As filed with the Securities and Exchange Commission on February 26, 1999
Securities Act File No. 333-00479
Investment Company Act File No. 811-07507
===========================================================================
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. 7
X
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
X
Amendment No. 9
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) 535-0532
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
101 Federal Street 787 Seventh Avenue
Boston, Massachusetts 02110 New York, NY 10019-6099
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:
_ immediately upon filing pursuant to paragraph (b), or
on pursuant to paragraph (b)
60 days after filing pursuant to paragraph (a)(1), or X on April
30, 1999 pursuant to paragraph (a)(1)
___ 75 days after filing pursuant to paragraph (a)(2) on __________
pursuant to paragraph (a)(2) of Rule 485
<PAGE>
shared\clients\bankers\peas\peano._\partc\pea6.doc
BT INSURANCE FUNDS TRUST
The purpose of this Post-Effective Amendment No. 7 is to comply with
amended Form N-1A and the plain English requirements of Rule 421 under the 1933
Act by filing simplified prospectuses 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. A simplified prospectus is not being filed for the Managed Assets Fund at
this time because the Managed Assets Fund has never been and is not
currently being offered. If and when the Managed Assets Fund is ever
expected to be offered, we will file at that time an amendment to the
Trust's registration statement pursuant to Rule 485(a) of the 1933 Act
and will, with respect to the Managed Assets Fund, comply with amended
Form N-1A and the plain English requirements of Rule 421 under the 1933 Act.
Small Cap Fund
With the goal of achieving long-term capital growth through investment in stocks
and other equity securities of small companies.
Prospectus: April 30, 1999
Trust: BT Insurance Funds Trust
Investment Adviser: Bankers Trust Company
Like shares of all mutual funds, these securities have not been approved or
disapproved by the Securities and Exchange Commission ("SEC") nor has the SEC
passed upon the accuracy or adequacy of this prospectus. Any representation to
the contrary is a criminal offense.
<TABLE>
<CAPTION>
<S> <C>
OVERVIEW OF THE SMALL CAP FUND
Goal..................................................... .......03
Core Strategy......................................... ...............03
Investment Policies and Strategies........................................................03
Principal Risks of Investing in the Fund..................................................03
Who Should Consider Investing in the Fund.................................................04
A DETAILED LOOK AT THE SMALL CAP FUND
Objective.................................................................................05
Strategy..................................................................................05
Principal Investments.....................................................................05
Investment Process........................................................................06
Portfolio Turnover........................................................................06
Risks.....................................................................................06
Management of the Fund....................................................................08
SHAREHOLDER INFORMATION
Calculating the Fund's Share Price........................................................10
Dividends and Distributions...............................................................11
Tax Considerations........................................................................11
Buying and Selling Shares.................................................................11
</TABLE>
<PAGE>
OVERVIEW OF THE SMALL CAP FUND
Goal
The Fund invests for long-term capital growth.
Core Strategy
The Fund invests primarily in stocks and other equity securities of companies
with market capitalizations, at the time we purchase the stock, within the
market capitalization range of the Russell 2000 Index.
The Russell 2000 Small Stock Index is a widely accepted benchmark of
small-company stock performance. It is a model, not an actual portfolio and is a
subset of the Russell 3000 Index. The Russell 2000 tracks the 2000 smallest
companies in the Russell 3000. It constitutes about 10% of the Russell 3000's
total market value. The weighted average market capitalization of the companies
in the Russell 2000 has run about $400 million in recent years. That compares to
$2 billion for the companies in the Russell 3000.
Investment Policies and Strategies
The Fund seeks to achieve its objective by investing in companies with small
market capitalizations. The Fund searches for small companies whose share price
does not reflect its prospects by looking at factors such as the company's
financial strength and technological opportunities.
Principal Risks of Investing in the Fund An investment in the Fund could lose
money, or the Fund's performance could trail that of other investments. For
example: Stocks that the Investment Adviser has selected could perform poorly;
Small company stock returns could trail stock market returns generally because
of the liquidity risks specific to small company investing: greater share-price
volatility and fewer buyers for small company shares in periods of economic or
stock market stress. Such lack of liquidity may accelerate a prevailing downward
price trend and limit the Fund's ability to exit from an unsuccessful
investment; or The stock market could decline or could underperform other
investments.
<PAGE>
Who Should Consider Investing in the Fund
The Fund sells its shares only to separate accounts of various insurance
companies (the "Companies"). Shares are available to the public through the
purchase of certain variable annuity and variable life insurance contracts
("Contract(s)") issued by the Companies. As a Contract owner, your premium
payments are allocated to the Fund through these separate accounts in accordance
with your contract. Please see the Contract prospectus that accompanies this
Prospectus for a detailed explanation of your Contract.
You should consider investing in the Small Cap Fund if you are seeking long-term
capital growth. There is, of course, no guarantee that the Fund will realize its
goal. Moreover, you should be willing to accept greater short-term fluctuation
in the value of your investment than you would typically experience investing in
bond or money market funds.
You should not consider investing in the Small Cap Fund if you are pursuing a
short-term financial goal, if you seek regular income or if you cannot tolerate
fluctuations in the value of your investments.
The Fund by itself does not constitute a balanced investment program. It can,
however, afford you exposure to investment opportunities not available to
someone who invests in large company and medium-sized company stocks.
An investment in the Small Cap Fund is not a deposit of Bankers Trust Company or
any other bank and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
(A Note on Fees)
As an investor in the Fund, you would incur various operating costs, including
management expenses. You also would incur fees associated with the Contracts you
purchase. Detailed information about the cost of investing in the Fund is
presented in the accompanying prospectus for the Contracts through which the
Fund's shares are offered to you.
The Fund has not commenced operations as of the date of this Prospectus;
therefore, no performance information is being presented to you.
<PAGE>
A DETAILED LOOK AT THE SMALL CAP FUND
Objective
The Small Cap Fund seeks long-term capital growth. Under normal circumstances,
the Fund invests at least 65% of its total assets in common stocks and other
securities with equity characteristics, or companies with market
capitalizations, at the time we first purchase the shares, within the market
capitalization range of the Russell 2000 Index.
The Fund invests for long-term growth, not income; any dividend and interest
income is incidental to the pursuit of its objective. While we give priority to
long-term capital growth, we cannot offer any assurance of achieving this
objective. The Fund's objective is not a fundamental policy. We must notify
shareholders before we change it, but we do not require their approval to do so.
Strategy
We invest for the long term. We are looking for small companies that have
reached a pivotal point - companies that are ready to reap the benefits of
technological change, companies that have begun to increase their market share,
companies that have completed a turnaround or whose pace of growth is starting
to accelerate. Normally, their share prices do not reflect their strong
prospects most investors have not yet discovered them. Two financial attributes
set these companies apart:
Evidence of above-average growth in revenues and earnings; and
A balance sheet that can support this growth potential with sufficient
working capital and manageable levels of debt.
Principal Investments
The Fund normally owns stock in approximately 90 to 100 small companies at any
one time. The Fund focuses principally on companies with market capitalizations
within the market capitalization range of the Russell 2000 Index.
The Fund may also invest up to 25% of its assets in the stocks of non-U.S.
companies and up to 35% of its assets in large caps. Under normal conditions,
these two tactics would not comprise major elements of its strategy.
"Market Capitalization," or "Market Cap," provides a ready gauge of a company's
size. It multiplies the total number of a company's outstanding shares by the
current price of its stock to arrive at an estimate of its current value.
Investment Process
The Fund's process begins with a methodical search for industries poised to take
off. Before identifying individual companies, we seek to identify the industries
that are undergoing positive change or that stand to benefit from broad
demographic and cultural trends.
Once we have identified a likely industry, the exhaustive search begins for the
most promising small companies within the industry. The Small Cap research team
meets frequently with the managements of investment candidates to gather a
first-hand impression of their prospects. The team's investigative work relies
on the analytical and forecasting tools that Bankers Trust has long applied and
is continuously enhancing. The work demands intensive research: visits to a
company's plants and frequent contact with its management, suppliers, customers
and competitors.
Portfolio Turnover
The Portfolio turnover rate measures the frequency that the Portfolio sells and
replaces the securities it holds within a given period. High turnover can
increase the Fund's transaction costs, thereby lowering its returns. It may also
increase your tax liability. We anticipate that the Fund will have a high
portfolio turnover rate.
Risks
Below we set forth some of the prominent risks associated with investing in
small company securities, as well as investing in general. Although we attempt
to assess the likelihood that these risks may actually occur and to omit them,
we make no guarantee that we will succeed.
Primary Risks
Market Risk
Although individual stocks can outperform their local markets, deteriorating
market conditions might cause an overall weakness in the stock prices of the
entire market.
<PAGE>
Stock Selection
A risk that pervades all investing is the risk that the securities an investor
has selected will not perform to expectations. We manage this risk in the Small
Cap Fund by closely monitoring the Fund's investments for the following signs of
negative change: Decelerating revenue or earnings growth;
Loss of market share;
Increasing levels of debt or decreasing levels of cash flow and working
capital; and A stock price that lags behind competitors'.
Small Company Risk
Small company stocks tend to experience steeper fluctuations in price - down as
well as up - than the stocks of larger companies. A shortage of reliable
information - the same information gap that creates opportunity in small company
investing - can also pose added risk. Industry-wide reversals have had a greater
impact on small companies, since they lack a large company's financial
resources. Small company managers typically have less experience coping with
adversity or capitalizing on opportunity than their counterparts at larger
companies. Finally, small company stocks are typically less liquid than large
company stocks: when things are going poorly, it is harder to find a buyer for a
small company's shares.
