturities of 397 days or less (or in money market mutual funds) to
meet anticipated redemptions and expenses or for day-to-day operating purposes
and when, in Bankers Trust's opinion, it is advisable to adopt a temporary
defensive position because of unusual or adverse conditions affecting the equity
markets. In addition, 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 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 Moody's Investors
Service, Inc. ("Moody's") or AA or higher by Standard & Poor's ("S&P") 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 or the issuer's parent must have outstanding debt rated Aa or higher
by Moody's or AA or higher by S&P, or outstanding commercial paper or bank
obligations rated Prime-1 by Moody's or A-1 by S&P; 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 that have been determined to be of high quality by a
nationally recognized statistical rating organization, or if unrated, by Bankers
Trust. For more information on these rating categories see "Appendix" in
the SAI.
Additional Investment Techniques
The Fund may also utilize the following investments and investment techniques
and practices: American Depositary Receipts ("ADRs"), Global Depositary Receipts
("GDRs"), European Depositary Receipts ("EDRs"), Rule 144A securities,
when-issued and delayed delivery securities, securities lending, repurchase
agreements, foreign currency exchange transactions, options on stocks, options
on foreign stock indices, futures contracts on foreign stock indices, and
options on futures contracts, See "Additional Information" herein for further
information.
Additional Investment Limitations
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. These are fundamental investment
policies of the Fund which may not be changed without investor 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
maturing in more than seven calendar days). Additional investment policies of
the Fund are contained in the SAI.
RISK FACTORS : MATCHING THE FUND TO YOUR INVESTMENT NEEDS
By itself, the Fund does not constitute a balanced investment plan; the Fund
seeks long-term capital appreciation from investment primarily in the equity
securities (or other securities with equity characteristics) of foreign issuers.
Changes in domestic and foreign interest rates may affect the value of the
Fund's investments, and rising interest rates can be expected to reduce the
Fund's share value. A description of a number of investments and investment
techniques available to the Fund, including foreign investments and the use of
options and futures, and certain risks associated with these investments and
techniques is included under "Additional Information" herein. The Fund's share
price and total return fluctuate and your investment may be worth more or less
than your original cost when you redeem your shares.
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. Although the Fund intends
to invest primarily in securities of established companies based in developed
countries, investors should realize that the value of the Fund's 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 those 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.
The Fund may invest in the securities of issuers based in underdeveloped
countries. Investment in securities of issuers based in underdeveloped countries
entails all of the risks of investing in securities of foreign issuers outlined
in this section to a heightened degree. These heightened risks include: (i)
greater risks of expropriation, confiscatory taxation, nationalization, and less
social, political and economic stability; (ii) lack of liquidity and greater
price volatility due to the smaller size of the market for such securities and a
low or nonexistent volume of trading; and (iii) certain national policies which
may restrict the Fund's investment opportunities including restrictions on
investing in issuers or industries deemed sensitive to relevant national
interests.
Because foreign securities generally are denominated and pay dividends or
interest in foreign currencies, and the Fund holds various foreign currencies
from time to time, 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.
Generally, the Fund's currency exchange transactions will be conducted on a spot
(i.e., cash) basis at the spot rate prevailing in the currency exchange market.
The cost of the Fund's currency exchange transactions will generally be the
difference between the bid and offer spot rate of the currency being purchased
or sold. In order to protect against uncertainty in the level of future foreign
currency exchange rates, the Fund is authorized to enter into certain foreign
currency exchange transactions. See "Additional Information" herein.
In addition, while the volume of transactions effected on foreign stock
exchanges has increased in recent years, in most cases it remains appreciably
below that of the New York Stock Exchange Inc. (the "NYSE"). Accordingly, 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. Moreover,
the settlement periods for foreign securities, which are often longer than those
for securities of U.S. issuers, may affect portfolio liquidity. In buying and
selling securities on foreign exchanges, the Fund normally pays fixed
commissions that are generally higher than the negotiated commissions charged in
the United States. In addition, there is generally less government supervision
and regulation of securities exchanges, brokers and issuers in foreign countries
than in the United States.
Further information about the foreign securities in which the Fund may invest,
including a further discussion of related risks and special considerations is
contained in the SAI.
Risks of Investing in Emerging Markets
The world's industrialized markets generally include but are not limited to the
following: Australia, Austria, Belgium, Canada, Denmark, Finland, France,
Germany, Hong Kong, Ireland, Italy, Japan, Luxembourg, Malaysia, the
Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden,
Switzerland, the United Kingdom, and the United States; the world's emerging
markets generally include but are not limited to the following: Argentina,
Botswana, Bolivia, Brazil, Bulgaria, Chile, China, Colombia, Costa Rica, the
Czech Republic, Ecuador, Egypt, Greece, Hungary, India, Indonesia, Israel, the
Ivory Coast, Jordan, Korea, Mexico, Morocco, Nicaragua, Nigeria, Pakistan, Peru,
the Philippines, Poland, Romania, Russia, Slovakia, Slovenia, South Africa,
South Korea, Sri Lanka, Taiwan, Thailand, Turkey, Uruguay, Venezuela, Vietnam
and Zimbabwe. Investment in securities of issuers based in
underdeveloped emerging markets entails all of the risks of investing in
securities of foreign issuers outlined in the section to a heightened degree.
These heightened risks include: (i) greater risks of expropriation, confiscatory
taxation, nationalization, and less social, political and economic stability;
(ii) the smaller size of the market for such securities and a low or nonexistent
volume of trading, resulting in lack of liquidity and in price volatility; and
(iii) certain national policies which may restrict the Fund's investment
opportunities including restrictions on investing in issuers or industries
deemed sensitive to relevant national interests. In addition to
brokerage commissions, custodial services and other costs relating to investment
in emerging markets are generally more expensive than in the United States. Such
markets have been unable to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. The inability of
the Fund to make intended security purchases due to settlement problems could
cause the Fund to miss attractive investment opportunities. Inability to dispose
of a security due to settlement problems could result either in losses to the
Fund due to subsequent declines in the value of the security or, if the Fund has
entered into a contract to sell the security, could result in possible liability
to the purchaser. Further information about the foreign markets in which a
Fund may invest, including a further discussion of related risks and special
considerations is contained in the SAI.
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 the use of derivatives. Futures
and options are commonly used for traditional hedging purposes in an attempt to
protect a fund from exposure to changing interest rates, securities prices, or
currency exchange rates and for cash management purposes as a low cost method of
gaining exposure to a particular securities market without investing directly in
those securities. However, some derivatives are used for leverage, which tends
to magnify the effects of an instrument's price changes as market conditions
change. Leverage involves the use of a small amount of money to control a large
amount of financial assets, and can in some circumstances, lead to significant
losses. Bankers Trust, as the Fund's Investment Adviser, will use derivatives
only in circumstances where Bankers Trust believes they offer the most economic
means of improving the risk/reward profile of the Fund. Derivatives will not be
used to increase portfolio risk above the level that could 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. The use of derivatives for non-hedging purposes may be considered
speculative. A description of the derivatives that the Fund may use and some of
their associated risks is found under "Additional Information" herein.
Year 2000
The investment management services provided to the Fund by Bankers Trust and the
services provided to shareholders by the Fund's other service providers depend
on the smooth functioning of their computer systems. Many computer software
systems in use today cannot recognize the year 2000, but revert to 1900 or some
other date, due to the manner in which dates were encoded and calculated. That
failure could have a negative impact on the Fund's operations, including the
handling of securities trades, pricing and account services. Bankers Trust and
the Fund's other service providers have advised the Fund that they have been
reviewing all of their computer systems and actively working on necessary
changes to their systems to prepare for the year 2000. There can be, however, no
assurance that Bankers Trust or any other service provider will be successful,
or that interaction with other non-complying computer systems will not impair
Fund services at that time. Portfolio Turnover Bankers Trust intends to
manage the Fund actively in pursuit of its investment objective. 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 net asset value ("NAV") per share of the Fund is calculated on each day
on which 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,
Martin Luther King Day, 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 NAV per share of the Fund is calculated once on each Valuation Day as
of the close of regular trading on the NYSE (the "Valuation Time"), which under
normal circumstances is 4:00 p.m., Eastern time or in the event that the NYSE
closes early, at the time of such early closing. The NAV 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 as of the Valuation Time. 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
Trust's Board of Trustees believes accurately reflects fair value.
A NAV for a Fund later determined to have been inaccurate for any reason
will be recalculated. Purchases and redemptions made at a NAV determined to have
been inaccurate will be adjusted, although in certain circumstances, such as
where the difference between the original NAV and the recalculated NAV divided
by the recalculated NAV is 0.005 (1/2 of 1%) or less or shareholder transactions
are otherwise in substantially affected, further action is not required.
</R.
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 EAFE Index, MSCI EAFE Index, 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 may have voluntarily
agreed to waive portions of its fees 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 semi-annual financial reports and annual
financial reports that are audited by independent accountants. These reports
include the Fund's financial statements, including listings of investment
securities held by the Fund at those dates. For current Fund performance or a
free copy of the Fund's financial report, please contact the relevant Company or
Bankers Trust.
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 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 Funds" in the SAI.
Investment Adviser
Bankers Trust Company, a New York banking corporation with principal 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
wholesale supplier of financial services to the international and domestic
institutional markets. As of December 31, 1997, Bankers Trust New York
Corporation was the seventh largest bank holding company in the United states
with total assets of over $100 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 90 offices in
more than 50 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 over $300 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. 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 of the Trust, 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 and employs professional investment managers
and securities analysts who provide research services to the Fund. Bankers Trust
may utilize the expertise of any of its worldwide subsidiaries and affiliates to
assist it in its role as Adviser. 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 is entitled to
receive a fee from the Fund computed daily and paid monthly at the annual rate
of 1.00% of the average daily net assets of the Fund. 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.
Fund Advisers
Mr. Michael Levy, Manager Director of Bankers Trust, is a co-lead manager of the
Fund and has been a Portfolio manager of other investment products with similar
investment objectives since joining Bankers Trust in 1993. Mr. Levy is Bankers
Trust's international equity strategist and is head of the international equity
team. He has served in each of these capacities since 1993. The international
equity team is responsible for the day to day management of the Fund as well as
other international equity portfolios managed by Bankers Trust. Mr. Levy's
experience prior to joining Bankers Trust includes senior equity analyst with
Oppenheimer & Company, as well as positions in investment banking, technology
and manufacturing enterprises. He has twenty-seven years of business experience,
of which seventeen years have been in the investment industry. Robert
Reiner, Principal at Bankers Trust, is a co-lead manager of the Fund and has
been a Portfolio manager of other investment products with similar investment
objectives since joining Bankers Trust in 1994. At Bankers Trust, he has been
involved in developing analytical and investment tools for the group's
international equity team; his primary focus has been on Japanese and European
markets. Prior to joining Bankers Trust, he was an equity analyst and also
provided macroeconomic coverage for Scudder, Stevens & Clark from 1993 to 1994.
He previously served as Senior Analyst at Sanford C. Bernstein & Co. from 1991
to 1992, and was instrumental in the development of Bernstein's International
Value Fund. Mr. Reiner spent more than nine years at Standard & Poor's
Corporation, where he was a member of its international ratings group. His
tenure included managing the day to day operations of the Standard & Poor's
Corporation Tokyo office for three years. Julie Wang, Principal at
Bankers Trust, is a co-manager of the Fund and has been a manager of other
investment products with similar investment objectives since joining Bankers
Trust in 1994. Ms. Wang has primary focus on the Asia-Pacific region and the
Fund's emerging market exposure. Prior to joining Bankers Trust, Ms. Wang was an
investment manger at American International Group, where she advised in the
management of $7 billion of assets in Southeast Asia, including private and
listed equities, bonds, loans and structured products. Ms. Wang received her
B.A. (economics) from Yale University and her MBA from the Wharton School.
Expenses of the Fund
In addition to the fees of Bankers Trust, 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, accounting costs
for reports sent to 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. 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. ("Investor Services Group"), 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,
Investor Services Group 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, the Trust has agreed to pay Investor Services Group 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 $5 billion; and
0.0075% of the Trust's monthly average net assets exceeding $5 billion, in
addition to a flat fee of $70,000 per year for each portfolio of the Trust and a
one-time start-up fee for each portfolio of the Trust.
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 Investor Services
Group serves as the transfer agent for the Fund. The principal business address
at the transfer agent is 4400 Computer Drive, Westborough, Massachusetts 01581.
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. Therefore, under the 1940 Act, Companies owning 25% or
more of the outstanding securities of the Fund are deemed to be in control of
the Fund. Nevertheless, when a shareholder 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 investments in the
Fund. This could 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.
ADDITIONAL INFORMATION
American Depositary Receipts, Global Depositary Receipts and European Depositary
Receipts
ADRs, GDRs and EDRs are certificates evidencing ownership of shares of a
foreign-based issuer held in trust by a bank or similar financial institution.
Designed for use in U.S., international and European securities markets,
respectively, ADRs, GDRs and EDRs are alternatives to the purchase of the
underlying securities in their national markets and currencies. ADRs, GDRs and
EDRs are subject to the same risks as the foreign securities to which they
relate.
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 the Custodian a
segregated account containing high grade liquid securities in an amount at least
equal to these commitments. When entering into a when-issued or delayed delivery
transaction, the Fund will rely on the other party to consummate the
transaction; if the other party fails to do so, the Fund may be disadvantaged.
Rule 144A Securities
The Fund may purchase securities in the United States that are not registered
for sale under federal securities laws but which can be resold to institutions
under SEC Rule 144A. Provided that a dealer or institutional trading market in
such securities exists, these restricted securities are treated as exempt from
the Fund's 15% limit on illiquid securities. Under the supervision of the Board
of Trustees of the Fund, Bankers Trust determines the liquidity of restricted
securities and, through reports from Bankers Trust, the Board will monitor
trading activity in restricted securities. If institutional trading in
restricted securities were to decline, the liquidity of the Fund could be
adversely affected.
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 securities issued or
guaranteed by the United States Government, its agencies or instrumentalities 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 may increase its
income by continuing to receive income on the loaned securities as well as by
the opportunity to receive interest on the collateral. During the term of the
loan, the Fund continues to bear the risk of fluctuations in the price of the
loaned securities. 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 receiving additional collateral,
in recovery should the borrower fail financially and possible loss of the
collateral. Upon receipt of appropriate regulatory approval, cash collateral may
be invested in a money market fund managed by Bankers Trust (or its affiliates)
and Bankers Trust may serve as the Fund's lending agent and may share in revenue
received from securities lending transactions as compensation for this service.
Repurchase Agreements In a repurchase agreement the Fund buys a
security and simultaneously agrees to sell it back at a higher price at a future
date. In the event of the bankruptcy of the other party to either a repurchase
agreement or a securities loan, the Fund could experience delays in recovering
either its cash or the securities it lent. To the extent that the value of the
securities repurchased decreases or the value of the securities loaned
increases, the Fund could experience a loss. In all cases, Bankers Trust must
find the creditworthiness of the other party to the transaction satisfactory. A
repurchase agreement is considered a collateralized loan under the 1940 Act.
Foreign Currency Exchange Transactions
Because the Fund buys and sells securities denominated in currencies other than
the U.S. dollars 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 the 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 high grade liquid 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 between the trade and
settlement dates of specific securities transactions or changes in foreign
currency exchange rates that would adversely affect a 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.
Options on Foreign Currencies
The Fund may write covered put and call options and purchase put and call
options on foreign currencies for the purpose of protecting against declines in
the dollar value of portfolio securities and against increases in the dollar
cost of securities to be acquired. The Fund may use options on a foreign
currency to cross-hedge, which involves writing or purchasing options on one
currency to hedge against changes in exchange rates for a different, but related
currency. As with other types of options, however, the writing of an option on a
foreign currency will constitute only a partial hedge up to the amount of the
premium received, and the Fund could be required to purchase or sell a foreign
currency at disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on foreign currency may be used to hedge against
fluctuations in exchange rates although, in the event of exchange rate movements
adverse to the Fund's position, it may forfeit the entire amount of the premium
plus related transaction costs. In addition, the Fund may purchase call options
on a foreign currency when the Adviser anticipates that the currency will
appreciate in value.
There is no assurance that a liquid secondary market will exist for any
particular option, or at any particular time. If the Fund is unable to effect a
closing purchase transaction with respect to covered options it has written, the
Fund will not be able to sell the underlying currency or dispose of assets held
in a segregated account until the options expire or are exercised. Similarly, if
the Fund is unable to effect a closing sale transaction with respect to options
it has purchased, it would have to exercise the options in order to realize any
profit and will incur transaction costs upon the purchase or sale of the
underlying currency. The Fund pays brokerage commissions or spreads in
connection with its options transactions.
As in the case of forward contracts, certain options on foreign currencies are
traded over-the-counter and involve liquidity and credit risks which may not be
present in the case of exchange-traded currency options. In some circumstances,
the Fund's ability to terminate over-the-counter options ("OTC Options") may be
more limited than with exchange-traded options. It is also possible that
broker-dealers participating in OTC Options transactions will not fulfill their
obligations. Provided that a dealer or institutional trading market in such
securities exists, these restricted securities are not covered by the Fund's 15%
limit on illiquid securities. Under the supervision of the Board of Trustees of
the Fund, Bankers Trust determines the liquidity of restricted securities and,
through reports from Bankers Trust, the Board will monitor trading activity in
restricted 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 Stocks
The Fund may write and purchase put and call options on stocks. A call option
gives the purchaser of the option the right to buy, and obligates the writer to
sell, the underlying stock at the exercise price at any time during the option
period. Similarly, a put option gives the purchaser of the option the right to
sell, and obligates the writer to buy, the underlying stock at the exercise
price at any time during the option period. A covered call option, which is a
call option with respect to the underlying Fund stock, is sold by exposing the
Fund during the term of the option to possible loss of opportunity to realize
appreciation in the market price of the underlying stock or to possible
continued holding of a stock which might otherwise have been sold to protect
against depreciation in the market price of the stock. A covered put option sold
by the Fund exposes the Fund during the term of the option to a decline in price
of the underlying stock. A put option sold by the Fund is covered when, among
other things, cash or liquid securities are placed in a segregated account to
fulfill the obligations undertaken.
To close out a position when writing covered options, the Fund may make a
"closing purchase transaction," which involves purchasing an option on the same
stock with the same exercise price and expiration date as the option which it
has previously written on the stock. The Fund will realize a profit or loss for
a closing purchase transaction if the amount paid to purchase an option is less
or more, as the case may be, than the amount received from the sale thereof. To
close out a position as a purchaser of an option, the Fund may make a "closing
sale transaction," which involves liquidating the Fund's position by selling the
option previously purchased.
The Fund intends to treat OTC Options purchased and the assets used to "cover"
OTC Options written as not readily marketable and therefore subject to the
limitations described in "Investment Restrictions" in the SAI.
Options on Foreign Stock Indices
The Fund may purchase and write put and call options on foreign stock indices
listed on domestic and foreign stock exchanges. The Fund may also purchase and
write OTC Options on foreign stock indices. These OTC Options would be subject
to the same liquidity and credit risks noted above with respect to OTC Options
on foreign currencies. A stock index fluctuates with changes in the market
values of the stocks included in the index.
OTC Options are purchased from or sold to securities dealers, financial
institutions or other parties (collectively referred to as "Counterparties" and
individually referred to as a "Counterparty") through direct bilateral agreement
with the Counterparty. In contrast to exchange listed options, which generally
have standardized terms and performance mechanics, all of the terms of an OTC
Option, including such terms as method of settlement, term exercise price,
premium, guaranties and security, are set by negotiation of the parties.
Unless the parties provide for it, no central clearing or guaranty function is
involved in an OTC Option. As a result, if a Counterparty fails to make or take
delivery of the security, currency or other instrument underlying an OTC Option
it has entered into with the Fund or fails to make a cash settlement payment due
in accordance with the terms of that option, the Fund will lose any premium it
paid for the option as well as any anticipated benefit of the transaction. Thus,
the Investment Adviser must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC Option will be met.
Options on stock indices are generally similar to options on stock except that
the delivery requirements are different. Instead of giving the right to take or
make delivery of stock at a specified price, an option on a stock index gives
the holder the right to receive a cash "exercise settlement amount" equal to (a)
the amount, if any, by which the fixed exercise price of the option exceeds (in
the case of a put) or is less than (in the case of a call) the closing value of
the underlying index on the date of exercise, multiplied by (b) a fixed "index
multiplier." Receipt of this cash amount will depend upon the closing level of
the stock index upon which the option is based being greater than, in the case
of a call, or less than, in the case of a put, the exercise price of the option.
The amount of cash received will be equal to such difference between the closing
price of the index and the exercise price of the option expressed in dollars or
a foreign currency, as the case may be, times a specified multiple. The writer
of the option is obligated, in return for the premium received, to make delivery
of this amount. The writer may offset its position in stock index options prior
to expiration by entering into a closing transaction on an exchange or the
option may expire unexercised.
To the extent permitted by U.S. federal or state securities laws, the Fund may
invest in options on foreign stock indices in lieu of direct investment in
foreign securities. The Fund may also use foreign stock index options for
hedging purposes.
Because the value of an index option depends upon movements in the level of the
index rather than the price of a particular stock, whether the Fund will realize
a gain or loss from the purchase or writing of options on an index depends upon
movements in the level of stock prices in the stock market generally or, in the
case of certain indices, in an industry or market segment, rather than movements
in the price of a particular stock. Accordingly, successful use by the Fund of
options on stock indices will be subject to Bankers Trust's ability to predict
correctly movements in the direction of the stock market generally or of a
particular industry. This requires different skills and techniques than
predicting changes in the price of individual stocks.
Futures Contracts on Foreign Stock Indices
The Fund may enter into contracts providing for the making and acceptance of a
cash settlement based upon changes in the value of an index of foreign
securities ("Futures Contracts"). This investment technique is designed only to
hedge against anticipated future change in general market prices which otherwise
might either adversely affect the value of securities held by the Fund or
adversely affect the prices of securities which are intended to be purchased at
a later date for the Fund. A Futures Contract may also be entered into to close
out or offset an existing futures position.
In general, each transaction in Futures Contracts involves the establishment of
a position which will move in a direction opposite to that of the investment
being hedged. If these hedging transactions are successful, the futures
positions taken for the Fund will rise in value by an amount which approximately
offsets the decline in value of the portion of the Fund's investments that are
being hedged. Should general market prices move in an unexpected manner, the
full anticipated benefits of Futures Contracts may not be achieved or a loss may
be realized.