Foreign Investment Risk
To the extent that the Fund holds companies based outside the United States, it
faces the risks inherent in foreign investing. Adverse political, economic or
social developments could undermine the value of the Fund's investments or
prevent the Fund from realizing their full value. Accounting and financial
reporting standards differ from those in the U.S. and could convey incomplete
information when compared to information typically provided by U.S. companies.
Finally, the currency of the country in which the Fund has invested could
decline relative to the value of the U.S. dollar, which would depreciate the
value of an investment itself to U.S. investors.
Secondary Risks
Pricing Risk
When price quotations for securities are not readily available, we determine
their value by the method that most accurately reflects their current worth in
the judgment of the Board of Trustees. This procedure implies an unavoidable
risk, the risk that our prices are higher or lower than the prices that the
securities might actually command if we sold them. If we have valued the
securities too highly, you may end up paying too much for Fund shares when you
buy. If we underestimate their price, you may not receive the full market value
for your Fund shares when you sell.
Year 2000 Risk
As with most businesses, the Fund faces the risk that the computer systems or
its Investment Adviser and other companies on which it relies for service or in
which it invests will not accommodate the changeovers necessary from dates in
the year 1999 to dates in the year 2000. These risks could adversely affect:
The companies in which the Fund invests, which could impact the value of
the Fund's investments; Our ability to service your Fund account,
including our ability to meet your requests to buy and sell Fund shares; and
Our ability to trade securities held by the Fund or to accurately price
securities held by the Fund.
We are working both internally and with our business partners and service
providers to address this problem. If we - or our business partners, service
providers, government agencies or other market participants - do not succeed, it
could materially affect shareholder services or it could affect the value of the
Fund's shares.
Temporary Defensive Position
For temporary defensive purposes, we may invest up to 100% of the Fund's assets
in the common stock of larger companies, in fixed-income securities, or
short-term money market securities. To the extent we find it necessary to invest
in such securities, the Fund may not meet its goal of long-term capital growth.
Management of the Fund
Board of Trustees
The Fund's shareholders, voting in proportion to the number of shares each owns,
elects a Board of Trustees, and the Trustees supervise all of the Fund's
activities on their behalf. The separate accounts of the Companies are the
shareholders of record of the Fund's shares. Any reference to the shareholder in
this Prospectus technically refers to the Companies' separate accounts and not
to you, the Contract owner.
Investment Adviser
Under the supervision of the Board of Trustees, Bankers Trust Company, with
headquarters at 130 Liberty Street, New York, NY 10006, acts as the Fund's
Investment Adviser. As Investment Adviser, Bankers Trust makes the Fund's
investment decisions and assumes responsibility for the securities the Fund
owns. It buys and sells securities for the Fund and conducts the research that
leads to the purchase and sale decisions. Bankers Trust is entitled to receive a
fee of 0.80% of the Fund's average daily net assets for its services.
As of December 31, 1998, Bankers Trust was the eighth largest bank holding
company in the United States with total assets of approximately $156 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 96 offices in more than 43 countries.
Bankers Trust's officers bring wide experience to managing both the Fund and its
Portfolio. The firm's own record dates back to its founding as a trust company
in 1903. It has invested retirement assets on behalf of the nation's largest
corporations and institutions for more than 50 years. Today, the assets under
its global management exceed $338 billion. The scope of the firm's capability is
broad: It is a leader in both the active and passive quantitative investment
disciplines and maintains a major presence in stock and bond markets worldwide.
The Investment Adviser is a wholly owned subsidiary of Bankers Trust
Corporation. On November 30, 1998, Bankers Trust Corporation entered into an
Agreement and Plan of Merger with Deutsche Bank AG under which Bankers Trust
Corporation would merge with and into a subsidiary of Deutsche Bank AG.
Deutsche Bank AG is a major global banking institution that is engaged in a wide
range of financial services, including retail and commercial banking, investment
banking and insurance. The transaction is contingent upon various regulatory
approvals, as well as the approval of the Fund's Board of Trustees and the
Fund's shareholders. If the transaction is approved and completed, Deutsche Bank
AG, as the Investment Adviser's new parent company, will control the operations
of the Investment Adviser, Bankers Trust believes that, under this new
arrangement, the services provided to the Fund will be maintained at their
current level.
<PAGE>
Portfolio Managers
The following portfolio managers are responsible for the day-to-day management
of the master portfolio's investments:
Timothy Woods, Principal of Bankers Trust.
Joined Bankers Trust in 1992 and the Fund in 1994.
Manager of small and mid-cap equity investments.
14 years of investment and financial experience.
Bachelors degree from Florida A&M University, MBA from The Wharton
School, University of Pennsylvania, Chartered Financial Analyst.
Mary P. Dugan, Vice President of Bankers Trust. Joined Bankers Trust and the
Fund in 1994. Securities Analyst specializing in health care, capital goods and
the energy industries at Fred Alger Management from 1992 to 1994. Bachelors
degree from the University of Rochester, MBA from New York University, Chartered
Financial Analyst.
SHAREHOLDER INFORMATION
Calculating the Fund's Share Price
We calculate the daily price of the Fund's shares (also known as the "Net Asset
Value" or "NAV") in accordance with the standard formula for valuing mutual fund
shares at the close of regular trading on the New York Stock Exchange every day
the Exchange is open for business. The formula calls for deducting all of the
Fund's liabilities from the total value of its assets - the market value of the
securities it holds, plus its cash reserves - and dividing the result by the
number of shares outstanding. (Note that prices for securities that trade on
foreign exchanges can change significantly on days when the New York Stock
Exchange is closed and you cannot buy or sell Fund shares. Price changes in the
securities the Fund owns may ultimately affect the price of Fund shares the next
time the NAV is calculated.)
We value the securities in the Fund at their stated market value if price
quotations are available. When price quotes for a particular security are not
readily available, we determine their value by the method that most accurately
reflects their current worth in the judgment of the Board of Trustees.
Open for business: The Exchange is open every week, Monday through Friday,
except when the following holidays are celebrated: New Year's Day, Martin Luther
King, Jr. Day (the third Monday in January), 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 fourth Thursday
in November) and Christmas Day.
Dividends and Distributions
If the Fund earns investment income or recognizes taxable net capital gains, it
is the Fund's policy to distribute to the Companies' separate accounts
substantially all of that taxable income or capital gain on an annual basis.
These distributions are automatically made in the form of additional shares of
the Fund and not cash, unless you, the Contract owner, elect to receive
distributions in cash. The result of automatic reinvestment of distributions is
that the Fund's performance, including the effect of dividends, is reflected in
the cash value of the Contracts you own. Please see the Contract prospectus
accompanying this Prospectus for more information.
Tax Considerations
Because shares of the Fund may be purchased only through Contracts, income
dividends or capital gains distributions from the Fund are taxable, if at all,
to the participating Companies and will be exempt from current taxation of the
Contract owner if left to accumulate within the Contract.
Please see the Contract prospectus accompanying this Prospectus for a
description of the Fund's federal tax impact on you as a Contract owner.
Because each investor's tax circumstances are unique and because the tax laws
are subject to change, we recommend that you consult your tax adviser about your
investment.
Buying and Selling Shares
The Fund does not sell its shares directly to the public. The Fund continuously
sells its shares to each Company's separate accounts, without a sales charge, at
the next net asset value per share determined after a proper purchase order is
placed with the Company. The Company offers to Contract owners 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 of their Contract owners, as set forth in the
accompanying prospectus for the Contracts. Redemption orders are effected at the
next net asset value per share determined after a proper redemption order is
placed with the Company.
Please see the Contract prospectus that accompanies this Prospectus for a
detailed description of your Contract and its allocation, transfer and
withdrawal provisions.
Financial Highlights
Because the Fund has not yet commenced operations, it has no financial
performance information to present to you in this Prospectus.
<PAGE>
BACK COVER
After the Fund commences operations, additional information about the Fund's
investments will be available in the Fund's annual and semiannual reports to
shareholders. In the Fund's annual report, you will find a discussion of the
market conditions and investment strategies that significantly affected the
Fund's performance during its last fiscal year.
You can find more detailed information about the Fund in the current Statement
of Additional Information, dated April 30, 1999, which we have filed
electronically with the Securities and Exchange Commission (SEC) and which is
incorporated by reference into this Prospectus. To receive your free copy of the
Statement of Additional Information, the annual or semiannual report, or if you
have questions about investing in the Fund, call the customer service center at
the telephone number shown in the accompanying Contract prospectus.
You can find reports and other information about the Fund on the SEC website
(http://www.sec.gov), or you can get copies of this information, after payment
of a duplicating fee, by writing to the Public Reference Section of the SEC,
Washington, D.C. 20549-6009. Information about the Fund, including its Statement
of Additional Information, can be reviewed and copied at the SEC's Public
Reference Room in Washington, D.C. For information on the Public Reference Room,
call the SEC at 1-800-SEC-0330.
Small Cap Fund
BT Insurance Funds Trust
Investment Company Act file number: 811-07507
<PAGE>
International Equity Fund
With the goal of long-term capital appreciation primarily through investment in
stocks and other equity securities of companies in developed countries outside
the United States.