Although Futures Contracts would be entered into for hedging purposes only, such
transactions do involve certain risks. These risks could include a lack of
correlation between the Futures Contract and the foreign equity market being
hedged, a potential lack of liquidity in the secondary market and incorrect
assessments of market trends which may result in poorer overall performance than
if a Futures Contract had not been entered into.
Brokerage costs will be incurred and "margin" will be required to be posted and
maintained as a good-faith deposit against performance of obligations under
Futures Contracts written for the Fund. The Fund may not purchase or sell a
Futures Contract if immediately thereafter its margin deposits on its
outstanding Futures Contracts would exceed 5% of the market value of the Fund's
total assets.
Options on Futures Contracts
The Fund may invest in options on such futures contracts for similar purposes.
All options that the Fund writes will be covered under applicable
requirements of the SEC.
There can be no assurance that the use of these portfolio strategies will be
successful.
<PAGE>
Asset Coverage
To assure that the Fund's use of futures and related options, as well as
when-issued and delayed-delivery securities and foreign currency exchange
transactions, are not used to achieve investment leverage, the Fund will cover
such transactions, as required under applicable interpretations of the SEC,
either by owning the underlying securities or by establishing a segregated
(e.g., "earmarked") account with the Fund's Custodian containing high grade
liquid debt securities in an amount at all times equal to or exceeding the
Fund's commitment with respect to these instruments or contracts.
SHAREHOLDER AND ACCOUNT POLICIES
PURCHASE AND REDEMPTION OF SHARES
Shares of the Fund are continuously offered to each Company's separate accounts
at the net asset value per share next determined after a completed and signed
purchase request has been received by the Company. The Company then offers to
owners of the Contracts, which provide for investment in the Fund
("Contractowner(s)"), units in its separate accounts which directly correspond
to shares in the Fund. Each Company will process a purchase order from a
prospective Contractowner within two business days of its receipt or its
completion. If an initial purchase request remains incomplete after five
business days, the prospective Contractowner will be informed by the Company as
to the reasons for delay and the initial purchase payment will be returned,
unless the prospective Contractowner consents to the Company's retaining the
purchase payment until the purchase request is completed.
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 First Data Distributors, Inc., the Fund's
distributor ("FDDI" or the "Distributor"), reserve the right to reject any
purchase order.
Payment for redeemed shares will ordinarily be made within three (3) 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 completed and signed redemption order.
Because shares of the Fund are offered to Contractowners of both variable
annuity and variable life insurance contracts, differences of tax treatment or
other considerations may result in a conflict of interest of the various
Contractowners holding shares of the Fund. The Board of Trustees will monitor
the Fund for any material conflicts between such Contractowners and determine
what action, if any, should be taken.
<PAGE>
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 a 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 investment income and capital
gains each year. 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. Contractowners who own units in
a separate account which corresponds to shares in the Fund will be notified when
distributions are made.
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"), in order to be relieved
of federal income tax on that part of its net investment income and realized
capital gains which it distributes to the Companies' separate accounts.
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. Bankers Trust 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.
<PAGE>
Investment Adviser of the Fund
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
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.
.
<PAGE>
BT INSURANCE FUND TRUST
SMALL CAP INDEX FUND
PROSPECTUS
MARCH 24, 1998
This Prospectus offers shares of the Small Cap 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 seven 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 Small Stock 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
adviser (the "Adviser") 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
offering memorandum.
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 COMPANY
Investment Adviser of the Fund
FIRST DATA DISTRIBUTORS, INC.
Distributor
4400 Computer Drive
Westborough, MA 01581
<PAGE>
TABLE OF CONTENTS
Page
THE FUND................................................................ 3
Financial Highlights
Who May Want to Invest
Investment Principles and Risks
THE FUND IN DETAIL..................................................... 5
Investment Objectives and Policies
Risk Factors: Matching the Fund to Your Investment Needs
Net Asset Value
Performance Information and Reports
Management of the Trust
SHAREHOLDER AND ACCOUNT POLICIES....................................... 16
Purchase and Redemption of Shares
Dividends, Distributions and Taxes
<PAGE>
THE FUND
The Fund seeks to replicate as closely as possible (before the 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.
FINANCIAL HIGHLIGHTS
The following table provides financial highlights of the Fund for the period
presented and should be read in conjunction with the financial statements and
related notes that appear in the Trust's annual report dated December 31, 1997
(the "Annual Report") and which are incorporated by reference into the SAI. The
financial statements and related notes contained in the Annual Report have been
audited by Ernst & Young LLP, independent accountants. Additional information
concerning the performance of the Fund is included in the Annual Report which
may be obtained without charge by writing First Data Distributors, Inc., the
distributor to the Fund at the address on the cover of this Prospectus.
Small Cap Index Fund
(For a Share Outstanding throughout each period)
<TABLE>
<CAPTION>
<S> <C> <C>
Year Ended
12/31/97(a)
Net asset value, beginning of period $10.00
Income from Investment Operations:
Net investment income (b) 0.03
Net realized and unrealized gain (loss)
on investments and futures contracts 0.48
Net increase (decrease) in net asset value from operations 0.51
Net asset value, end of period $10.51
======
Total Return (c) 5.10%
<PAGE>
Ratios / Supplemental Data:
Net assets, end of period (in 000's) $12,617 Ratios to average net
assets:
Net investment income including reimbursement(d) 1.08%
Operating expenses including reimbursement (d) 0.45%
Operating expenses excluding reimbursement (d) 3.27%
Portfolio turnover rate 8%
Average commission rate paid $0.0208
- -----------------
(a) The Fund commenced operations on August 25, 1997.
(b) Based on average shares outstanding.
(c) Total investment return is calculated assuming an initial investment made
at the net asset value beginning of the period, reinvestment of all
dividends and distributions at net asset value during the period and
redemption on the last day of the period. Total return calculated for a
period of less than one year is not annualized.
(d) Annualized.
</TABLE>
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 designed 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.
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 investor's investment. When an investor sells his or her Fund shares, they
may be worth more or less than what the investors paid for them. See "Risk
Factors: Matching the Fund to Your Investment Needs" 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: Matching the Fund to Your Investment Needs"
in this Prospectus and in the Fund's SAI. The Fund seeks to replicate
as closely as possible (before the deduction of 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,
1997, the average stock market capitalization of the Russell 2000 was $440
million and the weighted average stock market capitalization of the Russell 2000
was $640 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 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
generally 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: Matching the Fund to Your Investment
Needs."
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: Matching the Fund
to Your Investment Needs" for more information about the investment practices of
the Fund.
<PAGE>
RISK FACTORS: MATCHING THE FUND TO YOUR INVESTMENT NEEDS
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: Matching the Fund to Your Investment Needs" 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 objectives, policies and restrictions of the
Fund, see "The Fund in Detail" herein and "Risk Factors: Matching the Fund to
Your Investment Needs" 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.
<PAGE>
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
The Fund may invest in 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 securities
issued or guaranteed by the United States Government, its agencies or
instrumentalities 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
may increase its income by the opportunity to receive interest on the
collateral. During the term of the loan, the Fund continues to bear the risk of
fluctuations in the price of the loaned securities. 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
receiving additional collateral, in recovery should the extensions of credit,
include delays in receiving additional collateral. Upon receipt of appropriate
regulatory approval, cash collateral may be invested in a money market fund
managed by Bankers Trust or its affiliates and Bankers Trust may serve as the
Fund's lending agent and may share in revenue received from securities lending
transactions as compensated for this service.
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. Bankers Trust
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, 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.
<PAGE>
Year 2000
The investment management services provided to the Fund by Bankers Trust and the
services provided to shareholders by the Fund's other service providers depend
on the smooth functioning of their computer systems. Many computer software
systems in use today cannot recognize the year 2000, but revert to 1900 or some
other date, due to the manner in which dates were encoded and calculated. That
failure could have a negative impact on the Fund's operations, including the
handling of securities trades, pricing and account services. Bankers Trust and
the Fund's other service providers have advised the Fund that they have been
reviewing all of their computer systems and actively working on necessary
changes to their systems to prepare for the year 2000. There can be, however, no
assurance that Bankers Trust or any other service provider will be successful,
or that interaction with other non-complying computer systems will not impair
Fund services at that time. Portfolio Turnover Bankers Trust intends to
manage the Fund actively in pursuit of its investment objective. The Fund's
annual portfolio turnover rate from the commencement of operations on August 25,
1997 to December 31, 1997 was 8%. NET ASSET VALUE
The net asset value ("NAV") per share of the Fund is calculated on each day the
New York Stock Exchange ("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, Martin Luther King Day, 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 NAV per share of the Fund is calculated once
on each Valuation Day as of the close of regular trading on the NYSE (the
"Valuation Time"), which under normal circumstances is 4:00 p.m., Eastern time
or in the event that the NYSE closes early, at the time of such early closing.
The NAV 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 as of the
Valuation Time. 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 Trust's Board of Trustees believes accurately reflects fair
value. A NAV for a Fund later determined to have been inaccurate for
any reason will be recalculated. Purchases and redemptions made at a NAV
determined to have been inaccurate will be adjusted, although in certain
circumstances, such as where the difference between the original NAV and the
recalculated NAV divided by the recalculated NAV is 0.005 (1/2 of 1%) or less or
shareholder transactions are otherwise in substantially affected, further action
is not required. 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 semi-annual financial reports and annual
financial reports that are audited by independent accountants. These reports
include the Fund's financial statements, including listings of investment
securities held by the Fund at those dates. For current Fund performance or a
free copy of the Fund's financial report, please contact the relevant Company or
Bankers Trust.
<PAGE>
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 Adviser
Bankers Trust Company, a New York banking corporation with principal 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
wholesale supplier of financial services to the international and domestic
institutional markets. As of December 31, 1997, Bankers Trust New York
Corporation was the seventh largest bank holding company in the United States
with total assets of over $100 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 90 offices in
more than 50 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 over $300 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. 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 of the Trust, 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 and
employs professional investment managers and securities analysts who provide
research services to the Fund. Bankers Trust may utilize the expertise of any of
its worldwide subsidiaries and affiliates to assist it in its role as Adviser.
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 is entitled to receive 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. Fund Adviser
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 of the Fund In
addition to the fees of Bankers Trust, 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. ("Investor Services Group"), 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,
Investor Services Group 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, the Trust has agreed to pay Investor Services Group 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 $5 billion; and
0.0075% of the Trust's monthly average net assets exceeding $5 billion, in
addition to a flat fee of $70,000 per year for each portfolio of the Trust and a
one-time start-up fee for each portfolio of the Trust.
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 Investor Services
Group serves as the transfer agent for the Fund. The principal business address
of the transfer agent is 4400 Computer Drive, Westborough, Massachusetts 01581.
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. Therefore under the 1940 Act, Companies owning 25%
or more of the outstanding securities of the Fund 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. As of March 19, 1998
the Company deemed to be a control person of the Fund was Travelers Insurance
Company. 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. Bankers Trust 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.
<PAGE>
Investment Adviser of the Fund
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
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.
<PAGE>
BT INSURANCE FUNDS TRUST
EAFE(R) EQUITY INDEX FUND
PROSPECTUS
MARCH 24, 1998
This Prospectus offers shares of the EAFE(R) 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 seven 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(R)) Index (the "
EAFE(R) 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 adviser (the
"Adviser") 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
offering memorandum.
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(R) 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 COMPANY
Investment Adviser of the Fund
FIRST DATA DISTRIBUTORS, INC.
Distributor
4400 Computer Drive
Westborough, MA 01581
<PAGE>
TABLE OF CONTENTS
Page
THE FUND................................................................. 3
Financial Highlights
Who May Want to Invest
Investment Principles and Risks
THE FUND IN DETAIL..................................................... 5
Investment Objectives and Policies
Risk Factors: Matching the Fund to Your Investment Needs
Net Asset Value
Performance Information and Reports
Management of the Trust
SHAREHOLDER AND ACCOUNT POLICIES........................................ 17
Purchase and Redemption of Shares
Dividends, Distributions and Taxes ]
<PAGE>
THE FUND
The Fund seeks to replicate as closely as possible (before the deduction of
Expenses) the total return of the Europe, Australia, Far East Index (the
"EAFE(R) 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(R) Index by buying most of the EAFE(R) Index securities. Securities
purchased for the Fund will generally, but not necessarily, be traded on a
foreign securities exchange.
FINANCIAL HIGHLIGHTS
The following table provides financial highlights of the Fund for the period
presented and should be read in conjunction with the financial statements and
related notes that appear in the Trust's annual report dated December 31, 1997
(the "Annual Report") and which are incorporated by reference into the SAI. The
financial statements and related notes contained in the Annual Report have been
audited by Ernst & Young LLP, independent accountants. Additional information
concerning the performance of the Fund is included in the Annual Report which
may be obtained without charge by writing First Data Distributors, Inc., the
distributor to the Fund at the address on the cover of this Prospectus.
EAFE(R) Equity Index Fund
(For a Share Outstanding throughout each period)
<TABLE>
<CAPTION>
<S> <C> <C>
Year
Ended
12/31/97(a)
Net asset value, beginning of period $10.00
Income from Investment Operations:
Net investment income (b) 0.02
Net realized and unrealized gain (loss)
on investments and futures contracts (0.68)
Net increase (decrease) in net asset value from operations (0.66)
Net asset value, end of period $9.34
=====
<PAGE>
Total Return (c) (6.60%)
Ratios / Supplemental Data:
Net assets, end of period (in 000's) $14,409 Ratios to average
net assets:
Net investment income including reimbursement(d) 0.72%
Operating expenses including reimbursement (d) 0.65%
Operating expenses excluding reimbursement (d) 2.75%
Portfolio turnover rate 0%(e)
Average commission rate paid $0.0196
- -------------------
(a) The Fund commenced operations on August 22, 1997.
(b) Based on average shares outstanding.
(c) Total investment return is calculated assuming an initial investment made
at the net asset value beginning of the period, reinvestment of all
dividends and distributions at net asset value during the period and
redemption on the last day of the period. Total return calculated for a
period of less than one year is not annualized.
(d) Annualized. (e) Less than 1%.
</TABLE>
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(R) 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.
<PAGE>
The Fund is intended to be a long-term investment vehicle and is not designed 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.
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 investor's investment. When an investor sells his or her Fund
shares, they may be worth more or less than what the investors paid for them.
See "Risk Factors: Matching the Fund to Your Investment Needs" 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: Matching the Fund to Your Investment Needs"
in this Prospectus and in the Fund's SAI. The Fund seeks to replicate as
closely as possible (before the deduction of Expenses) the total return of the
EAFE(R) Index. The Fund attempts to achieve this objective by investing in a
statistically selected sample of the equity securities included in the EAFE(R)
Index.
The EAFE(R) 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(R) 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 The United Kingdom.
The Fund is constructed to have aggregate investment characteristics similar to
those of the EAFE(R) Index. The Fund invests in a statistically selected sample
of the securities of companies included in the EAFE(R) 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(R) Index. From time to time,
adjustments may be made in the Fund because of changes in the composition of the
EAFE(R) 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(R) 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(R) 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(R) Index. Inclusion of a security in the EAFE(R) 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 of, or quantities of shares of the Fund
to be issued or in the determination or calculation of the equation by which
shares of the Fund are redeemable for cash. Morgan Stanley has no obligation or
liability to owners of shares 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(R)
Index is expected to be 0.95 or higher before deduction of 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(R) Index. The Fund's ability to track the EAFE(R) 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(R)
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(R) Index, Bankers Trust
generally 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(R) 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(R) Index should concentrate to an extent greater than that amount, the
Fund's 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(R) 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(R) 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(R) Index. These instruments may be considered derivatives. See
"Risk Factors: Matching the Fund to Your Investment Needs." 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: Matching the Fund to Your Investment Needs" for
more information about the investment practices of the Fund.
RISK FACTORS: MATCHING THE FUND TO YOUR INVESTMENT NEEDS
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.
<PAGE>
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: Matching the Fund to Your Investment Needs" 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: Matching the Fund to
Your Investment Needs" 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
The Fund may invest in 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 securities issued or
guaranteed by the United States Government, its agencies or instrumentalities 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 may increase its
income by the opportunity to receive interest on the collateral. During the term
of the loan, the Fund continues to bear the risk of fluctuations in the price of
the loaned securities. 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 receiving additional collateral,
in recovery should the extensions of credit, include delays in receiving
additional collateral. Upon receipt of appropriate regulatory approval, cash
collateral may be invested in a money market fund managed by Bankers Trust or
its affiliates and Bankers Trust may serve as the Fund's lending agent and may
share in revenue received from securities lending transactions as compensated
for this service.
<PAGE>
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. Bankers Trust
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.
<PAGE>
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(R) 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. Year 2000
The investment management services provided to the Fund by Bankers Trust and the
services provided to shareholders by the Fund's other service providers depend
on the smooth functioning of their computer systems. Many computer software
systems in use today cannot recognize the year 2000, but revert to 1900 or some
other date, due to the manner in which dates were encoded and calculated. That
failure could have a negative impact on the Fund's operations, including the
handling of securities trades, pricing and account services. Bankers Trust and
the Fund's other service providers have advised the Fund that they have been
reviewing all of their computer systems and actively working on necessary
changes to their systems to prepare for the year 2000. There can be, however, no
assurance that Bankers Trust or any other service provider will be successful,
or that interaction with other non-complying computer systems will not impair
Fund services at that time. Portfolio Turnover Bankers Trust
intends to manage the Fund actively in pursuit of its investment objective. The
Fund's annual portfolio turnover rate from the commencement of operations on
August 22, 1997 to December 31, 1997 was less than 1%. NET ASSET VALUE
The net asset value ("NAV") per share of the Fund is calculated on each day on
which the New York Stock Exchange ("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, Martin Luther King Day, 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.
<PAGE>
The NAV per share of the Fund is calculated once on each Valuation Day as of the
close of regular trading on the NYSE (the "Valuation Time"), which under normal
circumstances is 4:00 p.m., Eastern time or in the event that the NYSE closes
early, at the time of such early closing. The NAV 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 as of the Valuation Time. 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 Trust's Board of
Trustees believes accurately reflects fair value. A NAV for a Fund
later determined to have been inaccurate for any reason will be recalculated.
Purchases and redemptions made at a NAV determined to have been inaccurate will
be adjusted, although in certain circumstances, such as where the difference
between the original NAV and the recalculated NAV divided by the recalculated
NAV is 0.005 (1/2 of 1%) or less or shareholder transactions are otherwise in
substantially affected, further action is not required. 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 EAFE(R)
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 semi-annual financial reports and annual
financial reports that are audited by independent accountants. These reports
include the Fund's financial statements, including listings of investment
securities held by the Fund at those dates. For current Fund performance or a
free copy of the Fund's financial report, please contact the relevant Company or
Bankers Trust. 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 Adviser
Bankers Trust Company, a New York banking corporation with principal 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
wholesale supplier of financial services to the international and domestic
institutional markets. As of December 31, 1997, Bankers Trust New York
Corporation was the seventh largest bank holding company in the United States
with total assets of over $100 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 90 offices in
more than 50 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 over $300 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. 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 of the Trust, 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 and
employs professional investment managers and securities analysts who provide
research services to the Fund. Bankers Trust may utilize the expertise of any of
its worldwide subsidiaries and affiliates to assist it in its role as Adviser.
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 is entitled to receive 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. Fund Adviser Richard J. Vella,
Managing Director of Bankers Trust, has been responsible for the day-to-day
management of the Fund since its inception. Mr. Vella has been employed by
Bankers Trust since 1985 and has thirteen years of trading and investment
experience. Expenses of the Fund
In addition to the fees of Bankers Trust, 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. ("Investor Services Group"), 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,
Investor Services Group 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, the Trust has agreed to pay Investor Services Group 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 $5 billion and 0.0075%
of the Trust's monthly average net assets exceeding $5 billion, in addition to a
flat fee of $70,000 per year for each portfolio of the Trust and a one-time
start-up fee for each portfolio of the Trust.
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 Investor Services
Group serves as the transfer agent for the Fund. The principal business address
of the transfer agent is 4400 Computer Drive, Westborough, Massachusetts 01581.
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. Therefore under the 1940 Act, Companies owning 25%
or more of the outstanding securities of the Fund 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. As of March 19, 1998
the Company deemed to be a control person of the Fund was Travelers Insurance
Company. 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. Bankers Trust 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.
<PAGE>
Investment Adviser of the Fund
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
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.
<PAGE>
BT INSURANCE FUNDS TRUST
EQUITY 500 INDEX FUND
PROSPECTUS
MARCH 24, 1998
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 seven 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 adviser (the "Adviser") 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
offering memorandum.
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 COMPANY
Investment Manager of the Fund
FIRST DATA DISTRIBUTORS, INC.
Distributor
4400 Computer Drive
Westborough, MA 01581
<PAGE>
TABLE OF CONTENTS
Page
THE FUND................................................................ 3
Financial Highlights
Who May Want to Invest
Investment Principles and Risks
THE FUND IN DETAIL...................................................... 5
Investment Objectives and Policies
Risk Factors: Matching the Fund to Your Investment Needs
Net Asset Value
Performance Information and Reports
Management of the Trust
SHAREHOLDER AND ACCOUNT POLICIES........................................ 17
Purchase and Redemption of Shares
Dividends, Distributions and Taxes
<PAGE>
THE FUND
The Fund seeks to replicate as closely as possible (before the 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. FINANCIAL HIGHLIGHTS
The following table provides financial highlights of the Fund for the period
presented and should be read in conjunction with the financial statements and
related notes that appear in the Trust's annual report dated December 31, 1997
(the "Annual Report") and which are incorporated by reference into the SAI. The
financial statements and related notes contained in the Annual Report have been
audited by Ernst & Young LLP, independent accountants. Additional information
concerning the performances of the Fund is included in the Annual Report which
may be obtained without charge by writing the First Data Distributors, Inc., the
distributor to the Fund at the address on the cover of this Prospectus.
Equity 500 Index Fund
(for a Fund Share outstanding throughout the period)
<TABLE>
<CAPTION>
<S> <C>
Year
Ended
12/31/97(a)
Net asset value, beginning of period $10.00
Income from Investment Operations:
Net investment income (b) 0.03
Net realized and unrealized gain (loss)
on investments and futures contracts 0.16
Net increase (decrease) in net asset value from operations 0.19
Net asset value, end of period $10.19
=====
Total Return (c) 1.90%
<PAGE>
Ratios / Supplemental Data:
Net assets, end of period (in 000's) $11,760 Ratios to average net assets:
Net investment income including reimbursement (d) 1.51%
Operating expenses including reimbursement (d) 0.30%
Operating expenses excluding reimbursement (d) 2.78%
Portfolio turnover rate 7%
Average commission rate paid $0.0203
- ------------
(a) The Fund commenced operations on October 1, 1997.
(b) Based on average shares outstanding.
(c) Total investment return is calculated assuming an initial investment made
at the net asset value beginning of the period, reinvestment of all
dividends and distributions at net asset value during the period and
redemption on the last day of the period. Total return calculated for a
period of less than one year is not annualized.
(d) Annualized.
</TABLE>
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 designed 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 investor's investment. When investors sell Fund shares, they may be worth
more or less than what the investors paid for them. See "Risk Factors: Matching
the Fund to Your Investment Needs" 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: Matching the Fund to Your Investment Needs"
herein and in the Fund's SAI. The Fund seeks to replicate as closely as
possible (before the 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.
Bankers Trust 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 a well-known stock market index that includes common stocks of
500 companies from several industrial sectors representing a significant portion
of the market value of all common stocks publicly traded in the United States,
most of which are listed on the NYSE. Stocks in the S&P 500 are weighted
according to their market capitalization (i.e., the number of shares outstanding
multiplied by the stock's current price). 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 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 generally 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 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 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: Matching the Fund to Your Investment Needs -- 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: Matching the Fund
to Your Investment Needs" for more information about the investment practices of
the Fund.
RISK FACTORS: MATCHING THE FUND TO YOUR INVESTMENT NEEDS
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: Matching the Fund to Your Investment Needs" 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: Matching the Fund to
Your Investment Needs" 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
The Fund may invest in 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.
<PAGE>
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 securities
issued or guaranteed by the United States Government, its agencies or
instrumentalities 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
may increase its income by the opportunity to receive interest on the
collateral. During the term of the loan, the Fund continues to bear the risk of
fluctuations in the price of the loaned securities. 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
receiving additional collateral, in recovery should the extensions of credit,
include delays in receiving additional collateral, in recovery should the
borrower fail financially and possible loss of the collateral. Upon receipt of
appropriate regulatory approval, cash collateral may be invested in a money
market fund managed by Bankers Trust or its affiliates and Bankers Trust may
serve as the Fund's lending agent and may share in revenue received from
securities lending transactions as compensated for this service.
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. Bankers Trust 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.
<PAGE>
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.
<PAGE>
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. Year 2000
The investment management services provided to the Fund by Bankers Trust and the
services provided to shareholders by the Fund's other service providers depend
on the smooth functioning of their computer systems. Many computer software
systems in use today cannot recognize the year 2000, but revert to 1900 or some
other date, due to the manner in which dates were encoded and calculated. That
failure could have a negative impact on the Fund's operations, including the
handling of securities trades, pricing and account services. Bankers Trust and
the Fund's other service providers have advised the Fund that they have been
reviewing all of their computer systems and actively working on necessary
changes to their systems to prepare for the year 2000. There can be, however, no
assurance that Bankers Trust or any other service provider will be successful,
or that interaction with other non-complying computer systems will not impair
Fund services at that time. Portfolio Turnover Bankers Trust intends to
manage the Fund actively in pursuit of its investment objective. The Fund's
annual portfolio turnover rate from commencement of operations on October 1,
1997 to December 31, 1997 was 7%. NET ASSET VALUE The net asset
value ("NAV") per share of the Fund is calculated on 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, Martin Luther King Day,
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 NAV per share
of the Fund is calculated once on each Valuation Day as of the close of regular
trading on the NYSE (the "Valuation Time"), which under normal circumstances is
4:00 p.m., Eastern time or in the event that the NYSE closes early, at the time
of such early closing. The NAV 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 as of the Valuation Time. 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 Trust's Board of Trustees
believes accurately reflects fair value.
A NAV for a Fund later determined to have been inaccurate for any reason will be
recalculated. Purchases and redemptions made at a NAV determined to have been
inaccurate will be adjusted, although in certain circumstances, such as where
the difference between the original NAV and the recalculated NAV divided by the
recalculated NAV is 0.005 (1/2 of 1%) or less or shareholder transactions are
otherwise in substantially affected, further action is not required.
A net asset value for a Fund later determined to have been inaccurate for any
reason will be recalculated. Purchases and redemptions made at a net asset value
determined to have been inaccurate will be adjusted if the difference between
the original net asset value and the recalculated net asset value divided by the
recalculated net asset value is 0.005 (1/2 of 1%) or greater and the difference
between the net asset value is equal to or greater than $0.01, unless the impact
of the error to a shareholder account was $10 or less. 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 semi-annual financial reports and annual
financial reports that are audited by independent accountants. These reports
include the Fund's financial statements, including listings of investment
securities held by the Fund at those dates. For current Fund performance or a
free copy of the Fund's financial report, please contact the relevant Company or
Bankers Trust. 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 Adviser
Bankers Trust Company, a New York banking corporation with principal 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
wholesale supplier of financial services to the international and domestic
institutional markets. As of December 31, 1997, Bankers Trust New York
Corporation was the seventh largest bank holding company in the United States
with total assets of over $100 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 90 offices in
more than 50 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 over $300 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. 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
of the Trust, 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 and employs professional investment managers
and securities analysts who provide research services to the Fund. Bankers Trust
may utilize the expertise of any of its worldwide subsidiaries and affiliates to
assist it in its role as Adviser. 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 is entitled to receive 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.
<PAGE>
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.
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 of the Fund
In addition to the fees of Bankers Trust, 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. ("Investor Services Group"), 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,
Investor Services Group 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, the Trust has agreed to pay Investor Services Group 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 $5 billion; and
0.0075% of the Trust's monthly average net assets exceeding $5 billion, in
addition to a flat fee of $70,000 per year for each portfolio of the Trust and a
one-time start-up fee for each portfolio of the Trust.
<PAGE>
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 Investor Services
Group serves as the transfer agent for the Fund. The principal business address
of the transfer agent is 4400 Computer Drive, Westborough, Massachusetts 01581.
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. Therefore under the 1940 Act, Companies owning 25%
or more of the outstanding securities of the Fund 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. As of March 19, 1998
the Company deemed to be a control person of the Fund was Integrity Life
Insurance Company. 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. Bankers Trust 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.
<PAGE>
Investment Manager of the Fund
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
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.
BT INSURANCE FUNDS TRUST
U.S. BOND INDEX FUND
PROSPECTUS
MARCH 24, 1998
This Prospectus offers shares of the U.S. Bond Index Fund (the "Fund"), a series
of BT Insurance Funds Trust (the "Trust"), which is an open-end management
investment company currently having seven 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 Lehman
Brothers Aggregate Bond 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
adviser (the "Adviser") 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 (the "SEC"), and is incorporated
herein by reference. You may request a free copy of the SAI by calling your
insurance company's Customer Service Center at the telephone number shown in the
accompanying
offering memorandum.
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 COMPANY
Investment Manager of the Fund
FIRST DATA DISTRIBUTORS, INC.
Distributor
4400 Computer Drive
Westborough, MA 01581
<PAGE>
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: Matching the Fund to Your Investment Needs
Net Asset Value
Performance Information and Reports
Management of the Trust
SHAREHOLDER AND ACCOUNT POLICIES......................................... 16
Purchase and Redemption of Shares
Dividends, Distributions and Taxes
<PAGE>
THE FUND
The Fund seeks to replicate as closely as possible (before the deduction of
Expenses) the investment performance of the Lehman Brothers Aggregate Bond Index
(the "Aggregate Bond Index"), a broad market weighted index which encompasses
U.S. Treasury and agency securities, corporate investment grade bonds,
international (dollar-denominated) investment grade bonds, and mortgage-backed
securities. The Fund will be invested primarily in fixed income securities of
the U.S. government or any agency thereof, publicly issued fixed rate domestic
debt of industrial, financial, and utility corporations, and U.S. dollar
denominated fixed income securities of foreign and supranational entities issued
publicly in the United States. The Fund will also invest in mortgage
pass-through securities issued by the Government National Mortgage Association
("GNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC"), and the Federal
National Mortgage Association ("FNMA").
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 Aggregate Bond 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 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 designed 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.
INVESTMENT PRINCIPLES AND RISKS
The value of the Fund's investments varies based on many factors. The value of
bonds fluctuates based on changes in domestic or foreign interest rates, the
credit quality of the issuer, market conditions, and other economic and
political news. In general, bond prices rise when interest rates fall, and vice
versa. This effect is usually more pronounced for longer-term securities. Lower
quality securities offer higher yields, but also carry more risk.
When an investor sells his or her Fund shares, they may be worth more or less
than what the investor paid for them. See "Risk Factors: Matching the Fund to
Your Investment Needs" 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: Matching the Fund to Your Investment Needs"
in this Prospectus and in the Fund's SAI. The Fund seeks to replicate as
closely as possible (before deduction of Fund expenses) the investment
performance of the Aggregate Bond Index, a broad market weighted index which
encompasses four major classes of investment grade fixed-income securities in
the United States: U.S. Treasury and agency securities, corporate bonds,
international (dollar-denominated) bonds, and mortgage-backed securities, with
maturities greater than one year. As of February 10, 1998, the major classes
of fixed-income securities represented the following proportions of the
Aggregate Bond Index's total market value.
......... Aggregate
......... Bond Index
U.S. Treasury and agency securities 49%
Corporate bonds 16%
International (dollar-denominated) bonds 4%
Mortgage-backed securities 30%
Asset Backed Securities 1%
Dollar-weighted average maturity (Years) 8.8 yrs
The Fund will be unable to hold all of the individual issues which comprise the
Aggregate Bond Index because of the large number of securities involved.
Instead, the Fund will hold a representative sample of the securities in the
Aggregate Bond Index, selecting one or two issues to represent entire "classes"
or types of securities in the Aggregate Bond Index. The Fund will be constructed
so as to match as closely as possible the composition of the Aggregate Bond
Index by investing in fixed-income securities approximating their relative
proportion of the Aggregate Bond Index's total market value.
The Fund may, from time to time, substitute one type of investment grade bond
for another. For instance, a Fund may hold more short-term corporate bonds (and,
in turn, hold fewer short U.S. Treasury bonds) than represented in the Aggregate
Bond Index so as to increase income. This corporate substitution strategy will
entail the assumption of additional credit risk; however, substantial
diversification within the corporate sector should moderate issue-specific
credit risk.
Fixed-income securities will be primarily of investment grade quality - i.e.,
those rated at least Baa by Moody's Investors Service, Inc. ("Moody's") or BBB-
by Standard & Poor's Ratings Group ("S&P"). Securities rated Baa or BBB possess
some speculative characteristics.
The Fund may invest in U.S. Treasury bills, notes and bonds and other "full
faith and credit" obligations of the U.S. government and in U.S. government
agency securities, which are debt obligations issued or guaranteed by agencies
or instrumentalities of the U.S. government ("U.S. Government Securities"). Such
"agency" securities may not be backed by the "full faith and credit" of the U.S.
government. Such U.S. government agencies may include the Farm Credit Banks and
the Resolution Trust Corporation.
Even though they all carry top (AAA) credit ratings, agency obligations are not
explicitly guaranteed by the U.S. government and so are perceived as somewhat
riskier than comparable Treasury bonds.
As a mutual fund investing primarily in fixed-income securities, the Fund is
subject to interest rate, income, call and credit risks. Since the Fund also
invests in mortgage-backed securities, it is also subject to prepayment risk.
See "Risk Factors: Matching the Fund to Your Investment Needs."
General
Over time, the correlation between the performance of the Fund and the Aggregate
Bond Index is expected to be 0.95 or higher before deduction of 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 Aggregate Bond Index. The Fund's ability to track the Aggregate
Bond 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 Aggregate Bond 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
Aggregate Bond Index, Bankers Trust generally 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 Aggregate Bond 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. 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 Aggregate Bond
Index. Securities index futures contracts and related options, warrants,
convertible securities and swap agreements may be used for several reasons: to
simulate full investment in the Aggregate Bond 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, convertible security or swap agreement is priced more
attractively than the underlying equity security or the Aggregate Bond Index.
These instruments may be considered derivatives. See "Risk Factors: Matching the
Fund to Your Investment Needs." 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 (such as altering the aggregate maturity of the Fund) 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 also invest in mortgage-related and other
asset-backed securities. See "Risk Factors: Matching the Fund to Your Investment
Needs" for more information about the investment practices of the Fund.
RISK FACTORS: MATCHING THE FUND TO YOUR INVESTMENT NEEDS 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.
Fixed Income Security Risk
Investors in the Fund are exposed to four types of risk from fixed income
securities: (1) Interest rate risk is the potential for fluctuations in bond
prices due to changing interest rates; (2) Income risk is the potential for a
decline in a Fund's income due to falling market interest rates; (3) Credit risk
is the possibility that a bond issuer will fail to make timely payments of
either interest or principal to the Fund; and (4) Prepayment risk or call risk
is the likelihood that, during periods of falling interest rates, securities
with high stated interest rates will be prepaid (or "called") prior to maturity,
requiring the Fund to invest the proceeds at generally lower interest rates.
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: Matching the Fund to Your Investment Needs" in the SAI for a
description of the fundamental policies 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" and "Risk Factors: Matching the Fund to Your
Investment Needs" herein and in the SAI.
Securities and Investment Practices
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
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 FNMA, 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 securities
issued or guaranteed by the United States Government, its agencies or
instrumentalities 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
may increase its income by the opportunity to receive interest on the
collateral. During the term of the loan, the Fund continues to bear the risk of
fluctuations in the price of the loaned securities. 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
receiving additional collateral, in recovery should the borrower fail
financially and possible loss of collateral. Upon receipt of appropriate
regulatory approval, cash collateral may be invested in a money market fund
managed by Bankers Trust or its affiliates and Bankers Trust may serve as the
Fund's lending agent and may share in revenue received from securities lending
transactions as compensated for this service.
<PAGE>
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.
Mortgage-Related Securities
As part of its effort to replicate the investment performance of the Aggregate
Bond Index, the Fund may invest in mortgage-backed securities. Mortgage-backed
securities represent an interest in an underlying pool of mortgages. Unlike
ordinary fixed-income securities, which generally pay a fixed rate of interest
and return principal upon maturity, mortgage-backed securities repay both
interest income and principal as part of their periodic payments. Because the
mortgages underlying mortgage-backed certificates can be prepaid at any time by
homeowners or corporate borrowers, mortgage-backed securities give rise to
certain unique "pre-payment" risks. See "Risk Factors: Matching the Fund to Your
Investment Needs."
The Fund may purchase mortgage-backed securities issued by the GNMA, the FHLMC,
the FNMA, and the Federal Housing Authority ("FHA"). GNMA securities are
guaranteed by the U.S. government as to the timely payment of principal and
interest; securities from other Government-sponsored entities are generally not
secured by an explicit pledge of the U.S. government. The Fund may also invest
in conventional mortgage securities, which are packaged by private corporations
and are not guaranteed by the U.S. government. Mortgage securities that are
guaranteed by the U.S. government are guaranteed only as to the timely payment
of principal and interest. The market value of such securities is not guaranteed
and may fluctuate.
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. 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.
<PAGE>
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.
Swap Agreements
The Fund may enter into swap agreements only to the extent that obligations
under such agreements represent not more than 10% of the Fund's total assets.
Swap agreements are contracts between parties in which one party agrees to make
payments to the other party based on the change in market value of a specified
index or asset. In return, the other party agrees to make payments to the first
party based on the return of a different specified index or asset.
Although swap agreements entail the risk that a party will default on its
payment obligations thereunder, the Fund will minimize this risk by entering
into agreements that mark to market no less frequently than quarterly. Swap
agreements also bear the risk that the Fund will not be able to meet its
obligation to the counterparty. This risk will be mitigated by investing the
Fund in the specific asset for which it is obligated to pay a return.
Warrants
The Fund's investment in warrants will not exceed more than 5% of its assets (2%
with respect to warrants not listed on a recognized United States stock
exchange). 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,
convertible securities and swap agreements
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, convertible securities and swap agreements for speculative purposes or
to leverage their net assets. Accordingly, the primary risks associated with the
use of futures contracts, options, warrants, convertible securities and swap
agreements 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, convertible securities and swap agreements; 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,
convertible securities and swap agreements 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, interest rate swaps and related options
transactions 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. Year 2000
The investment management services provided to the Fund by Bankers Trust and the
services provided to shareholders by the Fund's other service providers depend
on the smooth functioning of their computer systems. Many computer software
systems in use today cannot recognize the year 2000, but revert to 1900 or some
other date, due to the manner in which dates were encoded and calculated. That
failure could have a negative impact on the Fund's operations, including the
handling of securities trades, pricing and account services. Bankers Trust and
the Fund's other service providers have advised the Fund that they have been
reviewing all of their computer systems and actively working on necessary
changes to their systems to prepare for the year 2000. There can be, however, no
assurance that Bankers Trust or any other service provider will be successful,
or that interaction with other non-complying computer systems will not impair
Fund services at that time.
Portfolio Turnover
Bankers Trust intends to manage the Fund actively in pursuit of its investment
objective. 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 net asset value ("NAV") per share of the Fund is calculated on each day the
New York Stock Exchange ("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, Martin Luther King Day, 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 NAV per share of the Fund is calculated once
on each Valuation Day as of the close of regular trading on the NYSE (the
"Valuation Time"), which under normal circumstances is 4:00 p.m., Eastern time
or in the event that the NYSE closes early, at the time of such early closing.
The NAV 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 as
of the Valuation Time. 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 Trust's Board of Trustees believes accurately
reflects fair value.
A NAV for a Fund later determined to have been inaccurate for any reason
will be recalculated. Purchases and redemptions made at a NAV determined to have
been inaccurate will be adjusted, although in certain circumstances, such as
where the difference between the original NAV and the recalculated NAV divided
by the recalculated NAV is 0.005 (1/2 of 1%) or less or shareholder transactions
are otherwise in substantially affected, further action is not required.
PERFORMANCE INFORMATION AND REPORTS
Mutual fund performance is commonly measured as total return and/or yield. The
Fund's performance is affected by the expenses of the Fund.
Total return is the change in value of an investment in the Fund over a given
period, assuming reinvestment of any dividends and capital gains. A cumulative
total return reflects actual performance over a stated period of time. An
average annual total return is a hypothetical rate of return that, if achieved
annually, would have produced the same cumulative total return if performance
had been constant over the entire period. Average annual total return
calculations smooth out variations in performance; they are not the same as
actual year-by-year results. Average annual total returns covering periods of
less than one year assume that performance will remain constant for the rest of
the year.
Yield refers to the income generated by an investment in a Fund over a given
period of time, expressed as an annual percentage rate. Yields are calculated
according to a standard that is required for all stock and bond funds. Because
this differs from other accounting methods, the quoted yield may not equal the
income actually paid to shareholders.
Performance information may include comparisons of the Fund's investment results
to various unmanaged indices or results of other mutual funds or investment or
savings vehicles. From time to time, Fund rankings may be quoted from various
sources, such as Lipper Analytical Services, Inc., Value Line and Morningstar,
Inc.
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 may be provided, Bankers Trust may have voluntarily agreed to waive
portions of their 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 yield and 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 audited annual financial reports and unaudited
semi-annual financial reports that include the Fund's financial statements,
including listings of investment securities held by the Fund at those dates. For
current Fund performance or a free copy of the Fund's financial report, please
contact the relevant Company or Bankers Trust. 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 Adviser
Bankers Trust Company, a New York banking corporation with principal 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
wholesale supplier of financial services to the international and domestic
institutional markets. As of December 31, 1997, Bankers Trust New York
Corporation was the seventh largest bank holding company in the United states
with total assets of over $100 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 90 offices in
more than 50 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 over $300 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. 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 of the Trust, 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 and
employs professional investment managers and securities analysts who provide
research services to the Fund. Bankers Trust may utilize the expertise of any of
its worldwide subsidiaries and affiliates to assist it in its role as Adviser.
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 is entitled to receive a fee from the Fund,
accrued daily and paid monthly, equal on an annual basis to 0.15% 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.
<PAGE>
Fund Manager
Louis R. D'Arienzo, Vice President of Bankers Trust, is responsible for the
day-to-day management of the Fund. Mr. D'Arienzo has been employed by Bankers
Trust since 1981 and has twelve years trading and investment experience in fixed
income securities. Expenses of the Fund In addition to the fees of
Bankers Trust, 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. ("Investor Services Group"), 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,
Investor Services Group 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, the Trust has agreed to pay Investor Services Group 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 $5 billion; and
0.0075% of the Trust's monthly average net assets exceeding $5 billion, in
addition to a flat fee of $70,000 per year for each portfolio of the Trust and a
one-time start up fee for each portfolio of the Trust.
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.
<PAGE>
Custodian and Transfer Agent
Bankers Trust acts as custodian of the assets of the Fund and Investor Services
Group serves as the transfer agent for the Fund. The principal business address
of the transfer agent is 4400 Computer Drive, Westborough, Massachusetts 01581.
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. Therefore, under the 1940 Act, Companies owning 25%
or more of the outstanding securities of the Fund 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 declares dividends from its net income daily
and pays the dividends monthly. Distribution of the Fund's net realized capital
gains, if any, are normally declared and paid annually at the end of the fiscal
year in which they were earned to the extent they are not offset by any capital
loss carryforwards. 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. Bankers Trust 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.
<PAGE>
Investment Manager of the Fund
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
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.
<PAGE>
STATEMENT OF
ADDITIONAL INFORMATION
BT INSURANCE FUNDS TRUST
SMALL CAP FUND
INTERNATIONAL EQUITY FUND
MARCH 24, 1998
BT Insurance Funds Trust (the "Trust") is currently comprised of seven series:
the Small Cap Fund and the International Equity Fund (each, a "Fund" and
together "Funds") and five other series. The shares of the Funds are described
herein. Capitalized terms not otherwise defined herein shall have the same
meaning as in the Prospectus.