Prospectus: April 30, 1999
Trust: BT Insurance Funds Trust
Investment Adviser: Bankers Trust Company
Like shares of all mutual funds, these securities have not been approved or
disapproved by the Securities and Exchange ("SEC") nor has the SEC passed upon
the accuracy or adequacy of this prospectus. Any representation to the contrary
is a criminal offense.
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
OVERVIEW OF THE INTERNATIONAL EQUITY FUND
Goal......................................................................................03
Core Strategy.............................................................................03
Investment Policies and Strategies........................................................03
Principal Risks of Investing in the Fund..................................................03
Who Should Consider Investing in the Fund.................................................04
A DETAILED LOOK AT THE INTERNATIONAL EQUITY FUND
Objective.................................................................................05
Strategy..................................................................................05
Principal Investments.....................................................................05
Investment Process........................................................................07
Portfolio Turnover........................................................................07
Risks.....................................................................................07
Management of the Fund....................................................................12
SHAREHOLDER INFORMATION
Calculating the Fund's Share Price........................................................14
Dividends and Distributions...............................................................15
Tax Considerations........................................................................15
Buying and Selling Shares.................................................................15
</TABLE>
OVERVIEW OF THE INTERNATIONAL EQUITY FUND
Goal
The Fund invests for long-term capital appreciation.
Core Strategy
The Fund invests primarily in the stocks and other equity securities of
companies in developed countries outside the United States.
Investment Policies and Strategies
The Fund seeks to achieve its objective by investing primarily in companies in
developed foreign countries. The Fund may also invest a portion of its assets in
companies based in emerging markets. The companies are selected by an extensive
tracking system plus the input of experts from various financial disciplines.
Principal Risks of Investing in the Fund
An investment in the Fund could lose money, or the Fund's performance could
trail that of other investments. For example: Stocks that the Investment
Adviser has selected could perform poorly; or The stock market could
perform poorly in one or more of the countries in which the Fund has invested.
Beyond the risks common to all stock investing, an investment in the Fund could
also lose money or underperform alternative investments as a result of risks in
the foreign countries in which the Fund invests: Adverse political, economic or
social developments could undermine the value of the Fund's investments or
prevent the Fund from realizing their full value; Accounting and financial
reporting standards differ from those in the U.S. and could convey incomplete
information when compared to information typically provided by U.S. companies;
or The currency of a country in which the Fund invests may decrease in value
relative to the U.S. dollar, which could affect the value of the investment to
U.S. investors.
<PAGE>
Who Should Consider Investing in the Fund
The Fund sells its shares only to separate accounts of various insurance
companies (the "Companies"). Shares are available to the public through the
purchase of certain variable annuity and variable life insurance contracts
("Contract(s)") issued by the Companies. As a Contract owner, your premium
payments are allocated to the Fund through these separate accounts in accordance
with your contract. Please see the Contract prospectus that accompanies this
Prospectus for a detailed explanation of your Contract.
You should consider investing in the International Equity Fund if you are
seeking long-term capital appreciation. There is, of course, no guarantee that
the Fund will realize its goal. Moreover, you should be willing to accept
greater short-term fluctuation in the value of your investment than you would
typically experience investing in bond or money market funds.
You should not consider investing in the International Equity Fund if you are
pursuing a short-term financial goal, if you seek regular income or if you
cannot tolerate fluctuations in the value of your investments.
The Fund by itself does not constitute a balanced investment program. It can,
however, provide exposure to investment opportunities not available to someone
who invests in U.S. securities alone. Diversifying your investments may improve
your long-run investment return and lower the volatility of your overall
investment portfolio.
An investment in the International Equity Fund is not a deposit of Bankers Trust
Company or any other bank and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency.
(A Note on Fees)
As an investor in the Fund, you would incur various operating costs, including
management expenses. You also would incur fees associated with the Contracts you
purchase. Detailed information about the cost of investing in the Fund is
presented in the accompanying prospectus for the Contracts through which the
Fund's shares are offered to you.
The Fund has not commenced operations as of the date of this Prospectus;
therefore, no performance information is being presented to you.
A DETAILED LOOK AT THE INTERNATIONAL EQUITY FUND
Objective
The Fund seeks long-term capital appreciation. Under normal circumstances, the
Fund invests at least 65% of its total assets in the stocks and other securities
with equity characteristics of companies in developed countries outside the
United States.
The Fund invests for capital appreciation, not income; any dividend and interest
income is incidental to the pursuit of its objective. While we give priority to
capital appreciation, we cannot offer any assurance of achieving this objective.
The Fund's objective is not a fundamental policy. We must notify shareholders
before we change it, but we do not require their approval to do so.
Strategy
The Fund invests for the long term. We employ a strategy of growth at a
reasonable price. We seek to identify companies outside the United States that
combine strong potential for earnings growth with reasonable investment value.
Such companies typically exhibit increasing rates of profitability and cash
flow, yet their share prices compare favorably to other stocks in a given market
and to their global peers. In evaluating stocks, we consider factors such as
sales, earnings, cash flow and enterprise value. Enterprise value is a company's
market capitalization plus the value of its net debt. We further consider the
relationship between these and other quantitative factors. Together, these
indicators of growth and value may identify companies with improving prospects
before the market in general has taken notice.
Principal Investments
Almost all the companies in which the Fund invests are based either in Canada or
in the developed foreign countries that make up the Morgan Stanley Capital
International (MSCI) EAFE(R) Index ("EAFE(R) Index") which emphasizes stocks of
companies in major markets in Europe, Australia and the Far East. The Fund may
also invest a portion of its assets in companies based in the emerging markets
of Latin America, the Middle East, Europe, Asia and Africa if we believe that
their return potential more than compensates for the extra risks associated with
these markets. While we have invested in emerging markets in the past, under
normal market conditions we do not consider this a central element of the Fund's
strategy. Typically, we would not hold more than 15% of net assets in emerging
markets.
Best/Worst Performing Stock Markets
[BAR CHART APPEARS BELOW DEPICTING THE BEST/WORST PERFORMING STOCK MARKETS]
1988 1994
New Zealand -12% Hong Kong -5%
Belgium 55% Finland 52%
S&P 500 17% S&P 500 1%
1989 1995
Finland -9% Austria - -4%
Austria 104% Switzerland 45%
S&P 500 32% S&P 500 38%
1990 1996
New Zealand -37% Japan -15%
United Kingdom 10% Spain 41%
S&P 500 -3% S&P 500 23%
1991 1997
Finland -17% Malaysia -68%
Hong Kong 50% Switzerland 45%
S&P 500 30% S&P 500 33%
1992 1998
Denmark -28% Norway -30%
Hong Kong 32% Finland 123%
S&P 500 8% S&P 500 29%
1993
United States 10%
Hong Kong 116%
S&P 500 10%
Returns in U.S. dollars
This chart does not represent the performance of the International Equity Fund
or any of the BT Insurance Funds. Past performance is not a guarantee of future
results.
From 1988 to 1998, the difference in annual returns between the strongest
performing markets and the weakest averaged 81%, according to Factset. And the
United States, notwithstanding some outstanding years during this period, never
posted the best annual return. Thus, by maintaining a presence across the
developed markets, investors can potentially improve their returns compared to
investing solely in U.S. stocks.
Investment Process
Company research lies at the heart of our investment process, as it does with
many stock mutual funds. We track several thousand companies to arrive at the
approximately 100 stocks the Fund normally holds. But our process brings an
added dimension to this fundamental research. It draws on the insight of experts
from a range of financial disciplines - regional stock market specialists,
global industry specialists, economists and quantitative analysts. They
challenge, refine and amplify each other's ideas. Their close collaboration is a
critical element of our investment process.
Portfolio Turnover
The portfolio turnover rate measures the frequency that the Portfolio sells and
replaces the securities it holds within a given period. We anticipate that the
Fund will have a low portfolio turnover rate.
Risks
Below we set forth some of the prominent risks associated with international
investing, as well as investing in general, and we detail our approaches to
containing them. Although we attempt to assess the likelihood that these risks
may actually occur and to limit them, we make no guarantee that we will succeed.
Primary Risks
Market Risk
Although individual stocks can outperform their local markets, deteriorating
market conditions might cause an overall weakness in the stock prices of the
entire market.
Stock Selection Risk
A risk that pervades all investing is the risk that the securities an investor
has selected will not perform to expectations. To minimize this risk, we monitor
each of the stocks in the Fund according to three basic quantitative criteria.
We subject a stock to intensive review if: its rate of price appreciation begins
to trail that of its national stock index;
the financial analysts who follow the stock both within Bankers Trust and
outside, cut their estimates of the stock's future earnings; or
the stock's price approaches the downside target we set when we first
bought the stock (and may since have modified to reflect changes in market
and economic conditions).
In this review, we seek to learn if the deteriorating performance accurately
reflects deteriorating prospects or if, in our view, it merely reflects investor
overreaction to temporary circumstances.
Political Risk
Some foreign governments have limited the outflow of profits to investors
abroad, extended diplomatic disputes to include trade and financial relations,
and imposed high taxes on corporate profits. While these political risks have
not occurred recently in the major countries in which the Fund invests, we
analyze countries and regions to try to anticipate these risks.