Table of Contents
Investment Objectives, Policies and Restrictions.....................2
Performance Information.............................................20
Valuation of Securities; Redemption in Kind ........................21
Management of the Funds ............................................22
Organization of the Trust...........................................26
Taxation............................................................27
Appendix...........................................................A-1
Shares of the Funds 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 manager
of each Fund is Bankers Trust Company (the "Adviser" or "Bankers Trust"). The
distributor of each Fund's shares is First Data Distributors, Inc. (the
"Distributor" or "First Data Distributors"). The Prospectus
for each Fund is dated March 24, 1998. Each Prospectus provides the basic
information investors should know before investing and may be obtained without
charge by calling your insurance company's Customer Service Center at the
telephone number shown in the accompanying offering memorandum(s). This
Statement of Additional Information ("SAI"), which is not a Prospectus, is
intended to provide additional information regarding the activities and
operations of each Fund and should be read in conjunction with that Fund's
Prospectus. This SAI is not an offer of any Fund for which an investor has not
received a Prospectus.
BANKERS TRUST COMPANY
Investment Adviser of each Fund
FIRST DATA DISTRIBUTORS, INC.
Distributor
4400 Computer Drive
Westborough, MA 01581
<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
Investment Objectives
The investment objective of each Fund is described in that Fund's Prospectus.
There can, of course, be no assurance that any Fund will achieve its investment
objective.
Investment Policies
The following is a discussion of the various investments of and techniques
employed by each 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.
Short-Term Instruments. When a 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, each Fund may hold short-term instruments 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
Standard & Poor's Ratings Group ("S&P") or Aa or higher by Moody's Investors
Services, Inc. ("Moody's") or, if unrated, are of comparable quality in the
opinion of Bankers Trust; (iii) commercial paper; (iv) bank obligations,
including negotiable certificates of deposit, time deposits and banker's
acceptances; and (v) repurchase agreements. At the time the Fund invests in
commercial paper, bank obligations or repurchase agreements, the issuer or 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.
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 remaining 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 Adviser 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 Adviser will monitor the liquidity of Rule 144A securities in each Fund's
holdings under the supervision of the Fund's Board of Trustees. In reaching
liquidity decisions, the Adviser will consider, among other things, the
following factors: (1) the frequency of trades and quotes for the security; (2)
the number of dealers and other potential purchasers or sellers of the security;
(3) dealer undertakings to make a market in the security; and (4) 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. Each Fund has the authority
to lend portfolio securities to brokers, dealers and other financial
organizations. By lending its securities, a Fund may increase its income by
continuing to receive payments in respect of dividends and 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 a fee paid by the
borrower when irrevocable letters of credit and U.S. Government Obligations are
used as collateral. Each Fund will adhere to the following conditions whenever
its securities are loaned: (i) the Fund must receive at least 100% collateral
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 received substitute payments in respect of all
dividends, interest or other distributions on the only loaned securities; and
(v) voting rights on the loaned securities may pass to the borrower; provided,
however, that if a material event adversely affecting the investment occurs, the
Board of Trustees must retain the right to terminate the loan and recall and
vote the securities.
Futures Contracts and Options on Futures Contracts
General. The successful use of such instruments draws upon the Adviser's skill
and experience with respect to such instruments and usually depends on the
Adviser's ability to forecast interest rate and currency exchange rate movements
correctly. Should interest or exchange rates move in an unexpected manner, a
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.
Futures Contracts. A Fund may enter into contracts for the purchase or sale for
future delivery of fixed-income securities, foreign currencies, or contracts
based on financial indices including any index of U.S. Government securities,
foreign government securities or corporate debt securities. U.S. futures
contracts have been designed by exchanges which have been designated "contracts
markets" by the Commodity Futures Trading Commission ("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. A Fund may enter into futures contracts which are based on debt
securities that are backed by the full faith and credit of the U.S. Government,
such as long-term U.S. Treasury Bonds, Treasury Notes, Government National
Mortgage Association modified pass-through mortgage-backed securities and
three-month U.S. Treasury Bills. A Fund may also enter into futures contracts
which are based on bonds issued by entities other than the U.S. Government.
At the same time a futures contract is purchased or sold, a 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.
At the time of delivery of securities pursuant to such a contract, adjustments
are made to recognize differences in value arising from the delivery of
securities with a different interest rate from that specified in the contract.
In some (but not many) cases, securities called for by a futures contract may
not have been issued when the contract was written.
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, a Fund will incur brokerage fees when it
purchases or sells futures contracts.
The purpose of the acquisition or sale of a futures contract, in the case of a
Fund which holds or intends to acquire fixed-income securities, is to attempt to
protect the Fund from fluctuations in interest or foreign exchange rates without
actually buying or selling fixed-income securities or foreign currencies. For
example, if interest rates were expected to increase, the Fund might enter into
futures contracts for the sale of debt securities. Such a sale would have much
the same effect as selling an equivalent value of the debt securities owned by
the Fund. If interest rates did increase, the value of the debt security in the
Fund would decline, but the value of the futures contracts to the Fund would
increase at approximately the same rate, thereby keeping the net asset value of
the Fund from declining as much as it otherwise would have. The Fund could
accomplish similar results by selling debt securities and investing in bonds
with short maturities when interest rates are expected to increase. However,
since the futures market is more liquid than the cash market, the use of futures
contracts as an investment technique allows the Fund to maintain a defensive
position without having to sell its portfolio securities.
Similarly, when it is expected that interest rates may decline, futures
contracts may be purchased to attempt to hedge against anticipated purchases of
debt securities at higher prices. Since the fluctuations in the value of futures
contracts should be similar to those of debt securities, a Fund could take
advantage of the anticipated rise in the value of debt securities without
actually buying them until the market had stabilized. At that time, the futures
contract could be liquidated and the Fund could then buy debt securities on the
cash market. To the extent a Fund enters into futures contracts for this
purpose, the assets in the segregated asset account maintained to cover the
Fund's obligations with respect to such futures contracts will consist of cash,
cash equivalents or high quality liquid debt securities from its portfolio in an
amount equal to the difference between the fluctuating market value of such
futures contracts and the aggregate value of the initial and variation margin
payments made by the Fund with respect to such 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 Adviser may still not
result in a successful transaction.
In addition, futures contracts entail risks. Although the Adviser believes that
use of such contracts will benefit the Funds, if the Adviser's investment
judgment about the general direction of interest rates is incorrect, a Fund's
overall performance would be poorer than if it had not entered into any such
contract. For example, if a Fund has hedged against the possibility of an
increase in interest rates which would adversely affect the price of debt
securities held in its portfolio and interest rates decrease instead, the Fund
will lose part or all of the benefit of the increased value of its debt
securities which it has hedged because it will have offsetting losses in its
futures positions. In addition, in such situations, if a Fund has insufficient
cash, it may have to sell debt securities from its portfolio to meet daily
variation margin requirements. Such sales of bonds may be, but will not
necessarily be, at increased prices which reflect the rising market. A Fund may
have to sell securities at a time when it may be disadvantageous to do so.
Options on Futures Contracts. Each Fund may purchase and write options on
futures contracts for hedging purposes. The purchase of a call option on a
futures contract is similar in some respects to the purchase of a call option on
an individual security. Depending on the pricing of the option compared to
either the price of the futures contract upon which it is based or the price of
the underlying debt securities, it may or may not be less risky than ownership
of the futures contract or underlying debt securities. As with the purchase of
futures contracts, when a Fund is not fully invested it may purchase a call
option on a futures contract to hedge against a market advance due to declining
interest rates.
The writing of a call option on a futures contract constitutes a partial hedge
against declining prices of the security or foreign currency which is
deliverable upon exercise of the futures contract. If the futures price at
expiration of the option is below the exercise price, a Fund will retain the
full amount of the option premium which provides a partial hedge against any
decline that may have occurred in the Fund's holdings. The writing of a put
option on a futures contract constitutes a partial hedge against increasing
prices of the security or foreign currency which is deliverable upon exercise of
the futures contract. If the futures price at expiration of the option is higher
than the exercise price, the Fund will retain the full amount of the option
premium which provides a partial hedge against any increase in the price of
securities which the Fund intends to purchase. If a put or call option the Fund
has written is exercised, the Fund will incur a loss which will be reduced by
the amount of the premium it receives. Depending on the degree of correlation
between changes in the value of its portfolio securities and changes in the
value of its futures positions, the Fund's losses from existing options on
futures may to some extent be reduced or increased by changes in the value of
portfolio securities.
The purchase of a put option on a futures contract is similar in some respects
to the purchase of protective put options on portfolio securities. For example,
a Fund may purchase a put option on a futures contract to hedge its portfolio
against the risk of rising interest rates.
The amount of risk a Fund assumes when it purchases an option on a futures
contract is the premium paid for the option plus related transaction costs. In
addition to the correlation risks discussed above, the purchase of an option
also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the option purchased.
The Board of Trustees has adopted the requirement with respect to each Fund that
futures contracts and options on futures contracts be used only as a hedge and
not for speculation. In addition to this requirement, the Board of Trustees has
also adopted a restriction with respect to each Fund 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. Options on Foreign
Currencies. Each Fund may purchase and write options on foreign currencies for
hedging purposes in a manner similar to that in which futures contracts on
foreign currencies, or forward contracts, will be utilized. For example, a
decline in the dollar value of a foreign currency in which portfolio securities
are denominated will reduce the dollar value of such securities, even if their
value in the foreign currency remains constant. In order to protect against such
diminutions in the value of portfolio securities, the Fund may purchase put
options on the foreign currency. If the value of the currency does decline, a
Fund will have the right to sell such currency for a fixed amount in dollars and
will thereby offset, in whole or in part, the adverse effect on its portfolio
which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby increasing the cost of such
securities, a Fund may purchase call options thereon. The purchase of such
options could offset, at least partially, the effects of the adverse movements
in exchange rates. As in the case of other types of options, however, the
benefit to the Fund deriving from purchases of foreign currency options will be
reduced by the amount of the premium and related transaction costs. In addition,
where currency exchange rates do not move in the direction or to the extent
anticipated, the Fund could sustain losses on transactions in foreign currency
options which would require it to forego a portion or all of the benefits of
advantageous changes in such rates.
Each Fund may write options on foreign currencies for the same types of hedging
purposes. For example, where a Fund anticipates a decline in the dollar value of
foreign currency denominated securities due to adverse fluctuations in exchange
rates it could, instead of purchasing a put option, write a call option on the
relevant currency. If the expected decline occurs, the option will most likely
not be exercised, and the diminution in value of portfolio securities will be
offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, a Fund could write a
put option on the relevant currency which, if rates move in the manner
projected, will expire unexercised and allow the Fund to hedge such increased
cost up to the amount of the premium. As in the case of other types of options,
however, the writing of a foreign currency option will constitute only a partial
hedge up to the amount of the premium, and only if rates move in the expected
direction. If this does not occur, the option may be exercised and the Fund
would be required to purchase or sell the underlying currency at a loss which
may not be offset by the amount of the premium. Through the writing of options
on foreign currencies, the Fund also may be required to forego all or a portion
of the benefits which might otherwise have been obtained from favorable
movements in exchange rates.
Each Fund intends to write covered call options on foreign currencies. A call
option written on a foreign currency by a Fund is "covered" if the Fund owns the
underlying foreign currency covered by the call or has an absolute and immediate
right to acquire that foreign currency without additional cash consideration (or
for additional cash consideration held in a segregated account by its Custodian)
upon conversion or exchange of other foreign currency held in its portfolio. A
call option is also covered if the Fund has a call on the same foreign currency
and in the same principal amount as the call written where the exercise price of
the call held (a) is equal to or less than the exercise price of the call
written or (b) is greater than the exercise price of the call written if the
difference is maintained by the Fund in cash, U.S. Government securities and
other high quality liquid debt securities in a segregated account with its
custodian.
Each Fund also intends to write call options on foreign currencies that are not
covered for cross-hedging purposes. A call option on a foreign currency is for
cross-hedging purposes if it is not covered, but is designed to provide a hedge
against a decline in the U.S. dollar value of a security which the Fund owns or
has the right to acquire and which is denominated in the currency underlying the
option due to an adverse change in the exchange rate. In such circumstances, the
Fund collateralizes the option by maintaining in a segregated account with its
custodian, cash or U.S. Government securities or other high quality liquid debt
securities in an amount not less than the value of the underlying foreign
currency in U.S. dollars marked to market daily.
Additional Risks of Options on Futures Contracts, Forward Contracts and Options
on Foreign Currencies. Unlike transactions entered into by a Fund in futures
contracts, options on foreign currencies and 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, although foreign
currency options are also traded on certain national securities exchanges such
as the Philadelphia Stock Exchange and the Chicago Board Options Exchange,
subject to SEC regulation. Similarly, options on currencies may be traded
over-the-counter. In an over-the-counter trading environment, many of the
protections afforded to exchange participants will not be available. For
example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of time.
Although the purchaser of an option cannot lose more than the amount of the
premium plus related transaction costs, this entire amount could be lost.
Moreover, the option writer and a trader of forward contracts could lose amounts
substantially in excess of their initial investments, due to the margin and
collateral requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges are within
the jurisdiction of the SEC, as are other securities traded on such exchanges.
As a result, many of the protections provided to traders on organized exchanges
will be available with respect to such transactions. In particular, all foreign
currency option positions entered into on a national securities exchange are
cleared and guaranteed by the Options Clearing Corporation ("OCC"), thereby
reducing the risk of counterparty default. Further, a liquid secondary market in
options traded on a national securities exchange may be more readily available
than in the over-the-counter market, potentially permitting a Fund to liquidate
open positions at a profit prior to exercise or expiration, or to limit losses
in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however, is
subject to the risks of the availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effects of other political and
economic events. In addition, exchange-traded options on foreign currencies
involve certain risks not presented by the over-the-counter market. For example,
exercise and settlement of such options must be made exclusively through the
OCC, which has established banking relationships in applicable foreign countries
for this purpose. As a result, the OCC may, if it determines that foreign
governmental restrictions or taxes would prevent the orderly settlement of
foreign currency option exercises, or would result in undue burdens on the OCC
or its clearing member, impose special procedures on exercise and settlement,
such as technical changes in the mechanics of delivery of currency, the fixing
of dollar settlement prices or prohibitions on exercise.
<PAGE>
As in the case of forward contracts, certain options on foreign currencies are
traded over-the-counter and involve liquidity and credit risks which may not be
present in the case of exchange-traded currency options. A 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, each 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.
In addition, futures contracts, options on futures contracts, forward contracts
and options on foreign currencies 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 a 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. Each
Fund may write (sell) covered call and put options to a limited extent on its
portfolio securities ("covered options") in an attempt to increase income.
However, the Fund may forgo the benefits of appreciation on securities sold or
may pay more than the market price on securities acquired pursuant to call and
put options written by the Fund. When a Fund writes a covered call option,
it gives the purchaser of the option the right to buy the security at the price
specified in the option (the "exercise price") by exercising the option at any
time during the option period. If the option expires unexercised, the Fund will
realize income in an amount equal to the premium received for writing the
option. If the option is exercised, a decision over which the Fund has no
control, the Fund must sell the security to the option holder at the exercise
price. By writing a covered call option, the Fund forgoes, in exchange for the
premium less the commission ("net premium"), the opportunity to profit during
the option period from an increase in the market value of the underlying
security above the exercise price.
When a Fund writes a covered put option, it gives the purchaser of the option
the right to sell the underlying security to the Fund at the specified exercise
price at any time during the option period. If the option expires unexercised,
the Fund will realize income in the amount of the premium received for writing
the option. If the put option is exercised, a decision over which the Fund has
no control, the Fund must purchase the underlying security from the option
holder at the exercise price. By writing a covered put option, the Fund, in
exchange for the net premium received, accepts the risk of a decline in the
market value of the underlying security below the exercise price. The Fund will
only write put options involving securities for which a determination is made at
the time the option is written that the Fund wishes to acquire the securities at
the exercise price. A Fund may terminate its obligation as the writer of a
call or put option by purchasing an option with the same exercise price and
expiration date as the option previously written. This transaction is called a
"closing purchase transaction." The Fund will realize a profit or loss from a
closing purchase transaction if the amount paid to purchase an option is less or
more, as the case may be, than the amount received from the sale thereof. To
close out a position as a purchaser of an option, the Fund, may make a "closing
sale transaction" which involves liquidating the Fund's position by selling the
option previously purchased. Where the Fund cannot effect a closing purchase
transaction, it may be forced to incur brokerage commissions or dealer spreads
in selling securities it receives or it may be forced to hold underlying
securities until an option is exercised or expires. When a Fund writes an
option, an amount equal to the net premium received by the Fund is included in
the liability section of the Fund's Statement of Assets and Liabilities as a
deferred credit. The amount of the deferred credit will be subsequently marked
to market to reflect the current market value of the option written. The current
market value of a traded option is the last sale price or, in the absence of a
sale, the mean between the closing bid and asked price. If an option expires on
its stipulated expiration date or if the Fund enters into a closing purchase
transaction, the Fund will realize a gain (or loss if the cost of a closing
purchase transaction exceeds the premium received when the option was sold), and
the deferred credit related to such option will be eliminated. If a call option
is exercised, the Fund will realize a gain or loss from the sale of the
underlying security and the proceeds of the sale will be increased by the
premium originally received. The writing of covered call options may be deemed
to involve the pledge of the securities against which the option is being
written. Securities against which call options are written will be segregated on
the books of the custodian for the Fund.
A Fund may purchase call and put options on any securities in which it may
invest. A Fund would normally purchase a call option in anticipation of an
increase in the market value of such securities. The purchase of a call option
would entitle the Fund, in exchange for the premium paid, to purchase a security
at a specified price during the option period. The Fund would ordinarily have a
gain if the value of the securities increased above the exercise price
sufficiently to cover the premium and would have a loss if the value of the
securities remained at or below the exercise price during the option period.
A Fund would normally purchase put options in anticipation of a decline in the
market value of securities in its portfolio ("protective puts") or securities of
the type in which it is permitted to invest. The purchase of a put option would
entitle the Fund, in exchange for the premium paid, to sell a security, which
may or may not be held in the Fund's holdings, at a specified price during the
option period. The purchase of protective puts is designed merely to offset or
hedge against a decline in the market value of the Fund's holdings. Put options
also may be purchased by the Fund for the purpose of affirmatively benefiting
from a decline in the price of securities which the Fund does not own. The Fund
would ordinarily recognize a gain if the value of the securities decreased below
the exercise price sufficiently to cover the premium and would recognize a loss
if the value of the securities remained at or above the exercise price. Gains
and losses on the purchase of protective put options would tend to be offset by
countervailing changes in the value of underlying portfolio securities.
Each Fund has adopted certain other nonfundamental policies concerning option
transactions which are discussed below. The Fund's activities in options may
also be restricted by the requirements of the Internal Revenue Code of 1986, as
amended (the "Code"), for qualification as a regulated investment company.
The hours of trading for options on securities may not conform to the hours
during which the underlying securities are traded. To the extent that the option
markets close before the markets for the underlying securities, significant
price and rate movements can take place in the underlying securities markets
that cannot be reflected in the option markets. It is impossible to predict the
volume of trading that may exist in such options, and there can be no assurance
that viable exchange markets will develop or continue.
A Fund may engage in over-the-counter options transactions with broker-dealers
who make markets in these options. At present, approximately ten broker-dealers,
including several of the largest primary dealers in U.S. Government securities,
make these markets. The ability to terminate over-the-counter option positions
is more limited than with exchange-traded option positions because the
predominant market is the issuing broker rather than an exchange, and may
involve the risk that broker-dealers participating in such transactions will not
fulfill their obligations. To reduce this risk, the Fund will purchase such
options only from broker-dealers who are primary government securities dealers
recognized by the Federal Reserve Bank of New York and who agree to (and are
expected to be capable of) entering into closing transactions, although there
can be no guarantee that any such option will be liquidated at a favorable price
prior to expiration. The Adviser will monitor the creditworthiness of dealers
with whom the Funds enter into such options transactions under the general
supervision of the Funds' Trustees.
Options on Securities Indices. In addition to options on securities, each Fund
may also 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. Such options will be used for the purposes described above
under "Options on Securities."
The International Equity Fund may, to the extent allowed by Federal and state
securities laws, invest in securities indices instead of investing directly in
individual foreign securities.
Options on securities indices entail risks in addition to the risks of options
on securities. The absence of a liquid secondary market to close out options
positions on securities indices is more likely to occur, although a Fund
generally will only purchase or write such an option if the Adviser believes the
option can be closed out.
<PAGE>
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. A Fund will not purchase such options unless the Adviser
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 a Fund's holdings 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 Adviser may be forced to liquidate portfolio securities
to meet settlement obligations.
Forward Foreign Currency Exchange Contracts. Because each Fund buys and sells
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,
each 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. A 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. Each Fund maintains with its custodian a segregated
account of high grade liquid 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.
Each Fund may enter into foreign currency hedging transactions in an attempt to
protect against changes in foreign currency exchange rates between the trade and
settlement dates of specific securities transactions or changes in foreign
currency exchange rates that would adversely affect a 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, a 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 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 a Fund's foreign currency denominated portfolio securities and the use of
such techniques will subject a 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, a 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 contract to
hedge or cross-hedge its assets. Also, with regard to a Fund's use of
cross-hedges, there can be no assurance that historical correlations between the
movement of certain foreign currencies relative to the U.S. dollar will
continue. Thus, at any time a poor correlation may exist between movements in
the exchange rates of the foreign currencies underlying a Fund's cross-hedges
and the movements in the exchange rates of the foreign currencies in which the
Fund's assets that are the subject of such cross-hedges are denominated.
Rating Services
The ratings of rating services represent their opinions as to the quality of the
securities that they undertake to rate. It should be emphasized, however, that
ratings are relative and subjective and are not absolute standards of quality.
Although these ratings are an initial criterion for selection of portfolio
investments, Bankers Trust also makes its own evaluation of these securities,
subject to review by the Board of Trustees. After purchase by a Fund, an
obligation may cease to be rated or its rating may be reduced below the minimum
required for purchase by the Fund. Neither event would require a Fund to
eliminate the obligation from its portfolio, but Bankers Trust will consider
such an event in its determination of whether a Fund should continue to hold the
obligation. A description of the ratings used herein and in each Fund's
Prospectus is set forth in the Appendix to this SAI.
Investment Restrictions
The following investment restrictions are "fundamental policies" of each Fund
and may not be changed with respect to the Fund without the approval of a
"majority of the outstanding voting securities" of the Fund. "Majority of the
outstanding voting securities" under the Investment Company Act of 1940, as
amended (the "1940 Act"), and as used in this SAI and the Prospectuses, means,
with respect to a Fund, the lesser of (i) 67% or more of the outstanding voting
securities of the Fund (or of the total beneficial interests of the Fund)
present at a meeting, if the holders of more than 50% of the outstanding voting
securities of the Fund (or of the total beneficial interests of the Fund) are
present or represented by proxy or (ii) more than 50% of the outstanding voting
securities of the Fund (or of the total beneficial interests of the Fund).
Whenever the Trust is requested to vote on a fundamental policy of the Fund, the
Trust will hold a meeting of the Fund's shareholders and will cast its vote as
instructed by that Fund's shareholders. Fund shareholders who do not vote will
not affect the Trust's votes at the meeting. The percentage of the Trust's votes
representing Fund shareholders not voting will be voted by the Trustees of the
Trust in the same proportion as the Fund shareholders who do, in fact, vote.
As a matter of fundamental policy, the Fund may not (except that no
investment restriction of the Fund shall prevent the Fund from investing all of
its assets in an open-end investment company with substantially the same
investment objective): (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 the 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 and except that assets may be
pledged to secure letters of credit solely for the purpose of
participating in a captive insurance company sponsored by the
Investment Company Institute; for additional related
restrictions, see clause (i) under the caption "Additional
Restrictions" below (as an operating policy, the Fund may not
engage in dollar-roll transactions);
(2) underwrite securities issued by other persons except insofar as
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 net assets (taken at market
value); (b) through the use of repurchase agreements or the
purchase of short-term obligations; or (c) by purchasing a
portion of an issue of debt securities of types distributed
publicly or privately;
(4) purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or
interests therein), interests in oil, gas or mineral leases,
commodities or commodity contracts (except futures and option
contracts) in the ordinary course of business (except that the
Fund 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 a Fund's investment
objective(s), up to 25% of its total assets may be invested in
any one industry; and
(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, 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.
Statutory Restrictions. In order to comply with certain statutes and regulatory
policies, neither Fund will, as a matter of operating policy:
(i) sell any security which it does not own unless by virtue of its
ownership of other securities it has at the time of sale a right
to obtain securities, without payment of further consideration,
equivalent in kind and amount to the securities sold and
provided that if such right is conditional the sale is made upon
the same conditions;
(ii) invest for the purpose of exercising control or management;
(iii)purchase securities issued by any investment company except by
purchase in the open market where no commission or profit to a
sponsor or dealer results from such purchase other than the
customary broker's commission, or except when such purchase,
though not made in the open market, is part of a plan of merger
or consolidation; provided, however, that securities of any
investment company will not be purchased for the Fund 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) (except the Portfolio may exceed the applicable
percentage limits to the extent permitted by an exemptive order
of the SEC) 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; provided further that, except in
the case of a merger or consolidation, the Fund shall not
purchase any securities of any open-end investment company;
(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 (excluding Rule 144A securities deemed
by the Board of Trustees to be liquid);
<PAGE>
(v) purchase securities of any issuer if such purchase at the time
thereof would cause the Fund to hold more than 10% of any class
of securities of such issuer, for which purposes all
indebtedness of an issuer shall be deemed a single class and all
preferred stock of an issuer shall be deemed a single class,
except that futures or option contracts shall not be subject to
this restriction;
(vi) with respect to 75% of its assets, invest more than 5% of its
total assets in the securities (excluding U.S. Government
securities) of any one issuer; and
(vii) invest more than 5% of the Fund's net assets in warrants (valued
at the lower of cost or market), but not more than 2% of the
Fund's net assets may be invested in warrants not listed on the
New York Stock Exchange Inc. ("NYSE") or the AMEX.
Portfolio Transactions and Brokerage Commissions
The Adviser is responsible for decisions to buy and sell securities, futures
contracts and options on such securities and futures for each 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 portfolio 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 portfolio securities
on behalf of a Fund are frequently placed by the Adviser 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 Adviser 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 a 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 Adviser reviews on a routine basis
commission rates, execution and settlement services performed, making internal
and external comparisons.
The Adviser is authorized, consistent with Section 28(e) of the Securities
Exchange Act of 1934, as amended, when placing portfolio transactions for a 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 Funds may determine, the Adviser may consider sales of shares of
the Funds and of other investment company clients of Bankers Trust 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 each 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 a Fund and to the Adviser, it is the opinion of the
management of the Funds that such information is only supplementary to the
Adviser's own research effort, since the information must still be analyzed,
weighed and reviewed by the Adviser's staff. Such information may be useful to
the Adviser in providing services to clients other than the Funds, and not all
such information is used by the Adviser in connection with the Funds.
Conversely, such information provided to the Adviser by brokers and dealers
through whom other clients of the Adviser effect securities transactions may be
useful to the Adviser in providing services to the Funds.
In certain instances there may be securities which are suitable for a Fund as
well as for one or more of the Adviser's other clients. Investment decisions for
a Fund and for the Adviser'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 Manager, 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 a Fund is concerned. However, it is believed that the ability
of a Fund to participate in volume transactions will produce better executions
for the Fund.
PERFORMANCE INFORMATION
Standard Performance Information
From time to time, quotations of a Fund's performance may be included in
advertisements, sales literature or shareholder reports. These performance
figures are calculated in the following manner:
Total return. A 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. A 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 a Fund
should not be considered as representative of the performance of the
Fund in the future since the net asset value and public 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 a Fund to total returns published for other investment
companies or other investment vehicles. Furthermore, total return does
not reflect charges or deductions against a Contractowner's separate
account. Accordingly, total return does not illustrate actual
investment performance under a contract. 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 a 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, a 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 a Fund's
performance made by independent sources may also be used in advertisements
concerning the Fund. Sources for a Fund's performance information could include
the following: Barron's, Business Week, Changing Times, The Kiplinger's
Magazine, Consumer Digest, 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
under the supervision of 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 a Fund purchases securities which are restricted as to resale
or for which current market quotations are not available, the Adviser of the
Fund will value such securities based upon all relevant factors as outlined in
FRR 1.
The Trust, on behalf of each 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 each Fund, has
elected, however, to be governed by Rule 18f-1 under the 1940 Act as a result of
which each 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 FUNDS
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.
<TABLE>
<CAPTION>
<S> <C> <C>
Trustees and Officers
Position Held Principal Occupations
Name, Address and Age with the Trust During Past 5 Years
- --------------------- -------------- - -------------------
Robert R. Coby, 46 Trustee President of Lynch & Mayer, Inc., since
118 North Drive December 1996; Formerly President of
North Massapequa, NY 11758 Leadership Capital Inc. (1995-1996); Chief
Operating Officer of CS First Boston
Investment Management, Inc. (1994-1995);
President of Blackhawk L.P. (1993-1994);
Chief Financial Officer of Equitable Capital
prior to February 1993.
Desmond G. Fitzgerald, 54 Trustee Chairman of North American Properties Group
2015 West Main Street since January 1987.
Stamford, CT 06902
James S. Pasman, Jr., 67 Trustee Retired; President and Chief Operations
29 The Trillium Officer of National Intergroup Inc.
Pittsburgh, PA 15238 (1989-1991).
*William E. Small, 56 Trustee and President Independent Consultant (1996-present);
Formerly Executive Vice President of First
Data Investor Services Group Inc. ("Investor
Services Group") (1993-1996).
Michael Kardok, 38 Vice President and Treasurer Vice President of Investor Services Group
since May 1994; Vice President of The Boston
Company Advisors Inc. prior to May 1994.
Elizabeth A. Russell, 35 Vice President and Secretary Counsel of Investor Services Group since
1994; Assistant Vice President and Counsel,
The Boston Company Advisors, Inc.
(1993-1994).
Brigid O. Bieber, 37 Vice President and Assistant Counsel of Investor Services Group since
Secretary 1994; Vice President and Associate General
Counsel, The Boston Company Advisors, Inc.
(prior to May 1994).
</TABLE>
Mr. Kardok, Msses. Bieber and Russell also hold similar positions for other
investment companies for which First Data Distributors, an affiliate of Investor
Services Group, 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. The Trust typically
pays its Trustees an annual retainer and a per meeting fee and reimburses them
for their expenses. The aggregate amount of compensation paid to each current
Trustee by the Trust for the fiscal year ended December 31, 1997, was as
follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
(1) (2) (3) (4) (5)
Total
Pension or Compensation
Retirement Estimated from Registrant
Aggregate Benefits Accrued Annual Benefits and Fund
Name of Compensation as Part of Upon Retirement Complex
Board Member from Fund* Fund's Expenses
Robert R. Coby $7,500 N/A N/A $7,500
Desmond G. FitzGerald 7,500$ N/A N/A $7,500
James S. Pasman, Jr. $7,500 N/A N/A $7,500
William E. Small $0 N/A N/A $0
</TABLE>
* Amount does not include reimbursed expenses for attending Board meetings,
which amounted to $669 for all Trustees as a group.
As of February 10, 1998, the Trustees and officers of the Trust owned in the
aggregate less than 1% of the shares of any Fund or the Trust (both series taken
together).
Investment Adviser
Under the terms of each 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, of which
each Fund is a series. 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 each Fund in
accordance with the Fund's investment objectives, restrictions and policies;
(iii) make investment decisions for each Fund; (iv) place purchase and sale
orders for securities and other financial instruments on behalf of each 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 each Management Agreement. Each 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, FDDI 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; costs
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 Funds,
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 Funds, Bankers Trust will not inquire or take into
consideration whether an issuer of securities proposed for purchase or sale by a
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.
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.
Administrator and Transfer Agent
Investor Services Group, One Exchange Place, Boston, Massachusetts 02109, serves
as administrator of each Fund. As administrator, Investor Services Group 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 each Fund. Investor Services Group will generally assist in
all aspects of the Funds' operations; supply and maintain office facilities
(which may be in Investor Services Group'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.
As compensation for Investor Services Group's services under
the
Administration Agreement, Investor Services Group is entitled to receive from
the Fund a monthly administration fee at the annual rate of 0.02% of the value
of the Trust's average monthly net assets not exceedng $2 billion; 0.01% of the
Trust's monthly average net assets exceeding $2 billion but not exceeding $5
billion; and 0.0075% of the Trust's monthly average net assets exceeding $5
billion, in addition to a flat fee of $70,000 per year for each fund of the
Trust and one-time start-up fee for each fund of the Trust.
Custodian and Transfer Agent
Bankers Trust, 130 Liberty Street (One Bankers Trust Plaza), New York, New York
10006, serves as custodian for each Fund. As custodian, it holds the Funds'
assets. Bankers Trust will comply with the self-custodian provisions of Rule
17f-2 under the 1940 Act.
Investor Services Group serves as transfer agent of the Trust and of each Fund.
Under its transfer agency agreement with the Trust, Investor Services Group
maintains the shareholder account records for each Fund, handles certain
communications between shareholders and the Fund and causes to be distributed
any dividends and distributions payable by a Fund.
Bankers Trust and Investor Services Group may be reimbursed by the Funds 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 Funds.
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 Funds contemplated by the Management Agreements
and other activities for the Funds described in the Prospectuses and this SAI
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
Funds. 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 Board 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 each Fund. Ernst & Young
LLP, 787 Seventh Avenue, New York, New York 10019, acts as independent
accountants of the Trust and each Fund.
<PAGE>
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 each Fund's
sole stockholders of record, therefore under the 1940 Act, Companies owning 25%
or more of a Fund's outstanding securities 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 a 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 the 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
It is the intention of the Trust that each Fund elect to be treated as a
regulated investment company and qualify annually under Subchapter M of the
Code.
As a regulated investment company, each 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. Each 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-deferred benefits
provided by the variable contracts which are offered in connection with such
separate accounts. The Adviser intends to diversify each 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, each 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 contractowner's control of the investments of a separate
account may cause the variable contractowner, 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 contractowner 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
contractowner'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 a 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 Funds. Other federal, state or local tax law provisions may also
affect the Funds and their operations. Anyone who is considering allocating,
transferring or withdrawing monies held under a variable contract to or from a
Fund should consult a qualified tax adviser.
Distributions
All dividends and capital gains distributions paid by a 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 either Fund will pay any dividends or realize any
capital gains. However, each 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
a 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 a Fund from sources within foreign countries may be subject
to withholding and other taxes imposed by such countries.
Backup Withholding
A 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.
Foreign Shareholders
The tax consequences to a foreign shareholder of an investment in a Fund may be
different from those described herein. Foreign shareholders are advised to
consult their own tax advisers with respect to the particular tax consequences
to them of an investment in a Fund.
Other Taxation
The Trust is organized as a Massachusetts business trust and, under current law,
neither the Trust nor any Fund is liable 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 a Fund.
<PAGE>
APPENDIX
COMMERCIAL PAPER RATINGS
S&P's Commercial Paper Ratings
A is the highest commercial paper rating category utilized by S&P,
which uses the numbers 1+, 1, 2 and 3 to denote relative strength within its A
classification. Commercial paper issues rated A by S&P have the following
characteristics: Liquidity ratios are better than industry average. Long-term
debt rating is A or better. The issuer has access to at least two additional
channels of borrowing. Basic earnings and cash flow are in an upward trend.
Typically, the issuer is a strong company in a well-established industry and has
superior management.
Moody's Commercial Paper Ratings
Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:
leading market positions in well-established industries; high rates of return on
funds employed; conservative capitalization structures with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; well-established access to
a range of financial markets and assured sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
Fitch Investors Service and Duff & Phelps Commercial Paper Ratings
Commercial paper rated "Fitch-1" is considered to be the highest grade
paper and is regarded as having the strongest degree of assurance for timely
payment. "Fitch-2" is considered very good grade paper and reflects an assurance
of timely payment only slightly less in degree than the strongest issue.
Commercial paper issues rated "Duff 1" by Duff & Phelps, Inc. have the
following characteristics: very high certainty of timely payment, excellent
liquidity factors supported by strong fundamental protection factors, and risk
factors which are very small. Issues rated "Duff 2" have a good certainty of
timely payment, sound liquidity factors and company fundamentals, small risk
factors, and good access to capital markets.
A-1
<PAGE>
Investment Adviser of the Fund
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.
<PAGE>
STATEMENT OF
ADDITIONAL INFORMATION
BT INSURANCE FUNDS TRUST
SMALL CAP INDEX FUND
MARCH 24, 1998
BT Insurance Funds Trust (the "Trust") is currently comprised of seven
series: the Small Cap Index Fund (the "Fund") and six 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......................................... 20
Taxation.......................................................... 21
Financial Statements.............................................. 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 Company (the "Adviser" 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 March 24, 1998. 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 offering memorandum. This Statement of Additional
Information ("SAI"), 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 SAI is not an
offer of any Fund for which an investor has not received a Prospectus.
BANKERS TRUST COMPANY
Investment Adviser of the Fund
FIRST DATA DISTRIBUTORS, INC.,
Distributor
4400 Computer Drive,
Westborough, MA 01581
<PAGE>
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
Adviser 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 Adviser 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 Adviser 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.
<PAGE>
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
Adviser'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 Adviser 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 Adviser 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
Adviser 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 Adviser 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 Fund 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 Adviser 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 Adviser 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 Adviser 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 Adviser reviews on a routine basis
commission rates, execution and settlement services performed, making internal
and external comparisons.
The Adviser 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 Adviser 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 Adviser, it is the
opinion of the management of the Trust that such information is only
supplementary to the Adviser's own research effort, since the information must
still be analyzed, weighed and reviewed by the Adviser's staff. Such information
may be useful to the Adviser in providing services to clients other than the
Fund, and not all such information is used by the Adviser in connection with the
Fund. Conversely, such information provided to the Adviser by brokers and
dealers through whom other clients of the Adviser effect securities transactions
may be useful to the Adviser 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 Adviser's other clients. Investment
decisions for the Fund and for the Adviser'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.
For the period from August 25, 1997 through December 31, 1997, the Fund
paid brokerage commissions in the amount of $11,148. The Fund's portfolio
turnover rate for this period was 8%.
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. Furthermore, total return does
not reflect charges or deductions against a Contractowner's separate
account. Accordingly, total return does not illustrate the actual
investment performance under a contract. Total return reflects the
performance of both principal and income.
For the period from commencement of operations on August 25, 1997
through December 31, 1997, the aggregate total return of the Fund was 5.10%.
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 under the supervision of 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
Adviser 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.
<PAGE>
<TABLE>
<S> <C> <C>
Trustees and Officers
Principal Occupations During
Name, Address and Age Position Held with the Trust Past 5 Years
- --------------------- ---------------------------- ------------
Robert R. Coby, 46 Trustee President of Lynch & Mayer, Inc., since
118 North Drive December 1996; Formerly President of
North Massapequa, NY 11758 Leadership Capital Inc. (1995-1996);
Chief Operating Officer of CS First
Boston Investment Management, Inc.
(1994-1995); President of Blackhawk
L.P. (1993-1994); Chief Financial
Officer of Equitable Capital prior to
February 1993.
Desmond G. FitzGerald, 54 Trustee Chairman of North American Properties
2015 West Main Street Group since January 1987.
Stamford, CT 06902
James S. Pasman, Jr., 67 Trustee Retired; President and Chief Operations
29 The Trillium Officer of National Intergroup Inc.
Pittsburgh, PA 15238 (1989-1991).
*William E. Small, 56 Trustee and President Independent Consultant (1996-present);
Formerly Executive Vice President of
First Data Investor Services Group Inc.
("Investor Services Group") (1993-1996).
Michael Kardok, 38 Vice President and Treasurer Vice President of First Data since May
1994; Vice President of The Boston
Company Advisors Inc. prior to May 1994.
Elizabeth Russell, 35 Vice President and Secretary Counsel of Investor Services Group
since 1994; Assistant Vice President
and Counsel, The Boston Company
Advisors, Inc. (1993-1994).
Brigid O. Bieber, 37 Vice President and Assistant Counsel of Investor Services Group
Secretary since 1994; Vice President and
Associate General Counsel, The Boston
Company Advisors, Inc. (prior to May
1994).
</TABLE>
Mr. Kardok, Msses. Bieber and Russell also hold similar positions for other
investment companies for which First Data Distributors, an affiliate of Investor
Services Group, 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.
The Trust typically pays its Trustees an annual retainer and a per
meeting fee and reimburses them for their expenses. The aggregate amount of
compensation paid to each current Trustee by the Trust for the fiscal year ended
December 31, 1997, was as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
(1) (2) (3) (4) (5)
Pension or Retirement Total Compensation
Benefits Accrued as from Registrant and
Aggregate Part of Estimated Annual Fund Complex
Name of Compensation Fund's Expenses Benefits
Board Member from Fund* Upon Retirement
Robert R. Coby $7,500 N/A N/A $7,500
Desmond G. FitzGerald $7,500 N/A N/A $7,500
James S. Pasman, Jr. $7,500 N/A N/A $7,500
William E. Small $0 N/A N/A $0
</TABLE>
* Amount does not include reimbursed expenses for attending Board meetings,
which amounted to $669 for all Trustees as a group.
As of February 10, 1998 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).
<PAGE>
The following persons are known by the Trust to own of record
5% or more of the Fund's shares outstanding on March 19, 1998:
<TABLE>
<CAPTION>
<S> <C> <C>
Name and Address Percentage Owned
National Integrity Life Insurance Company 5.78%
515 West Market Street
8th Floor
Louisville, KY 40202
Integrity Life Company 7.05%
515 West Market Street
8th Floor
Louisville, KY 40202
Travelers Life and Annuity Company 19.51%
One Tower Square
Hartford, CT 06183
Travelers Insurance Company 67.54%
One Tower Square
Hartford, CT 06183
</TABLE>
Through its separate accounts the Companies are the Fund's sole
stockholders of record. Therefore, under the 1940 Act, Travelers Insurance
Company, a Connecticut corporation and subsidiary of Travelers Group Inc.,
because it owns more than 25% of the outstanding voting securities of the Fund,
is deemed to be in control of the Fund.
Investment Adviser
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.
For the period from inception of Fund operations on August 25, 1997
through December 31, 1997, Bankers Trust aggregated $13,629 in compensation for
investment advisory services provided to the Fund. During the same period,
Bankers Trust waived or reimbursed the Fund $110,002 to cover expenses. The
Fund's prospectus contains additional 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.
Administrator
Investor Services Group, One Exchange Place, Boston, Massachusetts
02109, serves as administrator of the Fund. As administrator, Investor Services
Group 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. Investor Services Group will generally assist in all
aspects of the Fund's operations; supply and maintain office facilities (which
may be in Investor Services Group'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.
As compensation for Investor Services Group's services under the
Administration Agreement, Investor Services Group is entitled to receive from
the Fund a monthly administration 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 $5
billion; and 0.0075% of the Trust's monthly average net assets exceeding $5
billion, in addition to a flat fee of $70,000 per year for each fund of the
Trust and a one-time start-up fee for each fund of the Trust.
Custodian and Transfer Agent
Bankers Trust, 130 Liberty Street (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.
Investor Services Group serves as transfer agent of the Trust. Under
its transfer agency agreement with the Trust, Investor Services Group 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 Investor Services Group 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 LLP, 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.
Although a Company owning 25% or more of the outstanding voting
securities of the Fund is deemed under the 1940 Act to be in control of the
Fund, 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 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 Adviser 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.
<PAGE>
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.
FINANCIAL STATEMENTS
The Trust's audited financial statements for the Fund contained in its
annual report for the fiscal year ended December 31, 1997 are incorporated into
this Statement of Additional Information by reference in their entirety.
<PAGE>
Investment Adviser of the Fund
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.
<PAGE>
STATEMENT OF
ADDITIONAL INFORMATION
BT INSURANCE FUNDS TRUST
EAFE(R) EQUITY INDEX FUND
MARCH 23, 1998
BT Insurance Funds Trust (the "Trust") is currently comprised of seven
series: the EAFE(R) Equity Index Fund (the "Fund") and six 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
Financial Statements............................................. 25
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 Company (the "Adviser" 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 March 23, 1998. 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 offering memorandum. This Statement of Additional
Information ("SAI"), 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 SAI is not an
offer of any Fund for which an investor has not received a Prospectus.
BANKERS TRUST COMPANY
Investment Adviser of the Fund
FIRST DATA DISTRIBUTORS, INC.,
Distributor
4400 Computer Drive,
Westborough, MA 01581
<PAGE>
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
Adviser 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 Adviser 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 Adviser 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.