Information Risk
Financial reporting standards for companies based in foreign markets differ from
those in the United States. Since the "numbers" themselves sometimes mean
different things, the Investment Adviser devotes much of its research effort to
understanding and assessing the impact of these differences upon a company's
financial conditions and prospects.
Foreign Stock Market Risk
From time to time, foreign capital markets have exhibited more volatility than
those in the United States. Trading stocks on some foreign exchanges is
inherently more difficult than trading in the United States for reasons
including:
Liquidity Risk. Stocks that trade less can be more difficult or more costly to
buy, or to sell, than more liquid or active stocks. This liquidity risk is a
factor of the trading volume of a particular stock, as well as the size and
liquidity of the entire local market. On the whole, foreign exchanges are
smaller and less liquid than the U.S. market. This can make buying and selling
certain shares more difficult and costly. Relatively small transactions in some
instances can have a disproportionately large effect on the price and supply of
shares. In certain situations, it may become virtually impossible to sell a
stock in an orderly fashion at a price that approaches our estimate of its
value. Regulatory Risk. Some foreign governments regulate their exchanges less
stringently, and the rights of shareholders may not be as firmly established.
The management of certain foreign companies may be less focused on short-term
earnings than some U.S. companies. For example, they may pay lower dividends.
In an effort to reduce these foreign stock market risks, the Fund diversifies
its investments, just as you may spread your investments among a range of
securities so that a setback in one need not overwhelm your entire strategy. In
this way, a reversal in one market or stock need not undermine the pursuit of
long-term capital appreciation.
Currency Risk
The Fund invests in foreign securities denominated in foreign currencies. This
creates the possibility that changes in foreign exchange rates will affect the
value of foreign securities or the U.S. dollar amount of income or gain received
on these securities. The Investment Adviser seeks to minimize this risk by
actively managing the currency exposure of the Fund.
Emerging Market Risk
To the extent that the Fund invests in emerging markets to enhance overall
returns, it may face higher political, information and stock market risks. In
addition, currency management is used to offset investment risks ("hedging")
and, where possible, to add to investment returns. Currency management
activities include the use of forward contracts and may include the use of other
instruments. There is no guarantee that these currency management activities
will work and they could cause losses to the Fund.
Profound social changes and business practices that depart from norms in
developed countries' economies have hindered the orderly growth of emerging
economies and their stock markets in the past. High levels of debt tend to make
emerging economies heavily reliant on foreign capital and vulnerable to capital
flight. For all these reasons, the Fund carefully limits and balances its
commitment to these markets.
Secondary Risks
Small Company Risk
Although the Fund generally invests in the shares of large, well-established
companies, it may occasionally take advantage of exceptional opportunities
presented by smaller companies. Such opportunities pose unique risks, which we
take into account in considering an investment. Small company stocks tend to
experience steeper fluctuations in price - down as well as up - then the stocks
of larger companies. A shortage of reliable information, the same information
gap that creates opportunity in small company investing, can also pose added
risk. Industry-wide reversals have had a greater impact on small companies,
since they lack a large company's financial resources. Small company managers
typically have less experience coping with adversity or capitalizing on
opportunity than their counterparts at larger companies. Finally, small company
stocks are typically less liquid than large company stocks: when things are
going poorly, it is hard to find a buyer for a small company's shares.
Pricing Risk
When price quotations for securities are not readily available, we determine
their value by the method that most accurately reflects their current worth in
the judgment of the Board of Trustees. This procedure implies an unavoidable
risk, the risk that our prices are higher or lower than the prices that the
securities might actually command if we sold them. If we have valued the
securities too highly, you may end up paying too much for Fund shares when you
buy. If we underestimate their price, you may not receive the full market value
for your Fund shares when you sell.
Futures and Options
Although not one of its principal investment strategies, the Fund may invest in
futures contracts and options on futures contracts. These investments, when
made, are for hedging purposes. If the Fund invests in futures contracts and
options on futures contracts for non-hedging purposes, the margin and premiums
required to make those investments will not exceed 5% of the Fund's net asset
value after taking into account unrealized profits and losses on the contracts.
Futures contracts and options on futures contracts used for non-hedging purposes
involve greater risks than stock investments. Futures contracts and options on
futures contracts are used as a low cost method of gaining exposure to a
particular securities market without investing directly in those securities.
Euro Risk
On January 1, 1999, eleven countries of the European Economic and Monetary Union
(EMU) began implementing a plan to replace their national currencies with a new
currency, the euro. Full conversion to the euro is slated to occur by July 1,
2002.
Although it is impossible to predict the impact of the conversion to the euro on
the Fund, the risks may include: changes in the relative strength and
value of the U.S. dollar or other major currencies; adverse effects on
the business or financial condition of European issuers that the Fund holds in
its portfolio; that the systems used to purchase and sell
euro-denominated securities may not work; uncertainty about how existing
financial contracts will be treated after euro implementation; and
unpredictable effects on trade and commerce generally.
These and other factors could increase volatility in financial markets worldwide
and could adversely affect the value of securities held by the Fund.
Year 2000 Risk
As with most businesses, the Fund faces the risk that the computer systems of
its Investment Adviser and other companies on which it relies for service or in
which it invests will not accommodate the changeovers necessary from dates in
the year 1999 to dates in the year 2000. These risks could adversely affect:
The companies in which the Fund invests, which could impact the value of
the Fund's investments; Our ability to service your Fund account,
including our ability to meet your requests to buy and sell Fund shares; and
Our ability to trade securities held by the Fund or to accurately price
securities held by the Fund.
We are working both internally and with our business partners and service
providers to address this problem. If we - or our business partners, service
providers, government agencies or other market participants - do not succeed, it
could materially affect shareholder services or the value of the Fund's shares.
Temporary Defensive Position
We may from time to time adopt a temporary defensive position in response to
extraordinary adverse political, economic or stock market events. We could place
up to 100% of the Fund's assets in U.S. or foreign-government money-market
investments, or other short-term bonds that offer comparable safety, if the
situation warranted. To the extent we might adopt such a position and over the
course of its duration, the Fund may not meet its goal of long-term capital
appreciation.
Management of the Fund
Board of Trustees
The Fund's shareholders, voting in proportion to the number of shares each owns,
elect a Board of Trustees, and the Trustees supervise all of the Fund's
activities on their behalf. The separate accounts of the Companies are the
shareholders of record of the Fund's shares. Any reference to the shareholder in
this Prospectus technically refers to the Companies' separate accounts and not
to you, the Contract owner.
Investment Adviser
Under the supervision of the Board of Trustees, Bankers Trust Company, with
headquarters at 130 Liberty Street, New York, NY 10006, acts as the Fund's
investment adviser. As investment adviser, Bankers Trust makes the Fund's
investment decisions and assumes responsibility for the securities the Fund
owns. It buys and sells securities for the Fund and conducts the research that
leads to the purchase and sale decisions. Bankers Trust is entitled to receive a
fee of 1.00% of the Fund's average daily net assets for its services.
As of December 31, 1998, Bankers Trust was the eighth largest bank holding
company in the United States with total assets of approximately $156 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 96 offices in more than 43 countries.
Bankers Trust's officers bring wide experience to managing both the Fund and its
Portfolio. The firm's own record dates back to its founding as a trust company
in 1903. It has invested retirement assets on behalf of the nation's largest
corporations and institutions for more than 50 years. Today, the assets under
its global management exceed $338 billion. The scope of the firm's capability is
broad: It is a leader in both the active and passive quantitative investment
disciplines and maintains a major presence in stock and bond markets worldwide.
BTFMI, a subsidiary of Bankers Trust with headquarters at Level 15, The Chifley
Tower, 2 Chifley Square, Sydney, N.S.W. 2000 Australia, offers a decade of
research and investing experience in small companies worldwide to a number of
private clients. It has developed a team dedicated exclusively to the small
company and emerging market disciplines.
The Investment Adviser is a wholly owned subsidiary of Bankers Trust
Corporation. On November 30, 1998, Bankers Trust Corporation entered into an
Agreement and Plan of Merger with Deutsche Bank AG under which Bankers Trust
Corporation would merge with and into a subsidiary of Deutsche Bank AG. The
transaction is contingent upon various regulatory approvals, as well as the
approval of the Fund's Board of Trustees and the Fund's shareholders. If the
transaction is approved and completed, Deutsche Bank AG, as the Investment
Adviser's new parent company, will control the operations of the Investment
Adviser. Bankers Trust believes that, under this new arrangement, the services
provided to the Fund will be maintained at their current level.
Portfolio Managers
The following portfolio managers are responsible for the day-to-day management
of the Fund's investments: Michael Levy, Managing Director of Bankers Trust and
Co-Lead Manager of the Fund.
Joined Bankers Trust and the Fund in 1993.
Bankers Trust's international equity strategist, overseeing the design
and implementation of the firm's proprietary stock selection process.
27 years of business experience, 17 of them as an investment professional.
Degrees in mathematics and geophysics from the University of Michigan.
Robert Reiner, Managing Director of Bankers Trust and Co-Lead Manager of
the Fund. Jointed Bankers Trust and the Fund in 1994. Specializes in
Japanese and European stock and market analysis. Served as a Senior
Financial Analyst at Scudder, Stevens & Clark from 1993 to 1994. 17 years
of investment industry experience. Degrees from the University of Southern
California and Harvard University.
Julie Wang, Principal of Bankers Trust and Co-Manager of the Fund Joined
Bankers Trust and the Fund in 1994.