<PAGE>
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 the Pacific
Basin. 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. The securities
markets in Asia are substantially smaller, less liquid and more volatile than
the major securities markets in the United States. A high proportion of the
shares of may issuers may be held by a limited number of persons and financial
institutions, which may limit the number of shares available for investment by
the Fund. Similarly, volume and liquidity in the bond markets in Asia are less
than in the United States and, at times, price volatility can be greater than in
the United States. A limited number of issuers in Asian securities markets may
represent a disproportionately large percentage of market capitalization and
trading value. The limited liquidity of securities markets in Asia may also
affect the Fund's ability to acquire or dispose of securities at the price and
time it wishes to do so. The Fund's inability to dispose fully and promptly of
position in declining markets will cause the Fund's net asset value to decline
as the value of the unsold positions is marked to lower prices. In addition, the
Asian securities markets are susceptible to being influenced by large investors
trading significant blocks of securities. Many stock markets are
undergoing a period of growth and change 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 Fund
invests in securities denominated in currencies of Asian countries. Accordingly,
changes in the value of these currencies against the U.S. dollar will result in
corresponding changes in the U.S. dollar value of the Fund's assets denominated
in those currencies. Futures Contracts and Options on Futures Contracts
General. The successful use of such instruments draws upon the
Adviser'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 Adviser'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 Adviser 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 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.
<PAGE>
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 Adviser 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
Adviser 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 Adviser 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 SAI 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 Fund 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 Adviser 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 Adviser 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 Adviser 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 Adviser reviews on a routine basis
commission rates, execution and settlement services performed, making internal
and external comparisons.
The Adviser 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 Adviser 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 Adviser, it is the
opinion of the management of the Trust that such information is only
supplementary to the Adviser's own research effort, since the information must
still be analyzed, weighed and reviewed by the Adviser's staff. Such information
may be useful to the Adviser in providing services to clients other than the
Fund, and not all such information is used by the Adviser in connection with the
Fund. Conversely, such information provided to the Adviser by brokers and
dealers through whom other clients of the Adviser effect securities transactions
may be useful to the Adviser 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 Adviser's other clients. Investment
decisions for the Fund and for the Adviser'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.
For the period from August 22, 1997 through December 31, 1997 the Fund
paid brokerage commissions in the amount of $24,396. The Fund's portfolio
turnover rate for this period was less than 1%.
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. Furthermore, total return does
not reflect charges or deductions against a Contractowner's separate
account. Accordingly, total return does not illustrate actual
investment performance under a contract. Total return reflects the
performance of both principal and income.
For the period from commencement of operations on August 22, 1997
through December 31, 1997, the aggregate total return of the Fund was (6.60%).
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.
<PAGE>
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 under the supervision of 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
Adviser 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.
<PAGE>
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. <TABLE> <CAPTION> <S> <C> <C>
Trustees and Officers
Principal Occupations During
Name, Address and Age Position Held with the Trust Past 5 Years
- --------------------- ---------------------------- ------------
Robert R. Coby, 46 Trustee President of Lynch & Mayer, Inc., since
118 North Drive December 1996; Formerly President of
North Massapequa, NY 11758 Leadership Capital Inc. (1995-1996);
Chief Operating Officer of CS First
Boston Investment Management, Inc.
(1994-1995); President of Blackhawk
L.P. (1993-1994); Chief Financial
Officer of Equitable Capital prior to
February 1993.
Desmond G. FitzGerald, 54 Trustee Chairman of North American Properties
2015 West Main Street Group since January 1987.
Stamford, CT 06902
James S. Pasman, Jr., 67 Trustee Retired; President and Chief Operations
29 The Trillium Officer of National Intergroup Inc.
Pittsburgh, PA 15238 (1989-1991).
*William E. Small, 56 Trustee and President Independent Consultant (1996-present);
Formerly Executive Vice President of
First Data Investor Services Group Inc.
("Investor Services Group") (1993-1996).
Michael Kardok, 38 Vice President and Treasurer Vice President of Investor Services
Group since May 1994; Vice President of
The Boston Company Advisors Inc. prior
to May 1994.
Elizabeth A. Russell, 35 Vice President and Secretary Counsel of Investor Services Group
since 1994; Assistant Vice President
and Counsel, The Boston Company
Advisors, Inc. (1993-1994).
Brigid O. Bieber, 37 Vice President and Assistant Counsel of Investor Services Group
Secretary since 1994; Vice President and
Associate General Counsel, The Boston
Company Advisors, Inc. (prior to May
1994).
</TABLE>
Mr. Kardok and Msses. Bieber and Russell also hold similar positions for other
investment companies for which First Data Distributors, an affiliate of Investor
Service Group, 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.
The Trust typically pays its Trustees an annual retainer and a per
meeting fee and reimburses them for their expenses. The aggregate amount of
compensation paid to each current Trustee by the Trust for the fiscal year ended
December 31, 1997, was as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
(1) (2) (3) (4) (5)
Total
Pension or Compensation
Retirement Estimated from Registrant
Aggregate Benefits Accrued Annual Benefits and Fund
Name of Compensation as Part of Upon Retirement Complex
Board Member from Fund* Fund's Expenses
Robert R. Coby $7,500 N/A N/A $7,500
Desmond G. FitzGerald $7,500 N/A N/A $7,500
James S. Pasman, Jr. $7,500 N/A N/A $7,500
William E. Small $0 N/A N/A $0
</TABLE>
* Amount does not include reimbursed expenses for attending Board meetings,
which amounted to $669 for all Trustees as a group.
As of February 10, 1998, 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).
The following persons are known by the Trust to own of record
5% or more of the Fund's shares outstanding on March 19, 1998:
<TABLE>
<CAPTION>
<S> <C> <C>
Name and Address Percentage Owned
Travelers Insurance Company 93.77%
One Tower Square
Hartford, CT 06183
</TABLE>
Through its separate accounts, the Companies are the Fund's sole stockholders of
record. Therefore, under the 1940 Act, Travelers Insurance Company, a
Connecticut corporation and subsidiary of Travelers Group, Inc. because it owns
more than 25% of the outstanding voting securities of the Fund, is deemed to be
in control of the Fund.
Investment Adviser
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.
<PAGE>
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.
For the period from inception of Fund operations on August 22, 1997
through December 31, 1997, Bankers Trust aggregated $23,060 in compensation for
investment advisory services provided to the Fund. During the same period,
Bankers Trust waived or reimbursed the Fund $107,853 to cover expenses. The
Fund's prospectus contains additional 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.
Administrator
Investor Services Group, One Exchange Place, Boston, Massachusetts
02109, serves as administrator of the Fund. As administrator, Investor Services
Group 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. Investor Services Group will generally assist in all
aspects of the Fund's operations; supply and maintain office facilities (which
may be in Investor Services Group'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.
<PAGE>
As compensation for Investor Services Group's services under the
Administration Agreement, Investor Services Group is entitled to receive from
the Fund a monthly administration fee at the annual rate of 0.02% of the Trust's
monthly average net assets not exceeding $2 billion, 0.01% of the Trust's
monthly average net assets exceeding $2 billion but not exceeding $5 billion;
and 0.0075% of the Trust's monthly average net assets exceeding $5 billion, in
addition to a flat fee of $70,000 per year for each fund of the Trust and a
one-time start-up fee for each fund of the Trust.
Custodian and Transfer Agent
Bankers Trust, 130 Liberty Street (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.
Investor Services Group serves as transfer agent of the Trust. Under
its transfer agency agreement with the Trust, Investor Services Group 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 Investor Services Group 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 LLP, 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.
Although a Company owning 25% or more of the outstanding voting
securities of the Fund is deemed under the 1940 Act to be in control of the
Fund, 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.
<PAGE>
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 Adviser 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.
<PAGE>
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.
<PAGE>
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.
FINANCIAL STATEMENTS
The Trust's audited financial statements for the Fund contained in its
annual report for the fiscal year ended December 31, 1997 are incorporated into
this Statement of Additional Information by reference in their entirety.
<PAGE>
Investment Adviser of the Fund
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.
<PAGE>
STATEMENT OF
ADDITIONAL INFORMATION
BT INSURANCE FUNDS TRUST
EQUITY 500 INDEX FUND
MARCH 24, 1998
BT Insurance Funds Trust (the "Trust") is currently comprised of seven
series: the Equity 500 Index Fund (the "Fund") and six 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....................................... 20
Taxation........................................................ 21
Financial Statements............................................ 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 Company (the "Adviser" 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 March 24, 1998. 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 offering memorandum. This Statement of Additional
Information ("SAI"), 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 SAI is not an
offer of any Fund for which an investor has not received a Prospectus.
BANKERS TRUST COMPANY
Investment Adviser of the Fund
FIRST DATA DISTRIBUTORS, INC.,
Distributor
4400 Computer Drive
Westborough, MA 01581.
<PAGE>
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
Adviser 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 Adviser 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 Adviser 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.
<PAGE>
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
Adviser'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 Adviser may still not
result in a successful transaction.
In addition, futures contracts entail risks. The Adviser 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 Adviser 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
Adviser 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 Adviser 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 Fund 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 Adviser 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 Adviser 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 Adviser 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 Adviser reviews on a routine basis
commission rates, execution and settlement services performed, making internal
and external comparisons.
The Adviser 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 Adviser 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 Adviser, it is the
opinion of the management of the Trust that such information is only
supplementary to the Adviser's own research effort, since the information must
still be analyzed, weighed and reviewed by the Adviser's staff. Such information
may be useful to the Adviser in providing services to clients other than the
Fund, and not all such information is used by the Adviser in connection with the
Fund. Conversely, such information provided to the Adviser by brokers and
dealers through whom other clients of the Adviser effect securities transactions
may be useful to the Adviser in providing services to the Fund.
<PAGE>
In certain instances there may be securities which are suitable for the
Fund as well as for one or more of the Adviser's other clients. Investment
decisions for the Fund and for the Adviser'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.
For the period from October 1, 1997 through December 31, 1997 the Fund
paid brokerage commissions in the amount of $1,075. The Fund portfolio turnover
rate for this period was 7%.
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. Furthermore, total return does
not reflect charges or deductions against a Contractowner's separate
account. Accordingly, total return does not illustrate actual
investment performance under a contract. Total return reflects the
performance of both principal and income.
For the period from commencement of operations on October 1,
1997 through December 31, 1997, the aggregate total return of the Fund was
1.90%.
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 under the supervision of 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:
<PAGE>
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
Adviser 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.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Trustees and Officers
Principal Occupations During
Name, Address and Age Position Held with the Trust Past 5 Years
- --------------------- ---------------------------- ------------
Robert R. Coby, 46 Trustee President of Lynch & Mayer, Inc., since
118 North Drive December 1996; Formerly President of
North Massapequa, NY 11758 Leadership Capital Inc. (1995-1996);
Chief Operating Officer of CS First
Boston Investment Management, Inc.
(1994-1995); President of Blackhawk
L.P. (1993-1994); Chief Financial
Officer of Equitable Capital prior to
February 1993.
Desmond G. FitzGerald, 54 Trustee Chairman of North American Properties
2015 West Main Street Group since January 1987.
Stamford, CT 06902
James S. Pasman, Jr., 67 Trustee Retired; President and Chief Operations
29 The Trillium Officer of National Intergroup Inc.
Pittsburgh, PA 15238 (1989-1991).
Independent Consultant (1996-present);
*William E. Small, 56 Trustee and President Formerly Executive Vice President of
First Data Investor Services Group Inc.
("Investor Service Group") (1993-1996).
Michael Kardok, 38 Vice President and Treasurer Vice President of First Data since May
1994; Vice President of The Boston
Company Advisors Inc. prior to May 1994.
Elizabeth A. Russell, 35 Vice President and Secretary Counsel of Investor Service Group since
1994; Assistant Vice President and
Counsel, The Boston Company Advisors,
Inc. (1993-1994).
Brigid O. Bieber, 37 Vice President and Assistant Counsel of Investor Services Group
Secretary since 1994; Vice President and
Associate General Counsel, The Boston
Company Advisors, Inc.(prior to May
1994).
</TABLE>
Mr. Kardok, Msses. Bieber and Russell also hold similar positions for other
investment companies for which First Data Distributors, an affiliate of Investor
Services Group, 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.
The Trust typically pays its Trustees an annual retainer and a per
meeting fee and reimburses them for their expenses. The aggregate amount of
compensation paid to each current Trustee by the Trust for the fiscal year ended
December 31, 1997, was as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
(1) (2) (3) (4) (5)
Total
Pension or Compensation
Retirement Estimated from Registrant
Aggregate Benefits Accrued Annual Benefits and Fund
Name of Compensation as Part of Upon Retirement Complex
Board Member from Fund* Fund's Expenses
Robert R. Coby $7,500 N/A N/A $7,500
Desmond G. FitzGerald $7,500 N/A N/A $7,500
James S. Pasman, Jr. $7,500 N/A N/A $7,500
William E. Small $0 N/A N/A $0
</TABLE>
* Amount does not include reimbursed expenses for attending Board meetings,
which amounted to $669 for all Trustees as a group.
As of February 10, 1998 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).
<PAGE>
The following persons are known by the Trust to own of record 5% or more of the
Fund's shares outstanding on March 19, 1998:
<TABLE>
<CAPTION>
<S> <C> <C>
Name and Address Percentage Owned
Integrity Life Company 80.48%
515 West Market Street
8th Floor
Louisville, KY 40202
National Integrity Life Insurance Company 15.50%
515 West Market Street
8th Floor
Louisville, KY 40202
</TABLE>
Through its separate accounts the Companies are the Fund's sole
stockholders of record. Therefore, under the 1940 Act, Integrity Life Company,
an Ohio company and subsidiary of Arm Financial Group, Inc., because it owns
more than 25% of the outstanding voting securities of the Fund, is deemed to be
in control of the Fund.
Investment Adviser
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.
For the period from inception of Fund operation on October 1, 1997
through December 31, 1997, Bankers Trust aggregated $5,294 in compensation for
investment advisory services provided to the Fund. During the same period,
Bankers Trust waived or reimbursed the Fund $65,771 to cover expenses. The
Fund's prospectus contains additional 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.
Administrator
Investor Services Group, One Exchange Place, Boston, Massachusetts
02109, serves as administrator of the Fund. As administrator, Investor Service
Group 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. Investor Services Group will generally assist in all
aspects of the Fund's operations; supply and maintain office facilities (which
may be in Investor Services Group'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.
As compensation for Investor Services Group's services under the
Administration Agreement, Investor Services Group is entitled to receive from
the Fund a monthly administration fee at the annual rate of 0.02% of the Trust's
monthly average net assets up to aggregate not exceeding $2 billion, 0.01% of
the Trust's monthly average net assets exceeding $2 billion but not exceeding $5
billion; and 0.0075% of the Trust's monthly average net assets exceeding $5
billion. In addition, the Trust has agreed to pay Investor Services Group a flat
fee of $70,000 per year for each Fund of the Trust.
Custodian and Transfer Agent
Bankers Trust, 130 Liberty Street (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.
Investor Services Group serves as transfer agent of the Trust. Under
its transfer agency agreement with the Trust, Investor Services Group 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 Investor Services Group 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 LLP, 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.
Although a Company owning 25% or more of the outstanding voting
securities of the Fund is deemed under the 1940 Act to be in control of the
Fund, 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.
<PAGE>
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 Adviser 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.
<PAGE>
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.
FINANCIAL STATEMENTS
The Trust's audited financial statements for the Fund contained in its
annual report for the fiscal year ended December 31, 1997 are incorporated into
this Statement of Additional Information by reference in their entirety.
<PAGE>
Investment Adviser of the Fund
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.
<PAGE>
STATEMENT OF
ADDITIONAL INFORMATION
BT INSURANCE FUNDS TRUST
U. S. BOND INDEX FUND
MARCH 24, 1998
BT Insurance Funds Trust (the "Trust") is currently comprised of seven
series: the U.S. Bond Index Fund (the "Fund") and six 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............................................ 20
Valuation of Securities; Redemption in Kind........................ 21
Management of the Trust............................................ 22
Organization of the Trust.......................................... 27
Taxation........................................................... 27
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 Company (the "Adviser" 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 March 24, 1998. The Prospectus provides the basic information
investors should know before investing and may be obtained without charge by
calling your insurance company's Customer Service Center at the telephone number
shown in the accompanying offering memorandum. This Statement of Additional
Information ("SAI"), 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 SAI is not an
offer of any Fund for which an investor has not received a Prospectus.
BANKERS TRUST COMPANY
Investment Adviser of the Fund
FIRST DATA DISTRIBUTORS, INC.,
Distributor
4400 Computer Drive,
Westborough, MA 01581.
<PAGE>
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, 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
Adviser 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 issuers, such as the PORTAL System
sponsored by the National Association of Securities Dealers, Inc.
The Adviser 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 Adviser 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 of sovereign
governments, their agencies, instrumentalities, authorities or political
subdivisions; (ii) other short-term debt securities rated AA or higher by
Standard & Poor's Rating Service ("S&P") or Aa or higher by Moody's Investors
Service, Inc. ("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
("FHLMC") 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 Farm
Credit Banks 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.
Swap Agreements. Swap agreements are contracts entered into by two
parties, primarily institutional investors, for periods ranging from a few weeks
to more than one year. In a standard swap transaction, two parties agree to
exchange the returns (or differentials in rates of return) earned or realized on
particular predetermined investments or instruments. The gross returns to be
exchanged or swapped between the parties are calculated with respect to a
notional amount, i.e., the return on or increase in value of a particular dollar
amount invested at a particular interest rate, or in a basket of securities
representing a particular index. The notional amount of the swap agreement is
only a fictive basis on which to calculate the obligations which the parties to
a swap agreement have agreed to exchange. The Fund's obligations (or rights)
under a swap agreement will generally be equal only to the net amount to be paid
or received under the agreement based on the relative values of the positions
held by each party to the agreement (the "net amount"). The Fund's obligations
under a swap agreement will be accrued daily (offset against any amounts owing
to the Fund) and any accrued but unpaid net amounts owed to a swap counterparty
will be covered by the maintenance of a segregated account consisting of cash,
U.S. Government Securities, or high grade debt obligations, to avoid any
potential leveraging of the Fund's portfolio.
The successful use of swap agreements will depend on the Adviser's
ability to correctly predict whether certain types of investments are likely to
produce greater returns than other investments. Swap agreements may be
considered to be illiquid because they are two party contracts and because they
may have terms of greater than seven days. Moreover, the Fund bears the risk of
loss of the amount expected to be received under a swap agreement in the event
of the default or bankruptcy of a swap agreement counterparty. The Fund will
enter into swap agreements only with counterparties that would be eligible for
consideration as repurchase agreement counterparties under the Fund's repurchase
agreement guidelines. Certain restrictions imposed on the Fund by the Internal
Revenue Code may limit the Fund's ability to use swap agreements. The swaps
market is a relatively new market and is largely unregulated. It is possible
that developments in the swaps market, including potential government
regulation, could adversely affect the Fund's ability to terminate existing swap
agreements or to realize amounts to be received under such agreements.
Certain swap agreements are exempt from most provisions of the
Commodity Exchange Act (the "CEA") and, therefore, are not regulated as futures
or commodity option transactions under the CEA, pursuant to regulations approved
by the Commodity Futures Trading Commission (the "CFTC") effective February 22,
1993. To qualify for this exemption, a swap agreement must be entered into by
eligible participants, which includes the following, provided the participant's
total assets exceed established levels: a bank or trust company, savings
association or credit union, insurance company, investment company subject to
regulation under the Investment Company Act of 1940, as amended (the "1940
Act"), commodity pool, corporation, partnership, proprietorship, organization,
trust or other entity, employee benefit plan, governmental entity,
broker-dealer, futures commission merchant or natural person. To be eligible,
natural persons and most other entities must have total assets exceeding $10
million; commodity pools and employee benefit plans must have assets exceeding
$5 million. In addition, an eligible swap transaction must meet three
conditions. First, the swap agreement may not be part of a fungible class of
agreements that are standardized as to their material economic terms. Second,
the creditworthiness of parties with actual or potential obligations under the
swap agreement must be a material consideration in entering into or determining
the terms of the swap agreement, including pricing, cost or credit enhancement
terms. Third, swap agreements may not be entered into and traded on or through a
multilateral transaction execution facility.
This exemption is not exclusive, and participants may continue to rely
on existing exclusions for swaps, such as the Policy Statement issued in July
1989 which recognized a "safe harbor" for swap transactions from regulation as
futures or commodity option transactions under the CEA or its regulations. The
Policy Statement applies to swap transactions settled in cash that: (i) have
individually tailored terms; (ii) lack exchange style offset and the use of a
clearing organization or margin system; (iii) are undertaken in conjunction with
a line of business; and (iv) are not marketed to the public.
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.
Ginnie Mae Certificates. The Government National Mortgage Association
("Ginnie Mae") is a wholly-owned corporate instrumentality of the United States
within the Department of Housing and Urban Development. The National Housing Act
of 1934, as amended (the "Housing Act"), authorizes Ginnie Mae to guarantee the
timely payment of the principal of and interest on certificates that are based
on and backed by a pool of mortgage loans insured by the Federal Housing
Administration under the Housing Act, or Title of the Housing Act of 1949 ("FHA
Loans"), or guaranteed by the Department of Veterans Affairs under the
Servicemen's Readjustment Act of 1944, as amended ("VA Loans"), or by pools of
other eligible mortgage loans. The Housing Act provides that the full faith and
credit of the U.S. government is pledged to the payment of all amounts that may
be required to be paid under any Ginnie Mae guaranty. In order to meet its
obligations under such guaranty, Ginnie Mae is authorized to borrow from the
U.S. Treasury with no limitations as to amount.
The Ginnie Mae Certificates in which the Fund will invest will
represent a pro rata interest in one or more pools of the following types of
mortgage loans: (i) fixed-rate level payment mortgage loans; (ii) fixed-rate
graduated payment mortgage loans; (iii) fixed-rate growing equity mortgage
loans; (iv) fixed-rate mortgage loans secured by manufactured (mobile) homes;
(v) mortgage loans on multifamily residential properties under construction;
(vi) mortgage loans on completed multifamily projects; (vii) fixed-rate mortgage
loans as to which escrowed funds are used to reduce the borrower's monthly
payments during the early years of the mortgage loans ("buydown" mortgage
loans); (viii) mortgage loans that provide for adjustments in payments based on
periodic changes in interest rates or in other payment terms of the mortgage
loans; and (ix) mortgage-backed serial notes. All of these mortgage loans will
be FHA Loans or VA Loans and, except as otherwise specified above, will be
fully-amortizing loans secured by first liens on one- to four-family housing
units.