Focuses on the Fund's Asia-Pacific investments and its emerging-markets
exposure.
Served as Investment Manager for American International Group's Southeast
Asia portfolio from 1991 to 1994. 10 years of investment management
experience. Bachelors degree in economics from Yale University, MBA from
The Wharton School, University of Pennsylvania.
SHAREHOLDER INFORMATION
Calculating the Fund's Share Price
We calculate the daily price of the Fund's shares (also known as the "Net Asset
Value" or "NAV") in accordance with the standard formula for valuing mutual fund
shares at the close of regular trading on the New York Stock Exchange every day
the Exchange is open for business. The formula calls for deducting all of the
Fund's liabilities from the total value of its assets - the market value of the
securities it holds, plus its cash reserves - and dividing the result by the
number of shares outstanding. (Note that prices for securities that trade on
foreign exchanges can change significantly on days when the New York Stock
Exchange is closed and you cannot buy or sell Fund shares. Price changes in the
securities the Fund owns may ultimately affect the price of Fund shares the next
time the NAV is calculated.)
We value the securities in the Fund at their stated market value if price
quotations are available. When price quotes for a particular security are not
readily available, we determine their value by the method that most accurately
reflects their current worth in the judgment of the Board of Trustees.
Open for business: The Exchange is open every week, Monday through Friday,
except when the following holidays are celebrated: New Year's Day, Martin Luther
King, Jr. Day (the third Monday in January), 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 fourth Thursday
in November) and Christmas Day.
Dividends and Distributions
If the Fund earns investment income or recognizes taxable net capital gains, it
is the Fund's policy to distribute to the Companies' separate accounts
substantially all of that taxable income or capital gain on an annual basis.
These distributions are automatically made in the form of additional shares of
the Fund and not cash, unless you, the Contract owner, elect to receive
distributions in cash. The result of automatic reinvestment of distributions is
that the Fund's performance, including the effect of dividends, is reflected in
the cash value of the Contracts you own. Please see the Contract prospectus
accompanying this Prospectus for more information.
Tax Considerations
Because shares of the Fund may be purchased only through Contracts, income
dividends or capital gains distributions from the Fund are taxable, if at all,
to the participating Companies and will be exempt from current taxation of the
Contract owner if left to accumulate within the Contract.
Please see the Contract prospectus accompanying this Prospectus for a
description of the Fund's federal tax impact on you as a Contract owner.
Because each investor's tax circumstances are unique and because the tax laws
are subject to change, we recommend that you consult your tax adviser about your
investment.
Buying and Selling Shares
The Fund does not sell its shares directly to the public. The Fund continuously
sells its shares to each Company's separate accounts, without a sales charge, at
the next net asset value per share determined after a proper purchase order is
placed with the Company. The Company offers to Contract owners 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 of their Contract owners, as set forth in the
accompanying prospectus for the Contracts. Redemption orders are effected at the
next net asset value per share determined after a proper redemption order is
placed with the Company.
Please see the Contracts prospectus that accompanies this Prospectus for a
detailed description of your Contract and its allocation, transfer and
withdrawal provisions.
Financial Highlights
Because the Fund has not yet commenced operations, it has no financial
performance information to present to you in this Prospectus.
BACK COVER
After the Fund commences operations, additional information about the Fund's
investments will be available in the Fund's annual and semiannual reports to
shareholders. In the Fund's annual report, you will find a discussion of the
market conditions and investment strategies that significantly affected the
Fund's performance during its last fiscal year.
You can find more detailed information about the Fund in the current Statement
of Additional Information, dated April 30, 1999, which we have filed
electronically with the Securities and Exchange Commission (SEC) and which is
incorporated by reference into this Prospectus. To receive your free copy of the
Statement of Additional Information, the annual or semiannual report, or if you
have questions about investing in the Fund, call the customer service center at
the telephone number shown in the accompanying Contract prospectus.
You can find reports and other information about the Fund on the SEC website
(http://www.sec.gov), or you can get copies of this information, after payment
of a duplicating fee, by writing to the Public Reference Section of the SEC,
Washington, D.C. 20549-6009. Information about the Fund, including its Statement
of Additional Information, can be reviewed and copied at the SEC's Public
Reference Room in Washington, D.C. For information on the Public Reference Room,
call the SEC at 1-800-SEC-0330.
International Equity Fund
BT Insurance Funds Trust
Investment Company Act file number: 811-07507
PROSPECTUS: APRIL 30, 1999
Small Cap Index Fund
With the goal of matching the performance of the Russell 2000 Small Stock Index,
which emphasizes stocks of small U.S. companies.
TRUST: BT INSURANCE FUNDS TRUST
INVESTMENT ADVISER: BANKERS TRUST COMPANY
Like shares of all mutual funds, these securities have not been approved or
disapproved by the Securities and Exchange Commission ("SEC") nor has the SEC
passed upon the accuracy or adequacy of this prospectus. Any representation to
the contrary is a criminal offense.
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TABLE OF CONTENTS
Small Cap Index Fund
Overview of the Small Cap Index Fund
Goal......................................................................................03
Core Strategy.............................................................................03
Investment Policies and Strategies........................................................03
Principal Risks of Investing in the Fund..................................................03
Who Should Consider Investing in the Fund.................................................04
Total Returns, After Fees and Expenses....................................................04
A Detailed Look at the Small Cap Index Fund
Objective.................................................................................05
Strategy..................................................................................06
Principal Investments.....................................................................06
Investment Process........................................................................07
Portfolio Turnover........................................................................07
Risks.....................................................................................07
Management of the Fund....................................................................09
Calculating the Fund's Share Price........................................................10
Dividends and Distributions...............................................................11
Tax Considerations........................................................................11
Buying and Selling Shares.................................................................11
Financial Highlights......................................................................12
</TABLE>
<PAGE>
Overview
Of the Small Cap Index Fund
Goal: The Fund seeks to match, as closely as possible, before expenses,
the performance of the Russell 2000 Small Stock Index (the
"Russell 2000 Index"), which emphasizes stocks of small U.S. companies.
Core Strategy: The Investment Adviser intends to invest in stocks and other
securities that are representative of the Russell 2000 Index as a whole.
The Russell 2000 Small Stock Index is a widely accepted benchmark of
small-company stock performance. It is a model, not an actual portfolio and is a
subset of the Russell 3000 Index. The Russell 2000 tracks the 2000 smallest
companies in the Russell 3000. It constitutes about 10% of the Russell 3000's
total market value. As of December 31, 1998, the weighted average market
capitalization of the companies in the Russell 2000 was $TK million. That
compares to $TK billion for the companies in the Russell 3000.
INVESTMENT POLICIES AND STRATEGIES
The Fund seeks to match, before expenses, the risk and return characteristics of
the Russell 2000 Index. The Fund will invest primarily in common stocks of
companies that compose the Russell 2000 Index, in approximately the same
weightings as the Russell 2000 Index. The Fund may also use stock index futures
and options.
PRINCIPAL RISKS OF INVESTING IN THE FUND An investment in the Fund could
lose money, or the Fund's performance could trail that of other
investments. For example: Stocks could decline generally or could
underperform other investments. Returns on small U.S. companies' stock
could trail the returns from stocks of medium or large companies. Each type
of stock tends to go through cycles of overperformance and underperformance
in comparison to the overall stock market. The Fund may not be able to
track closely the performance of the Russell 2000 Index for a number of
reasons: the Fund's costs of buying and selling securities, the flow of
money into and out of the Fund, and the underperformance of stocks selected
by the Investment Adviser. The Fund could suffer losses if its futures and
options positions are not well correlated with those of other investments
or it cannot close out its positions.
<PAGE>
WHO SHOULD CONSIDER INVESTING IN THE FUND
The Fund sells its shares only to separate accounts of various insurance
companies (the "Companies"). Shares are available to the public through the
purchase of certain variable annuity and variable life insurance contracts
("Contract(s)") issued by the Companies. As a Contract owner, your premium
payments are allocated to the Fund through these separate accounts in accordance
with your Contract. Please see the Contract prospectus that accompanies this
Prospectus for a detailed explanation of your Contract.
You should consider investing in the Fund if you are seeking the following:
capital appreciation over the long term; exposure to the U.S. equity
market as represented by smaller companies; and investment returns that
track the performance of the Russell 2000 Index.
There is, of course, no guarantee that the Fund will realize its goal.
You should not consider investing in the Small Cap Index Fund if you are:
pursuing a short-term financial goal;
seeking regular income and stability of principal; unable to tolerate
fluctuations in the value of your investments; or seeking to outperform
the Russell 2000 Index.
The Fund by itself does not constitute a balanced investment program. It can,
however, provide exposure to investment opportunities not available to an
investor in large- and medium-sized company stocks. Diversifying your
investments may also improve your long-run investment return and lower the
volatility of your overall investment portfolio.
An investment in the Small Cap Index Fund is not a deposit of Bankers Trust
Company or any other bank, and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency.
TOTAL RETURNS, AFTER FEES AND EXPENSES
The bar chart and table on this page can help you evaluate the potential risk
and rewards of investing in the Fund by showing changes in the Fund's
performance year to year. The bar chart shows the Fund's actual return for the
full 1998 calendar year since the Fund began selling shares on August 25, 1997
(its inception date). The table compares the Fund's average annual return with
the Russell 2000 Index over the last calendar year and since its inception. An
index is a group of securities whose overall performance is used as a standard
to measure investment performance. It does not factor in the costs of buying,
selling and holding stock--costs that are reflected in the Fund's performance
results. These figures also do not include the effect of Contract charges, which
would lower the return shown.
Year-by-Year Returns for Each Full Calendar Year Since Inception
[bar chart]
- -------------------
TK
- -------------------
- -------------------
1998
- -------------------
Since inception, the Fund's highest return in any calendar quarter was TK% and
its lowest quarterly return was TK%. Past performance offers no indication of
how the Fund will perform in the future.
Average Annual Returns as of December 31, 1998
<TABLE>
<CAPTION>
<S> <C> <C>
- -----------------------------------------------------------------------------------------
Since Inception
1 year (August 25, 1997)*
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
Small Cap Index Fund TK TK
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
Russell 2000 Index TK TK
- ----------------------------------------------------------------------------
</TABLE>
(A Note on Fees)
As an investor in the Fund, you would incur various operating costs, including
management expenses. You also would incur fees associated with the Contracts you
purchase. Detailed information about the cost of investing in the Fund is
presented in the accompanying prospectus for the Contracts through which the
Fund's shares are offered to you.
A Detailed Look
at the Small Cap Index Fund
OBJECTIVE
The Fund seeks to match, as closely as possible, before expenses, the
performance of the Russell 2000 Index, which emphasizes stocks
of small U.S. companies.
The Fund invests for capital appreciation, not income; any dividend and interest
income is incidental to the pursuit of its objective. While we give priority to
matching the Index's total return, we cannot offer any assurance of achieving
this objective. The Fund's objective is not a fundamental policy. We must notify
shareholders before we change it, but we are not required to seek their approval
to do so.
Index Versus Active Management
Active management involves the investment adviser buying and selling securities
based on research and analysis. Unlike a fund that is actively managed, an index
fund tries to match, as closely as possible, the performance of a target index
by holding either all, or a representative sample, of the securities in the
index. Indexing appeals to many investors for the following reasons:
indexing provides simplicity because it is a straightforward
market-matching strategy; index funds generally provide diversification by
investing in a wide variety of companies and industries; an index fund's
performance is predictable in that the Fund's value is expected to move in
the same direction, up or down, as
the target index;
index funds tend to have lower costs because they do not have many of the
expenses of actively managed funds such as research;
index funds usually have relatively low trading activity and therefore
brokerage commissions tend to be lower; and index funds generally have low
realization of capital gains.
STRATEGY
To match the risk and return characteristics of the Russell 2000 Index as
closely as possible, the Fund invests in a statistically selected sample of the
securities found in the Russell 2000 Index, using a process known as
"optimization." This process selects stocks for the Fund so that industry
weightings, market capitalizations and fundamental characteristics
(price-to-book ratios, price-to-earnings ratios, debt-to-asset ratios and
dividend yields) closely match those of the securities in the Russell 2000
Index. Over the long term, the Investment Adviser seeks a correlation between
the performance of the Fund, before expenses, and the Russell 2000 Index of 95%
or better. (A figure of 100% would indicate perfect correlation.)
PRINCIPAL INVESTMENTS
The Fund will invest at least 80% of its assets in stocks of companies included
in the Russell 2000 Index. The Fund's securities are weighted to attempt to make
the Fund's total investment characteristics similar to those of the Russell 2000
Index as a whole. The Investment Adviser may exclude or remove any Russell 2000
stock from the Fund, if the Investment Adviser believes that the stock is
illiquid or has impaired financial conditions brought on by extraordinary
events.
The Fund may hold up to 25% of its assets in short-term debt securities, money
market instruments, stock index futures and options. Futures and options are
considered derivatives because they "derive" their value from a traditional
security (like a stock or bond), asset or index. The Fund intends to buy futures
in anticipation of buying stocks.
Futures and options on futures contracts are used as a low-cost method of
gaining exposure to a particular securities market without investing directly in
those securities. The Fund also invests in derivatives to keep cash on hand to
meet shareholder redemptions or other needs while maintaining exposure to the
stock market.
INVESTMENT PROCESS
The Fund normally does not hold every one of the 2,000 stocks in the Russell
2000 Index. In an effort to run an efficient and effective strategy, the Fund
uses the process of "optimization," a statistical sampling technique. In
choosing stocks, the Investment Adviser tries to match the industry and risk
characteristics of all the companies in the Russell 2000 Index without buying
all of those stocks. This approach attempts to maximize the Fund's liquidity and
returns while minimizing its costs.
PORTFOLIO TURNOVER
The annual portfolio turnover rate measures the frequency that the Portfolio
sells and replaces the value of its securities within a given period.
Historically, this Fund has had a low portfolio turnover rate.
RISKS
Below we set forth some of the prominent risks associated with investing in
general, with index investing and with investing in small-cap stocks.
Primary Risks
Market Risk. Deteriorating market conditions might cause an overall weakness in
the market that reduces the absolute level of stock prices in that market.
Tracking Error. There are several reasons that the Fund's performance may not
match the Russell 2000 Index exactly: Unlike the Russell 2000 Index, the
Fund incurs administrative expenses and transaction costs in trading
stocks. The composition of the Russell 2000 Index and the stocks held by
the Fund may occasionally diverge. The timing and magnitude of cash
inflows from investors buying shares could create balances of uninvested
cash. Conversely, the
timing and magnitude of cash outflows to investors selling shares could
require ready reserves of uninvested cash. Either situation would likely
cause the Fund's performance to deviate from the "fully invested" Russell
2000 Index.
Small Company Risk. Small company stocks tend to experience steeper fluctuations
in price--down as well as up--than the stocks of larger companies. A shortage of
reliable information--the same information gap that creates opportunity in small
company investing--can also pose added risk. Industry-wide reversals have had a
greater impact on small companies, since they lack a large company's financial
resources to deal with setbacks. Small company managers typically have less
experience coping with adversity or capitalizing on an opportunity than their
counterparts at larger companies. Finally, small company stocks are typically
less liquid than large company stocks: when things are going poorly, it is
harder to find a buyer for a small company's shares.
Futures and Options. The Fund may invest, to a limited extent, in stock
index futures or options, which are types of derivatives. The Fund will not
use these derivatives for speculative purposes or as leveraged investments
that magnify the gains or losses of an investment. The Fund invests in
derivatives to keep cash on hand to meet shareholder redemptions or other
needs while maintaining exposure to the stock market. Risks associated with
derivatives include: the risk that the derivative will not fully offset the
underlying positions the risk that derivatives used for risk management may
not have the intended effects and may result in losses or missed
opportunities the risk that the Fund cannot sell the derivative because of
an illiquid secondary market.
If the Fund invests in futures contracts and options on futures contracts for
nonhedging purposes, the margin and premiums required to make those investments
will not exceed 5% of the Fund's net asset value after taking into account
unrealized profits and losses on the contracts. Futures contracts and options on
futures contracts used for nonhedging purposes involve greater risks than stock
investments.
Secondary Risk
Pricing Risk. We value securities in the Fund at their stated market value if
price quotations are available and, if not, by the method that most accurately
reflects their current worth in the judgment of the Board of Trustees. This
procedure implies an unavoidable risk, the risk that our prices are higher or
lower than the prices that the securities might actually command if we sold
them. If we have valued the securities too highly, you may end up paying too
much for Fund shares when you buy. If we underestimate their price, you may not
receive the full market value for your Fund shares when you sell.
Year 2000 Risk. As with most businesses, the Fund faces the risk that the
computer systems of its Investment Adviser and other companies on which it
relies for service or in which it invests will not accommodate the changeover
necessary from dates in the year 1999 to dates in the year 2000. These risks
could adversely affect:
the companies in which the Fund invests, which could impact the value of
the Fund's investments our ability to service your Fund account, including
our ability to meet your requests to buy and sell Fund shares our ability
to trade securities held by the Fund or to accurately price securities
held by the Fund
We are working both internally and with our business partners and service
providers to address this problem. If we--or our business partners, service
providers, government agencies or other market participants--do not succeed, it
could materially affect shareholder services or the value of the Fund's shares.
MANAGEMENT OF THE FUND
Board of Trustees. The Fund's shareholders, voting in proportion to the number
of shares each owns, elect a Board of Trustees, and the Trustees supervise all
the Fund's activities on their behalf. The separate accounts of the Companies
are the shareholders of record of the Fund's shares. Any reference to the
shareholder in this Prospectus technically refers to the Companies' separate
accounts and not to you, the Contract owner.
Investment Adviser. Under the supervision of the Board of Trustees, Bankers
Trust Company, with headquarters at 130 Liberty Street, New York, NY 10006, acts
as the Fund's Investment Adviser. As Investment Adviser, Bankers Trust makes the
Fund's investment decisions and assumes responsibility for the securities the
Fund owns. It buys and sells securities for the Fund and conducts the research
that leads to the purchase and sale decisions. Bankers Trust received a fee of
0.35% of the Fund's average daily net assets for its services in the last fiscal
year.
As of December 31, 1998, Bankers Trust was the eighth largest bank holding
company in the United States, with total assets of approximately $156 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 96 offices in more than 43 countries.