Fannie Mae Certificates. The Federal National Mortgage Association
("FNMA") ("Fannie Mae") is a federally chartered and privately owned corporation
organized and existing under the Federal National Mortgage Association Charter
Act of 1938. The obligations of Fannie Mae are not backed by the full faith and
credit of the U.S. government.
Each Fannie Mae Certificate will represent a pro rata interest in one
or more pools of FHA Loans, VA Loans or conventional mortgage loans (i.e.,
mortgage loans that are not insured or guaranteed by any governmental agency) of
the following types: (i) fixed-rate level payment mortgage loans; (ii)
fixed-rate growing equity mortgage loans; (iii) fixed-rate graduated payment
mortgage loans; (iv) variable rate mortgage loans; (v) other adjustable rate
mortgage loans; and (vi) fixed-rate and adjustable mortgage loans secured by
multifamily projects.
Freddie Mac Certificates. The FHLMC ("Freddie Mac") is a corporate
instrumentality of the United States created pursuant to the Emergency Home
Finance Act of 1970, as amended (the "FHLMC Act"). The obligations of Freddie
Mac are obligations solely of Freddie Mac and are not backed by the full faith
and credit of the U.S. government.
Freddie Mac Certificates represent a pro rata interest in a group of
mortgage loans (a "Freddie Mac Certificate group") purchased by Freddie Mac. The
mortgage loans underlying the Freddie Mac Certificates will consist of
fixed-rate or adjustable rate mortgage loans with original terms to maturity of
between ten and thirty years, substantially all of which are secured by first
liens on one- to four-family residential properties or multifamily projects.
Each mortgage loan must meet the applicable standards set forth in the FHLMC
Act. A Freddie Mac Certificate group may include whole loans, participating
interests in whole loans and undivided interests in whole loans and
participations comprising another Freddie Mac Certificate group.
Adjustable Rate Mortgages - Interest Rate Indices. Adjustable rate
mortgages in which the Fund invests may be adjusted on the basis of one of
several indices. The One Year Treasury Index is the figure derived from the
average weekly quoted yield on U.S. Treasury Securities adjusted to a constant
maturity of one year. The Cost of Funds Index reflects the monthly weighted
average cost of funds of savings and loan associations and savings banks whose
home offices are located in Arizona, California and Nevada (the "FHLB Eleventh
District") that are member institutions of the Federal Home Loan Bank of San
Francisco (the "FHLB of San Francisco"), as computed from statistics tabulated
and published by the FHLB of San Francisco. The FHLB of San Francisco normally
announces the Cost of Funds Index on the last working day of the month following
the month in which the cost of funds was incurred.
A number of factors affect the performance of the Cost of Funds Index
and may cause the Cost of Funds Index to move in a manner different from indices
based upon specific interest rates, such as the One Year Treasury Index. Because
of the various origination dates and maturities of the liabilities of members of
the FHLB Eleventh District upon which the Cost of Funds Index is based, among
other things, at any time the Cost of Funds Index may not reflect the average
prevailing market interest rates on new liabilities of similar maturities. There
can be no assurance that the Cost of Funds Index will necessarily move in the
same direction or at the same rate as prevailing interest rates since as longer
term deposits or borrowings mature and are renewed at market interest rates, the
Cost of Funds Index will rise or fall depending upon the differential between
the prior and the new rates on such deposits and borrowings. In addition,
dislocations in the thrift industry in recent years have caused and may continue
to cause the cost of funds of thrift institutions to change for reasons
unrelated to changes in general interest rate levels. Furthermore, any movement
in the Cost of Funds Index as compared to other indices based upon specific
interest rates may be affected by changes instituted by the FHLB of San
Francisco in the method used to calculate the Cost of Funds Index. To the extent
that the Cost of Funds Index may reflect interest changes on a more delayed
basis than other indices, in a period of rising interest rates, any increase may
produce a higher yield later than would be produced by such other indices, and
in a period of declining interest rates, the Cost of Funds Index may remain
higher than other market interest rates which may result in a higher level of
principal prepayments on mortgage loans which adjust in accordance with the Cost
of Funds Index than mortgage loans which adjust in accordance with other
indices.
LIBOR, the London interbank offered rate, is the interest rate that the
most creditworthy international banks dealing in U.S. dollar-denominated
deposits and loans charge each other for large dollar-denominated loans. LIBOR
is also usually the base rate for large dollar-denominated loans in the
international market. LIBOR is generally quoted for loans having rate
adjustments at one, three, six or twelve month intervals.
Asset-Backed Securities. The asset-backed securities in which the Fund
may invest are limited to those which are readily marketable, dollar-denominated
and rated BBB or higher by S&P or Baa or higher by Moody's. Asset-backed
securities present certain risks that are not presented by mortgage-backed
securities. Primarily, these securities do not have the benefit of the same type
of security interest in the related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to avoid payment of certain amounts owed on the credit cards, thereby
reducing the balance due. Most issuers of automobile receivables permit the
servicer to retain possession of the underlying obligations. If the servicer
were to sell these obligations to another party, there is a risk that the
purchaser would acquire an interest superior to that of the holders of the
related automobile receivables. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of the automobile receivables may not have a
proper security interest in all of the obligations backing such receivables.
Therefore, there is the possibility that recoveries on repossessed collateral
may not, in some cases, be available to support payments on these securities.
Mortgage-Backed Securities and Asset-Backed Securities Types of Credit
Support. The mortgage-backed securities in which the Fund may invest are limited
to those relating to residential mortgages. Mortgage-backed securities and
asset-backed securities are often backed by a pool of assets representing the
obligations of a number of different parties. To lessen the effect of failure by
obligors on underlying assets to make payments, such securities may contain
elements of credit support. Such credit support falls into two categories: (i)
liquidity protection and (ii) protection against losses resulting from ultimate
default by an obligor on the underlying assets. Liquidity protection refers to
the provision of advances, generally by the entity administering the pool of
assets, to ensure that the pass-through of payments due on the underlying pool
occurs in a timely fashion. Protection against losses resulting from ultimate
default enhances the likelihood of ultimate payment of the obligations on at
least a portion of the assets in the pool. Such protection may be provided
through guarantees, insurance policies or letters of credit obtained by the
issuer or sponsor from third parties, through various means of structuring the
transaction or through a combination of such approaches. The Fund will not pay
any additional fees for such credit support, although the existence of credit
support may increase the price of a security.
The ratings of mortgage-backed securities and asset-backed securities
for which third-party credit enhancement provides liquidity protection or
protection against losses from default are generally dependent upon the
continued creditworthiness of the provider of the credit enhancement. The
ratings of such securities could be subject to reduction in the event of
deterioration in the creditworthiness of the credit enhancement provider even in
cases where the delinquency and loss experience on the underlying pool of assets
is better than expected.
Examples of credit support arising out of the structure of the
transaction include "senior-subordinated securities," creation of "reserve
funds" (where cash or investments, sometimes funded from a portion of the
payments on the underlying assets, are held in reserve against future losses)
and "over-collateralization" (where the scheduled payments on, or the principal
amount of, the underlying assets exceed those required to make payment of the
securities and pay any servicing or other fees). The degree of credit support
provided for each issue is generally based on historical information with
respect to the level of credit risk associated with the underlying assets.
Delinquency or loss in excess of SAI is anticipated could adversely affect the
return on an investment in such a security.
Stripped Mortgage-Backed Securities. The cash flows and yields on IO
and PO classes are extremely sensitive to the rate of principal payments
(including prepayments) on the related underlying mortgage assets. For example,
a rapid or slow rate of principal payments may have a material adverse effect on
the yield to maturity of IOs or POs, respectively. If the underlying mortgage
assets experience greater than anticipated prepayments of principal, an investor
may fail to recoup fully its initial investment in an IO class of a stripped
mortgage-backed security, even if the IO class is rated AAA or Aaa. Conversely,
if the underlying mortgage assets experience slower than anticipated prepayments
of principal, the yield on a PO class will be affected more severely than would
be the case with a traditional mortgage-backed security.
Futures Contracts and Options on Futures Contracts
General. The successful use of such instruments draws upon the
Adviser's skill and experience with respect to such instruments and usually
depends on the Adviser's ability to forecast interest rate and currency exchange
rate movements correctly. Should interest or 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 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 fixed-income securities or contracts based on
financial indices including any index of U.S. Government Securities or corporate
debt securities. 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.
The Fund may enter into futures contracts which are based on debt securities
that are backed by the full faith and credit of the U.S. government, such as
long-term U.S. Treasury Bonds, Treasury Notes, Ginnie Mae modified pass-through
mortgage-backed securities and three-month U.S. Treasury Bills. The Fund may
also enter into futures contracts which are based on bonds issued by entities
other than the U.S. government.
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.
At the time of delivery of securities pursuant to such a contract,
adjustments are made to recognize differences in value arising from the delivery
of securities with a different interest rate from that specified in the
contract. In some (but not many) cases, securities called for by a futures
contract may not have been issued when the contract was written.
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 purpose of the acquisition or sale of a futures contract, in the
case of the Fund which holds or intends to acquire fixed-income securities, is
to attempt to protect the Fund from fluctuations in interest rates without
actually buying or selling fixed-income securities. For example, if interest
rates were expected to increase, the Fund might enter into futures contracts for
the sale of debt securities. Such a sale would have much the same effect as
selling an equivalent value of the debt securities owned by the Fund. If
interest rates did increase, the value of the debt security in the Fund would
decline, but the value of the futures contracts to the Fund would increase at
approximately the same rate, thereby keeping the net asset value of the Fund
from declining as much as it otherwise would have. The Fund could accomplish
similar results by selling debt securities and investing in bonds with short
maturities when interest rates are expected to increase. However, since the
futures market is more liquid than the cash market, the use of futures contracts
as an investment technique allows the Fund to maintain a defensive position
without having to sell its portfolio securities.
Similarly, when it is expected that interest rates may decline, futures
contracts may be purchased to attempt to hedge against anticipated purchases of
debt securities at higher prices. Since the fluctuations in the value of futures
contracts should be similar to those of debt securities, the Fund could take
advantage of the anticipated rise in the value of debt securities without
actually buying them until the market had stabilized. At that time, the futures
contracts could be liquidated and the Fund could then buy debt securities on the
cash market. To the extent the Fund enters into futures contracts for this
purpose, the assets in the segregated asset account maintained to cover the
Fund's obligations with respect to such futures contracts will consist of cash,
cash equivalents or high quality liquid debt securities from its portfolio in an
amount equal to the difference between the fluctuating market value of such
futures contracts and the aggregate value of the initial and variation margin
payments made by the Fund, with respect to such 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 Adviser may still not
result in a successful transaction.
In addition, futures contracts entail risks. Although the Adviser
believes that use of such contracts will benefit the Fund, if the Adviser's
investment judgment about the general direction of interest rates is incorrect,
the Fund's overall performance would be poorer than if it had not entered into
any such contract. For example, if the Fund has hedged against the possibility
of an increase in interest rates which would adversely affect the price of debt
securities held in its portfolio and interest rates decrease instead, the Fund
will lose part or all of the benefit of the increased value of its debt
securities which it has hedged because it will have offsetting losses in its
futures positions. In addition, in such situations, if the Fund has insufficient
cash, it may have to sell debt securities from its portfolio to meet daily
variation margin requirements. Such sales of bonds may be, but will not
necessarily be, at increased prices which reflect the rising market. The Fund
may have to sell securities at a time when it may be disadvantageous to do so.
Options on Futures Contracts. The Fund may purchase and write options
on futures contracts for hedging purposes. The purchase of a call option on a
futures contract is similar in some respects to the purchase of a call option on
an individual security. Depending on the pricing of the option compared to
either the price of the futures contract upon which it is based or the price of
the underlying debt securities, it may or may not be less risky than ownership
of the futures contract or underlying debt securities. As with the purchase of
futures contracts, when the Fund is not fully invested it may purchase a call
option on a futures contract to hedge against a market advance due to declining
interest rates.
The writing of a call option on a futures contract constitutes a
partial hedge against declining prices of the underlying security which is
deliverable upon exercise of the futures contract. If the futures price at
expiration of the option is below the exercise price, a the Fund will retain the
full amount of the option premium which provides a partial hedge against any
decline that may have occurred in the Fund's portfolio holdings. The writing of
a put option on a futures contract constitutes a partial hedge against
increasing prices of the underlying security which is deliverable upon exercise
of the futures contract. If the futures price at expiration of the option is
higher than the exercise price, the Fund will retain the full amount of the
option premium which provides a partial hedge against any increase in the price
of securities which the Fund intends to purchase. If a put or call option the
Fund has written is exercised, the Fund will incur a loss which will be reduced
by the amount of the premium it receives. Depending on the degree of correlation
between changes in the value of its portfolio securities and changes in the
value of its futures positions, the Fund's losses from existing options on
futures may to some extent be reduced or increased by changes in the value of
portfolio securities.
The purchase of a put option on a futures contract is similar in some
respects to the purchase of protective put options on portfolio securities. For
example, the Fund may purchase a put option on a futures contract to hedge its
portfolio against the risk of rising interest rates.
The amount of risk the Fund assumes when it purchases an option on a
futures contract is the premium paid for the option plus related transaction
costs. In addition to the correlation risks discussed above, the purchase of an
option also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the option purchased.
The Board of Trustees of the Trust 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.
Options on Securities. The Fund may write (sell) covered call and put
options to a limited extent on its portfolio securities ("covered options") in
an attempt to increase income. However, the Fund may forgo the benefits of
appreciation on securities sold or may pay more than the market price on
securities acquired pursuant to call and put options written by the Fund.
When the Fund writes a covered call option, it gives the purchaser of
the option the right to buy the underlying security at the price specified in
the option (the "exercise price") by exercising the option at any time during
the option period. If the option expires unexercised, the Fund will realize
income in an amount equal to the premium received for writing the option. If the
option is exercised, a decision over which the Fund has no control, the Fund
must sell the underlying security to the option holder at the exercise price. By
writing a covered call option, the Fund forgoes, in exchange for the premium
less the commission ("net premium"), the opportunity to profit during the option
period from an increase in the market value of the underlying security above the
exercise price.
When the Fund writes a covered put option, it gives the purchaser of
the option the right to sell the underlying security to the Fund at the
specified exercise price at any time during the option period. If the option
expires unexercised, the Fund will realize income in the amount of the premium
received for writing the option. If the put option is exercised, a decision over
which the Fund has no control, the Fund must purchase the underlying security
from the option holder at the exercise price. By writing a covered put option,
the Fund, in exchange for the net premium received, accepts the risk of a
decline in the market value of the underlying security below the exercise price.
The Fund will only write put options involving securities for which a
determination is made at the time the option is written that the Fund wishes to
acquire the securities at the exercise price.
The Fund may terminate its obligation as the writer of a call or put
option by purchasing an option with the same exercise price and expiration date
as the option previously written. This transaction is called a "closing purchase
transaction." The Fund will realize a profit or loss for a closing purchase
transaction if the amount paid to purchase an option is less or more, as the
case may be, than the amount received from the sale thereof. To close out a
position as a purchaser of an option, the Fund, may make a "closing sale
transaction" which involves liquidating the Fund's position by selling the
option previously purchased. Where the Fund cannot effect a closing purchase
transaction, it may be forced to incur brokerage commissions or dealer spreads
in selling securities it receives or it may be forced to hold underlying
securities until an option is exercised or expires.
When the Fund writes an option, an amount equal to the net premium
received by the Fund is included in the liability section of the Fund's
Statement of Assets and Liabilities as a deferred credit. The amount of the
deferred credit will be subsequently marked to market to reflect the current
market value of the option written. The current market value of a traded option
is the last sale price or, in the absence of a sale, the mean between the
closing bid and asked price. If an option expires on its stipulated expiration
date or if the Fund enters into a closing purchase transaction, the Fund will
realize a gain (or loss if the cost of a closing purchase transaction exceeds
the premium received when the option was sold), and the deferred credit related
to such option will be eliminated. If a call option is exercised, the Fund will
realize a gain or loss from the sale of the underlying security and the proceeds
of the sale will be increased by the premium originally received. The writing of
covered call options may be deemed to involve the pledge of the securities
against which the option is being written. Securities against which call options
are written will be segregated on the books of the custodian for the Fund.
The Fund may purchase call and put options on any securities in which
it may invest. The Fund would normally purchase a call option in anticipation of
an increase in the market value of such securities. The purchase of a call
option would entitle the Fund, in exchange for the premium paid, to purchase a
security at a specified price during the option period. The Fund would
ordinarily have a gain if the value of the securities increased above the
exercise price sufficiently to cover the premium and would have a loss if the
value of the securities remained at or below the exercise price during the
option period.
The Fund would normally purchase put options in anticipation of a
decline in the market value of securities in its portfolio ("protective puts")
or securities of the type in which it is permitted to invest. The purchase of a
put option would entitle the Fund, in exchange for the premium paid, to sell a
security, which may or may not be held in the Fund's portfolio, at a specified
price during the option period. The purchase of protective puts is designed
merely to offset or hedge against a decline in the market value of the Fund's
portfolio securities. Put options also may be purchased by the Fund for the
purpose of affirmatively benefiting from a decline in the price of securities
which the Fund does not own. The Fund would ordinarily recognize a gain if the
value of the securities decreased below the exercise price sufficiently to cover
the premium and would recognize a loss if the value of the securities remained
at or above the exercise price. Gains and losses on the purchase of protective
put options would tend to be offset by countervailing changes in the value of
underlying portfolio securities.
The Fund has adopted certain other nonfundamental policies concerning
option transactions which are discussed below. The Fund's activities in options
may also be restricted by the requirements of the Internal Revenue Code of 1986,
as amended (the "Code"), for qualification as a regulated investment company.
The hours of trading for options on securities may not conform to the
hours during which the underlying securities are traded. To the extent that the
option markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying securities
markets that cannot be reflected in the option markets. It is impossible to
predict the volume of trading that may exist in such options, and there can be
no assurance that viable exchange markets will develop or continue.
The Fund may engage in over-the-counter options transactions with
broker-dealers who make markets in these options. At present, approximately ten
broker-dealers, including several of the largest primary dealers in U.S.
government securities, make these markets. The ability to terminate
over-the-counter option positions is more limited than with exchange-traded
option positions because the predominant market is the issuing broker rather
than an exchange, and may involve the risk that broker-dealers participating in
such transactions will not fulfill their obligations. To reduce this risk, the
Fund will purchase such options only from broker-dealers who are primary
government securities dealers recognized by the Federal Reserve Bank of New York
and who agree to (and are expected to be capable of) entering into closing
transactions, although there can be no guarantee that any such option will be
liquidated at a favorable price prior to expiration. The Adviser will monitor
the creditworthiness of dealers with whom the Fund enters into such options
transactions under the general supervision of the Funds' Trustees.
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 Adviser 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
Adviser 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 Adviser 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 SAI 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 and except that assets may be pledged to secure
letters of credit solely for the purpose of participating in a captive insurance
company sponsored by the Investment Company Institute; for additional related
restrictions, see clause (i) under the caption "Additional Restrictions" below
(as an operating policy, the Fund may not engage in dollar roll transactions);
(2) underwrite securities issued by other persons except insofar as the
Trust or the Fund 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 net assets (taken at market value); (b) through the use of repurchase
agreements or the purchase of short-term obligations; or (c) by purchasing a
portion of an issue of debt securities of types distributed publicly or
privately;
(4) purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or interests therein),
interests in oil, gas or mineral leases, commodities or commodity contracts
(except futures and option contracts) 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; and
(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;
(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) sell securities it does not own such that the dollar amount of such
short sales at any one time exceeds 25% of the net equity of the Fund,
and the value of securities of any one issuer in which the Fund is
short exceeds the lesser of 2.0% of the value of the Fund's net assets
or 2.0% of the securities of any class of any U.S. issuer and,
provided that short sales may be made only in those securities which
are fully listed on a national securities exchange (This provision
does not include the sale of securities where the Fund
contemporaneously owns or has the right to obtain securities
equivalent in kind and amount to those sold, i.e., short sales against
the box.) (the Fund has no current intention to engage in short
selling); (iii) invest for the purpose of exercising control or
management;
(iv) purchase securities issued by any investment company except by
purchase in the open market where no commission or profit to a sponsor
or dealer results from such purchase other than the customary broker's
commission, or except when such purchase, though not made in the open
market, is part of a plan of merger or consolidation; provided,
however, that securities of any investment company will not be
purchased for the Fund 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) (except the Fund may exceed the
applicable percentage limits to the extent permitted by an exemptive
order of the SEC)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) (except the Fund may exceed the applicable percentage
limits to the extent permitted by an exemptive order of the SEC)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; provided further that, except in the case of a merger or
consolidation, the Fund shall not purchase any securities of any
open-end investment company unless the Fund (1) waives the investment
advisory fee with respect to assets invested in other open-end
investment companies and (2) incurs no sales charge in connection with
the investment (as an operating policy, the Fund will not invest in
another open-end registered investment company);
(v) invest more than 10% of the Fund's total assets (taken at the greater
of cost or market value) in securities that are restricted as to resale
under the 1933 Act (other than Rule 144A securities deemed liquid by
the Fund's Board of Trustees);
(vi) 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: (i) is not
traded flat or in default as to interest or principal;
<PAGE>
(vii) invest in warrants (other than warrants acquired by the Fund as part of
a unit or attached to securities at the time of purchase) if, as a
result, the investments (valued at the lower of cost or market) would
exceed 5% of the value of the Fund's net assets or if, as a result,
more than 2% of the Fund's net assets would be invested in warrants not
listed on a recognized United States stock exchange, to the extent
permitted by applicable state securities laws;
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 Adviser 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 Adviser 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 Adviser 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 Adviser reviews on a routine basis
commission rates, execution and settlement services performed, making internal
and external comparisons.
The Adviser 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 Adviser may consider sales of
shares of the 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 Adviser, it is the
opinion of the management of the Trust that such information is only
supplementary to the Adviser's own research effort, since the information must
still be analyzed, weighed and reviewed by the Adviser's staff. Such information
may be useful to the Adviser in providing services to clients other than the
Fund, and not all such information is used by the Adviser in connection with the
Fund. Conversely, such information provided to the Adviser by brokers and
dealers through whom other clients of the Adviser effect securities transactions
may be useful to the Adviser 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 Adviser's other clients. Investment
decisions for the Fund and for the Adviser'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.