Bankers Trust's officers bring wide experience to managing the Fund. The firm's
own record dates back to its founding as a trust company in 1903. It has
invested retirement assets on behalf of the nation's largest corporations and
institutions for more than 50 years. Today, the assets under its global
management exceed $338 billion. The scope of the firm's capability is broad--it
is a leader in both the active and passive quantitative investment disciplines
and maintains a major presence in stock and bond markets worldwide.
The Investment Adviser is a wholly owned subsidiary of Bankers Trust
Corporation. On November 30, 1998, Bankers Trust Corporation entered into an
Agreement and Plan of Merger with Deutsche Bank AG under which Bankers Trust
Corporation would merge with and into a subsidiary of Deutsche Bank AG. Deutsche
Bank AG is a major global banking institution that is engaged in a wide range of
financial services, including retail and commercial banking, investment banking
and insurance. The transaction is contingent upon various regulatory approvals,
as well as the approval of the Fund's shareholders. If the transaction is
approved and completed, Deutsche Bank AG, as the Investment Adviser's new parent
company, will control the operations of the Investment Adviser. Bankers Trust
believes that, under this new arrangement, the services provided to the Fund
will be maintained at their current level.
Portfolio Manager.
Frank Salerno, Managing Director of Bankers Trust, is responsible for the
day-to-day management of the Fund's investments: Joined Bankers Trust in
1981 and the Fund at its commencement in 1997.
16 years of investment industry experience.
Bachelor's degree from Syracuse University, MBA from New York University.
CALCULATING THE FUND'S SHARE PRICE
We calculate the daily price of the Fund's shares (also known as the "Net Asset
Value" or "NAV") in accordance with the standard formula for valuing mutual fund
shares at the close of regular trading on the New York Stock Exchange every day
the Exchange is open for business. The formula calls for deducting all of the
Fund's liabilities from the total value of its assets--the market value of the
securities it holds, plus its cash reserves--and dividing the result by the
number of shares outstanding.
We value the securities in the Fund at their stated market value if price
quotations are available. When price quotations for a particular security are
not readily available, we estimate their value by the method that most
accurately reflects their current worth in the judgment of the Board of
Trustees.
Open for business: The Exchange is open every week, Monday through Friday,
except when the following holidays are celebrated: New Year's Day, Martin Luther
King, Jr. Day (the third Monday in January), 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 fourth Thursday
in November) and Christmas Day.
DIVIDENDS AND DISTRIBUTIONS
If the Fund earns investment income or recognizes taxable net capital gains, it
is the Fund's policy to distribute to the Companies' separate accounts
substantially all of that taxable income or capital gain on an annual basis.
These distributions are automatically made in the form of additional shares of
the Fund and not cash, unless you, the Contract owner, elect to receive
distributions in cash. The result of automatic reinvestment of distributions is
that the Fund's performance, including the effect of dividends, is reflected in
the cash value of the Contracts you own. Please see the Contract prospectus
accompanying this Prospectus for more information.
TAX CONSIDERATIONS
Because shares of the Fund may be purchased only through Contracts, income
dividends or capital gains distributions from the Fund are taxable, if at all,
to the participating Companies and will be exempt from current taxation of the
Contract owner if left to accumulate within the Contract.
Please see the Contract prospectus accompanying this Prospectus for a
description of the Fund's federal tax impact on you as a Contract owner.
Because each investor's tax circumstances are unique and because the tax laws
are subject to change, we recommend that you consult your tax adviser about your
investment.
BUYING AND SELLING SHARES
The Fund does not sell its shares directly to the public. The Fund continuously
sells its shares to each Company's separate accounts, without a sales charge, at
the next net asset value per share determined after a proper purchase order is
placed with the Company. The Company offers to Contract owners 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 of their Contract owners, as set forth in the
accompanying prospectus for the Contracts. Redemption orders are effected at the
next net asset value per share determined after a proper redemption order is
placed with the Company.
Please see the Contract prospectus that accompanies this Prospectus for a
detailed description of your Contract and its allocation, transfer and
withdrawal provisions.
FINANCIAL HIGHLIGHTS
The table below provides a picture of the Fund's financial performance since
inception. The information selected reflects financial results for a single Fund
share. The total returns in the table represent the rates of return that an
investor would have earned on an investment in the Fund, assuming reinvestment
of all dividends and distributions. This information has been audited by Ernst &
Young LLP, whose report, along with the Fund's financial statements, is included
in the Fund's annual report. The annual report is available free of charge by
calling the customer service center at the telephone number shown in the
accompanying Contract prospectus.
<PAGE>
<TABLE>
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Financial Highlights
- -------------------------------------------------------------------------------------------------------------------------
For a share outstanding throughout each period
For the period
August 25, 1997 (1)
Year ended through
December 31 1998 December 31 1997
----------------------- -----------------------
Net asset value, beginning of period $10.51 $10.00
Income (Loss) from Investment Operations:
Net investment income (b) 0.06 0.03 (2)
Net realized and unrealized gain (loss)
on investments and futures contracts 0.48
(0.30)
---------------------- ----------------------
Net increase in net asset value
from operations (0.24) 0.51
---------------------- ----------------------
Less Distributions:
Distributions from net investment income (0.05) 0.00
Distributions from net realized gain on investments (0.16) 0.00
---------------------- ----------------------
Total distributions (0.21) 0.00
Net asset value, end of period $10.06 $10.51
====================== ======================
Total Return (4) -2.18% 5.10%
Ratios / Supplemental Data
Net assets, end of period (in 000s) $36,744 $12,617
Ratios to average net assets:
Net investment income including reimbursement/waiver 1.18% 1.08% (3)
Operating expenses including reimbursement/waiver 0.45% 0.45% (3)
Operating expenses excluding reimbursement/waiver 1.55% 3.27% (3)
Portfolio turnover rate 30% 8%
- --------------
(1) Commencement of operations.
(2) Based on average shares outstanding
(3) Annualized
(4) Total investment return is calculated assuming an initial investment made at
the net asset asset value at the beginning of the period, reinvestment of all
dividends and distributions at net asset value during the period and redemption
on the last day of the period. Total return calculated for a period of less than
one year is not annualized.
</TABLE>
<PAGE>
BACK COVER
Additional information about the Fund's investments is available in the Fund's
annual and semiannual reports to shareholders. In the Fund's annual report, you
will find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year.
You can find more detailed information about the Fund in the current Statement
of Additional Information, dated April 30, 1999, which we have filed
electronically with the Securities and Exchange Commission (SEC) and which is
incorporated by reference into this Prospectus. To receive your free copy of the
Statement of Additional Information, the annual or semiannual report, or if you
have questions about investing in the Fund, call the customer service center at
the telephone number shown in the accompanying Contract prospectus.
You can find reports and other information about the Fund on the SEC website
(http://www.sec.gov), or you can get copies of this information, after payment
of a duplicating fee, by writing to the Public Reference Section of the SEC,
Washington, D.C. 20549-6009. Information about the Fund, including its Statement
of Additional Information, can be reviewed and copied at the SEC's Public
Reference Room in Washington, D.C. For information on the Public Reference Room,
call the SEC at 1-800-SEC-0330.
Small Cap Index Fund
BT Insurance Funds Trust
Investment Company Act file number: 811-07507
<PAGE>
PROSPECTUS: APRIL 30, 1999
EAFE(R) Equity Index Fund*
With the goal of matching the performance of the Morgan Stanley Capital
International Europe, Australasia, Far East ("EAFE(R)") Index, which is an index
of equity securities of companies outside the United States.
TRUST: BT INSURANCE FUNDS TRUST
INVESTMENT ADVISER: BANKERS TRUST COMPANY
Like shares of all mutual funds, these securities have not been approved or
disapproved by the Securities and Exchange Commission ("SEC") nor has the SEC
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 of Morgan Stanley and has been licensed for
use by Bankers Trust Company.
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
TABLE OF CONTENTS
EAFE(R) Equity Index Fund
Overview of the EAFE(R) Equity Index Fund
Goal......................................................................................03
Core Strategy.............................................................................03
Investment Policies and Strategies........................................................03
Principal Risks of Investing in the Fund..................................................03
Who Should Consider Investing in the Fund.................................................04
Total Returns, After Fees and Expenses....................................................05
A Detailed Look at the EAFE(R) Equity Index Fund
Objective.................................................................................06
Strategy..................................................................................08
Principal Investments.....................................................................08
Investment Process........................................................................08
Portfolio Turnover........................................................................08
Risks.....................................................................................09
Management of the Fund...................................................................12
Calculating the Fund's Share Price........................................................13
Dividends and Distributions...............................................................14
Tax Considerations........................................................................14
Buying and Selling Shares.................................................................14
Financial Highlights.....................................................................15
</TABLE>
<PAGE>
Overview
of the EAFE(R) Equity Index Fund
Goal: The Fund seeks to match, as closely as possible, before expenses, the
performance of the Morgan Stanley Capital International (MSCI) EAFE(R) Index
("EAFE(R) Index") which emphasizes stocks of companies in major markets in
Europe, Australia and the Far East performance.
Core Strategy: The Investment Adviser attempts to invest in stocks and
other securities that are representative of the EAFE(R) Index as a whole.
The EAFE(R) Index of major markets in Europe, Australia and the Far East is a
widely accepted benchmark of international stock performance. It is a model, not
an actual portfolio. It tracks equity securities in Australia, Austria, Belgium,
Denmark, Finland, France, Germany, Hong Kong, Ireland, Italy, Japan, the
Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden,
Switzerland and the United Kingdom. The Index is "capitalization weighted,"
which means that a company whose securities have a high market value will
contribute proportionately more to the Index's performance results than a
company whose securities have a lower market value.