<PAGE>
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:
Yield: Yields for the Fund used in advertising are computed by dividing
the Fund's interest and dividend income for a given 30-day or one-month
period, net of expenses, by the average number of shares entitled to
receive distributions during the period, dividing this figure by the
Fund's net asset value per share at the end of the period, and
annualizing the result (assuming compounding of income) in order to
arrive at an annual percentage rate. Income is calculated for purpose
of yield quotations in accordance with standardized methods applicable
to all stock and bond mutual funds. Dividends from equity investments
are treated as if they were accrued on a daily basis, solely for the
purpose of yield calculations. In general, interest income is reduced
with respect to bonds trading at a premium over their par value by
subtracting a portion of the premium from income on a daily basis, and
is increased with respect to bonds trading at a discount by adding a
portion of the discount to daily income. Capital gains and losses
generally are excluded from the calculation.
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 public 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. Furthermore, total return does
not reflect charges or deductions against a Contractowner's separate
account. Accordingly, total return does not illustrate the actual
investment performance under a contract. 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 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
Debt securities (other than short-term debt obligations maturing in 60
days or less), including 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 value.
Securities for which market quotations are not available are valued by
Bankers under the supervision of 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
Adviser 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 the
Fund shareholder in securities, the shareholder may incur transaction expenses
in converting these securities into cash. The Trust, on behalf of the Fund, has
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. <TABLE> <CAPTION> <S> <C> <C>
Trustees and Officers
Principal Occupations During
Name, Address and Age Position Held with the Trust Past 5 Years
- --------------------- ---------------------------- ------------
Robert R. Coby, 46 Trustee President of Lynch & Mayer, Inc., since
118 North Drive December 1996; Formerly President of
North Massapequa, NY 11758 Leadership Capital Inc. (1995-1996);
Chief Operating Officer of CS First
Boston Investment Management, Inc.
(1994-1995); President of Blackhawk
L.P. (1993-1994); Chief Financial
Officer of Equitable Capital prior to
February 1993.
Desmond G. FitzGerald, 54 Trustee Chairman of North American Properties
2015 West Main Street Group since January 1987.
Stamford, CT 06902
James S. Pasman, Jr., 67 Trustee Retired; President and Chief Operations
29 The Trillium Officer of National Intergroup Inc.
Pittsburgh, PA 15238 (1989-1991).
*William E. Small, 56 Trustee and President Independent Consultant (1996-present);
Formerly Executive Vice President of
First Data Investor Services Group Inc.
("Investor Services Group") (1993-1996).
Michael Kardok, 38 Vice President and Treasurer Vice President of First Data since May
1994; Vice President of The Boston
Company Advisors Inc. prior to May 1994.
Elizabeth Russell, 35 Vice President and Secretary Counsel of Investor Services Group
since 1994; Assistant Vice President
and Counsel, The Boston Company
Advisors, Inc. (1993-1994).
Brigid O. Bieber, 37 Vice President and Assistant Counsel of Investor Services Group
Secretary since 1994; Vice President and
Associate General Counsel, The Boston
Company Advisors, Inc. (prior to May
1994).
</TABLE>
Mr. Kardok, Msses. Bieber and Russell also hold similar positions for other
investment companies for which First Data Distributors, an affiliate of Investor
Service Group, 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.
<PAGE>
The Trust typically pays its Trustees an annual retainer and a per meeting
fee and reimburses them for their expenses. The aggregate amount of compensation
paid to each current Trustee by the Trust for the fiscal year ended December 31,
1997, was as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
(1) (2) (3) (4) (5)
Total
Pension or Compensation
Retirement Estimated from Registrant
Aggregate Benefits Accrued Annual Benefits and Fund
Name of Compensation as Part of Upon Retirement Complex
Board Member from Fund* Fund's Expenses
Robert R. Coby $7,500 N/A N/A $7,500
Desmond G. FitzGerald $7,500 N/A N/A $7,500
James S. Pasman, Jr. $7,500 N/A N/A $7,500
William E. Small $0 N/A N/A $0
</TABLE>
* Amount does not include reimbursed expenses for attending Board meetings,
which amounted to $669 for all Trustees as a group.
As of February 10, 1998 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 Adviser
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 additional 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.
Administrator
Investor Services Group, One Exchange Place, Boston, Massachusetts
02109, serves as administrator of the Fund. As administrator, Investor Services
Group 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. Investor Services Group will generally assist in all
aspects of the Fund's operations; supply and maintain office facilities (which
may be in Investor Services Group'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.
As compensation for Investor Services Group's services under the
Administration Agreement, Investor Services Group is entitled to receive from
the Fund a monthly administration 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 $5
billion; and 0.0075% of the Trust's monthly average net assets exceeding $5
billion, in addition to a flat fee of $70,000 per year for each fund of the
Trust and a one-time start-up fee for each fund of the Trust.
Custodian and Transfer Agent
Bankers Trust 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.
Investor Services Group serves as transfer agent of the Trust. Under
its transfer agency agreement with the Trust, Investor Services Group 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 Investor Services Group 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 SAI 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.
<PAGE>
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 LLP, 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, Companies owning 25% or more of a
Fund's outstanding securities 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 Fund
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 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-deferred benefits provided by the variable contracts which are offered in
connection with such separate accounts. The Adviser 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 liable 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.
<PAGE>
Investment Adviser of the Fund
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 SAI
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 SAI constitutes an offer in any state in which, or to any
person to whom, such offer may not lawfully be made.
<PAGE>
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
Included in Part A
Financial Highlights
(Small Cap Index Fund, EAFE(R) Equity Index Fund
and Equity 500 Index Fund)
Included in Part B
The Registrant's Annual Report for the fiscal year
ended December 31, 1997 and the Report of Independent
Auditors, are incorporated by reference to the
Definitive 30b-2 filed (EDGAR Form N-30D) on March
10, 1998
(b) Exhibits:
Exhibit
Number Description
1 Declaration of Trust is hereby incorporated
by reference to the initial Registration
Statement filed with the Securities and
Exchange Commission via EDGAR on January 26,
1996.
2 The Registrant's By-Laws are incorporated by reference
to Amendment No. 1 filed with the Securities and
Exchange Commission via EDGAR on September 18, 1996.
3 Not Applicable.
4 Not Applicable.
5(a) The form of Investment Management Agreement
between Managed Assets Fund and Bankers
Trust Company is incorporated by reference
to Amendment No. 1 filed with the Securities
and Exchange Commission via EDGAR on
September 18, 1996.
(b) The form of Investment Management Agreement
between Small Cap Index Fund and
International Equity Fund and Bankers Trust
Company is incorporated by reference to
Pre-Effective Amendment No. 1 filed with the
Securities and Exchange Commission via EDGAR
on September 20, 1996.
<PAGE>
Exhibit
NumberDescription
(c) The form of Investment Management Agreement
between Small Cap Index Fund, Equity 500
Index Fund and EAFE(R) Equity Index Fund and
Bankers Trust Company is incorporated by
reference to Post-Effective Amendment No. 1
filed with the Securities and Exchange
Commission via EDGAR on November 22, 1996.
(d) The form of Investment Management Agreement
between U.S. Bond Index Fund and Bankers
Trust Company is incorporated by reference
to Post-Effective Amendment No. 2 filed with
the Securities and Exchange Commission via
EDGAR on July 18, 1997.
6 The form of Distribution Agreement between Registrant
and 440 Financial Distributors, Inc. is incorporated by
reference to Pre-Effective Amendment No. 1 filed with
the Securities and Exchange Commission via EDGAR on
September 20, 1996.
7 Not Applicable.
8 The Custodian Agreement between Registrant
and Bankers Trust Company is incorporated by
reference to Amendment No. 1 filed with the
Securities and Exchange Commission via EDGAR
on September 18, 1996.
9(a) The form of Transfer Agency Agreement
between Registrant and First Data Investor
Services Group, Inc. is incorporated by
reference to Amendment No. 1 filed with the
Securities and Exchange Commission via EDGAR
on September 18, 1996.
(b) The form of Administration Agreement between
Registrant and First Data Investor Services
Group, Inc. is incorporated by reference to
Pre-Effective Amendment No. 1 filed with the
Securities and Exchange Commission via EDGAR on
September 20, 1996.
10 Not Applicable.
11(a) Consent of Independent Auditors is filed
herewith.
11(b) Powers of Attorney is incorporated by
reference to Post-Effective
Amendment No. 3 filed with the Securities
and Exchange Commission via
EDGAR on August 20, 1997.
12 Not Applicable.
<PAGE>
Exhibit
NumberDescription
13(a) The form of Purchase Agreement relating
to Initial Capital is
incorporated by reference to Amendment
No. 1 filed with the
Securities and Exchange Commission via EDGAR
on September 18, 1996.
(b) The form of Purchase Agreement relating to
Small Cap Fund and International Equity Fund
is incorporated by reference to
Pre-Effective Amendment No. 1 filed with the
Securities and Exchange Commission via EDGAR
on September 20, 1996.
(c) The form of Purchase Agreement relating to
Small Cap Index Fund, EAFE(R) Equity Index
Fund and Equity 500 Index Fund is
incorporated by reference to Post-Effective
Amendment No. 1 filed with the Securities
and Exchange Commission via EDGAR on
November 22, 1996.
(d) The form of Purchase Agreement relating to
the U.S. Bond Index Fund is incorporated by
reference to Post-Effective Amendment No. 2
filed with the Securities and Exchange
Commission via EDGAR on July 18, 1997.
14 Not Applicable.
15 Not Applicable.
16 Not Applicable.
17 Financial Data Schedules for the Small Cap
Index Fund, EAFE(R) Equity Index Fund and
Equity 500 Index Fund is filed herewith.
18 Not Applicable.
Item 25. Persons Controlled by or Under Common Control with Registrant
Not Applicable.
Item 26. Number of Holders of Securities
EAFE(R)Equity Index Fund 3
Small Cap Index Fund 3
Equity 500 Index Fund 3
Small Cap Fund 0
International Equity Fund 0
U.S. Bond Index Fund 0
Item 27. Indemnification
Reference is made to Articles IV and V of Registrant's Declaration
of Trust filed with Securities and Exchange Commission on January 26, 1996.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Securities Act") may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant understands that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
Item 28. Business and Other Connections of Investment Adviser
Bankers Trust Company ("Bankers Trust") serves as investment
adviser to the Trust. Bankers Trust, a New York banking corporation, is a wholly
owned subsidiary of Bankers Trust New York Corporation. Bankers Trust conducts a
variety of commercial banking and trust activities and is a major wholesale
supplier of financial services to the international institutional market.
To the knowledge of the Trust, none of the directors or officers
of Bankers Trust, except those set forth below, is engaged in any other
business, profession, vocation or employment of a substantial nature, except
that certain directors and officers also hold various positions with and engage
in business for Bankers Trust New York Corporation. Set forth below are the
names and principal businesses of the directors and officers of Bankers Trust
who are engaged in any other business, profession, vocation or employment of a
substantial nature.
NAME AND PRINCIPAL BUSINESS ADDRESS, PRINCIPAL OCCUPATION AND OTHER INFORMATION
George B. Beitzel, International Business Machines Corporation, Old Orchard
Road, Armonk, NY 10504. Director, Bankers Trust Company; Retired senior vice
president and Director, International Business machines Corporation; Director,
Computer Task Group; Director, Phillips Petroleum Company; Director, Caliber
Systems, Inc. (formerly, Roadway Services Inc.); Director, Rohm and Haas
Company; Director, TIG Holdings; Chairman emeritus of Amherst College; and
Chairman of the Colonial Willimsburg Foundation.
Richard H. Daniel, Bankers Trust Company, 130 Liberty Street, New York, New York
10006. Vice chairman and chief financial officer, Bankers Trust Company and
Bankers Trust New York Corporation; Beneficial owner, general partner, Daniel
Brothers, Daniel Lingo & Assoc., Daniel Pelt & Assoc.; Beneficial owner, Rhea C.
Daniel Trust.
Philip A. Griffiths, Bankers Trust Company, 130 Liberty Street, New York, New
York 10006. Director, Institute for Advanced Study; Director, Bankers Trust
Company; Chairman, Committee on Science, Engineering and Public Policy of the
National Academies of Sciences and Engineering & the Institute of Medicine; and
Chairman and member, Nominations Committee and Committee on Science and
Engineering Indicators, National Science Board; Trustee, North Carolina School
of Science and Mathematics and the Woodward Academy.
William R. Howell, J.C. Penney Company, Inc., P.O. Box 10001, Plano, TX
75301-0001. Chairman Emeritus, J.C. Penney Company, Inc.; Director, Bankers
Trust Company; Director, Exxon Corporation; Director, Halliburton Company;
Director, Warner-Lambert Corporation; Director, The Williams Companies, Inc.;
and Director, National Retail Federation.
Vernon E. Jordan, Jr., Akin, Gump, Strauss, Hauer & Feld, LLP, 1333 New
Hampshire Ave., N.W., Washington, DC 20036. Senior Partner, Akin, Gump, Strauss,
Hauer & Feld, LLP; Director, Bankers Trust Company; Director, American Express
Company; Director, Dow-Jones, Inc.; Director, J.C. Penney Company, Inc.;
Director, Revlon Group Incorporated; Director, Ryder System, Inc.; Director,
Sara Lee Corporation; Director, Union Carbide Corporation; Director, Xerox
Corporation; Trustee, Brookings Institution; Trustee, The Ford Foundation; and
Trustee, Howard University.
David Marshall, 130 Liberty Street, New York, New York 10006. Chief Information
Officer and Executive Vice President, Bankers Trust New York Corporation; Senior
Managing Director, Bankers Trust Company.
Hamish Maxwell, Philip Morris Companies Inc., 120 Park Avenue, New York, NY
10006. Retired Chairman and Chief Executive Officer, Philip Morris Companies
Inc.; Director, Bankers Trust Company; Director, The News Corporation Limited;
Director, Sola International Inc.; and Chairman, WWP Group pic.
Frank N. Newman, Bankers Trust Company, 130 Liberty Street, New York, New York
10006. Chairman of the Board, Chief Executive Officer and President, Bankers
Trust New York Corporation and Bankers Trust Company; Director, Bankers Trust
Company; Director, Dow-Jones, Inc.; and Director, Carnegie Hall.
N.J. Nicholas Jr., 745 Fifth Avenue, New York, NY 10020. Director, Bankers Trust
Company; Director, Boston Scientific Corporation; and Director, Xerox
Corporation.
Russell E. Palmer, The Palmer Group, 3600 Market Street, Suite 530,
Philadelphia, PA 19104. Chairman and Chief Executive Officer of The Palmer
Group; Director, Bankers Trust Company; Director, Allied-Signal Inc.; Director,
Federal Home Loan Mortgage Corporation; Director, GTE Corporation; Director, The
May Department Stores Company; Director, Safeguard Scientifics, Inc.; and
Trustee, University of Pennsylvania.
Donald L. Staheli, Bankers Trust Company, 130 Liberty Street, New York, New York
10006. Chairman of the Board and Chief Executive Officer, Continental Grain
Company; Director, Bankers Trust Company; Director, ContiFinancial Corporation;
Director, Prudential Life Insurance Company of America; Director, Fresenius
Medical Care, A.g.; Director, America-China Society; Director, National
Committee on United States-China Relations; Director, New York City Partnership;
Chairman, U.S.-China Business Council; Chairman, Council on Foreign Relations;
Chairman, National Advisor Council of Brigham Young University's Marriott School
of Management; Vice Chairman, The Points of Light Foundation; and Trustee,
American Graduate School of International Management.
Patricia Carry Stewart, c/o Office of the Secretary, 130 Liberty Street, New
York, NY 10006. Director, Bankers Trust Company; Director, CVS Corporation;
Director, Community Foundation for Palm Beach and Martin Counties; Trustee
Emerita, Cornell University.
George J. Vojta, Bankers Trust Company, 130 Liberty Street, New York, NY 10006.
Vice Chairman, Bankers Trust New York Corporation and Bankers Trust Company;
Director, bankers Trust Company; Director; Alicorp S.A.; Director; Northwest
Airlines; Director, Private Export Funding Corp.; Director, New York State
Banking Board; Director, St. Lukes-Roosevelt Hospital Center; Partner, New York
City Partnership; and Chairman, Wharton Financial Services Center.
Paul A. Volcker, Bankers Trust Company, 130 Liberty Street, New York, New York
10006. Director, Bankers Trust Company; Director, American Stock Exchange;
Director, Nestle S.A.; Director, Prudential Insurance Company; Director, UAL
Corporation; Chairman, Group of 30; North American Chairman, Trilateral
Commission; Co-Chairman, Bretton Woods Committee; Co-Chairman, U.S./Hong Kong
Economic Cooperation Committee; Director, American Council on Germany; Director,
Aspen Institute; Director, Council on Foreign Relations; Director, The Japan
Society; and Trustee, The American Assembly.
Melvin A. Yellin, Bankers Trust Company, 130 Liberty Street, New York, New York
10006. Senior Managing Director and General Counsel of Bankers Trust New York
Corporation and Bankers Trust Company; Director, 1136 Tenants Corporation; and
Director, ABA Securities Association.
Item 29. Principal Underwriters
(a) In addition to BT Insurance Funds Trust, First Data Distributors, Inc.
(the "Distributor") currently acts as distributor for First Choice Funds Trust,
The Galaxy Fund, The Galaxy VIP Fund, Galaxy Fund II, Panorama Trust, CT&T
Funds, Wilshire Target Funds, Inc., Potomac Funds, Undiscovered Managers Funds,
LKCM Funds, Rembrandt Funds, IBJ Funds Trust and the ICM Series Trust. The
Distributor is registered with the Securities and Exchange Commission as a
broker-dealer and is a member of the National Association of Securities Dealers.
The Distributor is a wholly-owned subsidiary of First Data Corporation and is
located at 4400 Computer Drive, Westborough, MA 01581.
(b) The information required by this Item 29 (b) with respect to
each director, officer, or partner of First Data Distributors, Inc. is
incorporated by reference to Schedule A of Form BD filed by First Data
Distributors, Inc. with the Securities and Exchange Commission pursuant to the
Securities Act of 1934 (File No. 8-45467).
(c) Not Applicable.
<PAGE>
Item 30. Location of Accounts and Records
All accounts books and other documents required to be maintained
by Registrant by Section 31(a) of the Investment Company Act of 1940 and the
Rules thereunder will be maintained at the offices of:
(1) Bankers Trust Company
280 Park Avenue
New York, NY 10017
(2) First Data Distributors, Inc.
4400 Computer Drive
Westborough, MA 01581
(3) First Data Investor Services Group, Inc.
One Exchange Place
Boston, MA 02109
Item 31. Management Services
Not Applicable.
Item 32. Undertakings
(a) Not Applicable.
(b) Not Applicable.
(c) The Registrant will furnish each person to whom a prospectus
is delivered with a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.
(d) Registrant hereby undertakes to call a meeting of its shareholders
for the purpose of voting upon the question of removal of a trustee or trustees
of Registrant when requested in writing to do so by the holders of at least 10%
of Registrant's outstanding shares. Registrant undertakes further, in connection
with the meeting, to comply with the provisions of Section 16(c) of the
Investment Company Act of 1940, as amended, relating to communications with the
shareholders of certain common-law trusts.
<PAGE>
INDEX TO EXHIBITS
Exhibit Number Exhibit
11(a) Consent of Independent Auditors.
17 Financial Data Schedules for the Small Cap Index Fund, EAFE Equity
Index Fund and Equity 500 Index Fund.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, the Registrant certifies
that this Post-Effective Amendment No. 6 to the Registration Statement meets the
requirements for effectiveness pursuant to Rule 485(b) of the Securities Act of
1933, as amended, and the Registrant has duly caused this Post-Effective
Amendment No. 6 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Boston and the Commonwealth of Massachusetts on this
24th day of March, 1998.
BT Insurance Funds Trust
By: *
William E. Small
* By:
/s/ Elizabeth A. Russell
Elizabeth A. Russell
as Attorney-in-Fact
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Signatures Title Date
* President and Trustee March 24, 1998
- ------------------------------
William E. Small
* Treasurer and Vice President March 24, 1998
- ------------------------------
Michael Kardok
* Trustee March 24, 1998
- ------------------------------
Robert R. Coby
* Trustee March 24, 1998
- ------------------------------
Desmond G. Fitzgerald
* Trustee March 24, 1998
- ------------------------------
James S. Pasman
</TABLE>
* By:
/s/ Elizabeth A. Russell
Elizabeth A. Russell
as Attorney-in-Fact
The Powers of Attorney are incorporated by reference to Post-Effective
Amendment No. 3 filed with the Securities and Exchange Commission via EDGAR on
August 20, 1997.
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions " Financial
Highlights", "Counsel and Independent Accountants" and "Independent Accountants"
and t the use of our report on BT Insurance Funds Trust, dated January 30, 1998,
which is incorporated by reference in this Registration Statement (Form N-1A
File No. 333-00479) of BT Insurance Funds Trust.
ERNST & YOUNG LLP
ERNST & YOUNG LLP
New York, New York
March 20, 1998
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> BT INSURANCE FUNDS TRUST SMALL CAP INDEX FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 12,195,875
<INVESTMENTS-AT-VALUE> 12,579,760
<RECEIVABLES> 177,200
<ASSETS-OTHER> 337,644
<OTHER-ITEMS-ASSETS> 15,099
<TOTAL-ASSETS> 13,109,703
<PAYABLE-FOR-SECURITIES> 399,107
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 93,576
<TOTAL-LIABILITIES> 492,683
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 12,102,820
<SHARES-COMMON-STOCK> 1,200,199
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 41,878
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 88,417
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 383,905
<NET-ASSETS> 12,617,020
<DIVIDEND-INCOME> 52,275
<INTEREST-INCOME> 4,049
<OTHER-INCOME> 3,039
<EXPENSES-NET> 17,485
<NET-INVESTMENT-INCOME> 41,878
<REALIZED-GAINS-CURRENT> 88,417
<APPREC-INCREASE-CURRENT> 383,905
<NET-CHANGE-FROM-OPS> 514,200
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 12,189,027
<NUMBER-OF-SHARES-REDEEMED> 86,207
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 12,617,020
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 13,629
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 127,487
<AVERAGE-NET-ASSETS> 11,104,273
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.03
<PER-SHARE-GAIN-APPREC> 0.48
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.51
<EXPENSE-RATIO> 0.45
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 5
<NAME> BT INSURANCE FUNDS TRUST EAFE EQUITY INDEX FUND
<S> <C>
<PERIOD-TYPE> YEAR
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 6
<NAME> BT INSURANCE FUNDS TRUST EQUITY 500 INDEX FUND
<S> <C>
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