INVESTMENT POLICIES AND STRATEGIES
The Fund seeks to match, before expenses, the risk and return characteristics of
the EAFE(R) Index. The Fund will invest primarily in common stocks of companies
that compose the EAFE(R) Index, in approximately the same weightings as the
EAFE(R) Index. The Fund may also use stock index futures and options.
PRINCIPAL RISKS OF INVESTING IN THE FUND An investment in the Fund could
lose money, or the Fund's performance could trail that of other
investments. For example: The stock market could perform poorly in one or
more of the countries in which the Fund has invested. Adverse political,
economic or social developments could undermine the value of the Fund's
investments or prevent the Fund from realizing their full value. Accounting
and financial reporting standards differ from those in the U.S. and could
convey incomplete information when compared to information typically
provided by U.S. companies. The currency of a country in which the Fund
invests may fluctuate in value relative to the U.S. dollar, which could
affect the value of the investment itself to U.S. investors. Stocks could
decline generally or could underperform other investments. The Fund may not
be able to track closely the performance of the EAFE(R) Index for a number
of reasons: the Fund's cost of buying and selling securities, the flow of
money into and out of the Fund, and the underperformance of stocks selected
by the Investment Adviser. The Fund could suffer losses if its futures and
options positions are not well correlated with those of other investments
or it cannot close out its positions.
WHO SHOULD CONSIDER INVESTING IN THE FUND
The Fund sells its shares only to separate accounts of various insurance
companies (the "Companies"). Shares are available to the public through the
purchase of certain variable annuity and variable life insurance contracts
("Contract(s)") issued by the Companies. As a Contract owner, your premium
payments are allocated to the Fund through these separate accounts in accordance
with your Contract. Please see the Contract prospectus that accompanies this
Prospectus for a detailed explanation of your Contract.
You should consider investing in the Fund if you are seeking the following:
capital appreciation over the long term; exposure to the equity market as
represented by companies outside the U.S.; and investment returns that
track the performance of the EAFE(R) Index.
There is, of course, no guarantee that the Fund will realize its goal.
You should not consider investing in the EAFE(R) Index Fund if you are:
pursuing a short-term financial goal; seeking regular income and stability
of principal; unable to tolerate fluctuations in the value of your
investments; or
seeking to outperform the EAFE(R) Index.
The Fund by itself does not constitute a balanced investment program. It can,
however, provide exposure to investment opportunities not available to someone
who invests in U.S. securities alone. Diversifying your investments may also
improve your long-run investment return and lower the volatility of your overall
investment portfolio.
An investment in the EAFE(R) Equity Index Fund is not a deposit of Bankers Trust
Company or any other bank, and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency.
TOTAL RETURNS, AFTER FEES AND EXPENSES
The bar chart and table on this page can help you evaluate the potential risk
and rewards of investing in the Fund by showing changes in the Fund's
performance year to year. The bar chart shows the Fund's actual return for the
full calendar year since the Fund began selling shares on August 22, 1997 (its
inception date). The table compares the Fund's average annual return with the
EAFE(R) Index over the last year and since the Fund's inception. An index is a
group of securities whose overall performance is used as a standard to measure
investment performance. It does not factor in the costs of buying, selling and
holding stock--costs that are reflected in the Fund's performance results. These
figures also do not include the effect of Contract charges, which would lower
the return shown.
Year-by-Year Returns for Each Full Calendar Year Since Inception
[bar chart]
- -------------------
TK
- -------------------
- -------------------
1998
- -------------------
Since inception, the Fund's highest return in any calendar quarter was TK% and
its lowest quarterly return was TK%. Past performance offers no indication of
how the Fund will perform in the future.
Average Annual Returns (as of December 31, 1998)
<TABLE>
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- -----------------------------------------------------------------------------------------
Since Inception
1 year (August 22, 1997)*
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
EAFE(R) Equity Index Fund TK TK
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
EAFE(R) Index TK TK
- -----------------------------------------------------------------------------------------
</TABLE>
(A Note on Fees)
As an investor in the Fund, you would incur various operating costs, including
management expenses. You also would incur fees associated with the Contracts you
purchase. Detailed information about the cost of investing in the Fund is
presented in the accompanying prospectus for the Contracts through which the
Fund's shares are offered to you.
A Detailed Look
at the EAFE(R) Equity Index Fund
OBJECTIVE
The Fund seeks to match, as closely as possible, before expenses, the
performance of the EAFE(R) Index.
The Fund invests for capital appreciation, not income; any dividend and interest
income is incidental to the pursuit of its objective. While we give priority to
matching the Index's performance, we cannot offer any assurance of achieving
this objective. The Fund's objective is not a fundamental policy. We must notify
shareholders before we change it, but we are not required to seek their approval
to do so.
This 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 this Fund or any member of the public regarding the advisability of investing
in securities generally or the ability of the EAFE(R) Index to track general
stock market performance.
Morgan Stanley is the licensor 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 this Fund, or
to this Fund itself. Morgan Stanley has no obligation to take the needs of the
issuer of this Fund or the owners of this 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,
prices or quantities of this Fund to be issued, or in the determination or
calculation of the equation by which this Fund is redeemable for cash. Morgan
Stanley has no obligation or liability to owners of this Fund in connection with
the administration, marketing or trading of this Fund. This 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 indexes from sources that 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 INDEXES 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 INDEXES 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.
Index Versus Active Management
Active management involves the investment adviser buying and selling securities
based on research and analysis. Unlike a fund that is actively managed, an index
fund tries to match, as closely as possible, the performance of a target index
by holding either all, or a representative sample, of the securities in the
index. Indexing appeals to many investors for the following reasons:
indexing provides simplicity because it is a straightforward
market-matching strategy; index funds generally provide diversification by
investing in a wide variety of companies and industries; an index fund's
performance is predictable in that the Fund's value is expected to move in
the same direction, up or down, as
the target index;
index funds tend to have lower costs because they do not have many of the
expenses of actively managed funds, such as research;
index funds usually have relatively low trading activity and therefore
brokerage commissions tend to be lower; and index funds generally have low
realization of capital gains.
<PAGE>
STRATEGY
To match the country, industry and risk characteristics of the EAFE(R) Index as
closely as possible, the Fund invests in a statistically selected sample of the
securities found in the EAFE(R) Index.
PRINCIPAL INVESTMENTS
Under normal circumstances, we pursue the Fund's objective by investing at least
80% of the Fund's assets in a statistically selected sample of the equity
securities of the roughly 1,100 companies that comprise the Index.
The Fund may hold up to 25% of its assets in short-term debt securities, money
market instruments, stock index futures and options. Futures and options are
considered derivatives because they "derive" their value from a traditional
security (like a stock or bond), asset or index. The Fund intends to buy futures
in anticipation of buying stocks.
Futures and options on futures contracts are used as a low-cost method of
gaining exposure to a particular securities market without investing directly in
those securities. The Fund also invests in derivatives to keep cash on hand to
meet shareholder redemptions or other needs while maintaining exposure to the
stock market.
INVESTMENT PROCESS
The Fund cannot as a practical matter hold every one of the roughly 1,100 stocks
in the EAFE(R) Index. In an effort to run an efficient and effective strategy,
the Fund uses the process of "optimization," a statistical sampling technique.
First, the Fund buys the stocks that make up the larger portions of the EAFE(R)
Index's value in roughly the same proportion as the EAFE(R) Index. Second,
smaller stocks are analyzed and selected. In choosing smaller stocks, the
Investment Adviser tries to match the industry and risk characteristics of all
of the smaller companies in the EAFE(R) Index without buying all of those
stocks. This approach attempts to maximize the Fund's liquidity and returns
while minimizing its costs.
PORTFOLIO TURNOVER
The annual portfolio turnover rate measures the frequency that the Fund sells
and replaces the value of its securities within a given period. Historically,
this Fund has had a low portfolio turnover rate.
<PAGE>
RISKS
Below we set forth some of the prominent risks associated with investing in
general, with investing in stocks outside the United States and with index
investing.
Primary Risks
Market Risk. Deteriorating market conditions might cause an overall weakness in
the market that reduces the absolute level of stock prices in that market.
Tracking Error Risk. There are several reasons that the Fund's performance may
not match the EAFE(R) Index exactly: Unlike the EAFE(R) Index, the Fund
incurs administrative expenses and transaction costs in trading stocks.
The composition of the EAFE(R) Index and the stocks held by the Fund may
occasionally diverge. The timing and magnitude of cash inflows from
investors buying shares could create balances of uninvested cash.
Conversely, the
timing and magnitude of cash outflows to investors selling shares could
require ready reserves of uninvested cash. Either situation would likely
cause the Fund's performance to deviate from the "fully invested" EAFE(R)
Index.
Political Risk. Some foreign governments have limited the outflow of profits to
investors abroad, extended diplomatic disputes to include trade and financial
relations, and imposed high taxes on corporate profits.
Information Risk. Financial reporting standards for companies based in
foreign markets differ from those in the United States.
Foreign Stock Market Risk. From time to time, foreign capital markets have
exhibited more volatility than those in the United States. Trading stocks on
some foreign exchanges is inherently more difficult than trading in the United
States for reasons that include:
Liquidity Risk. Stocks that trade less can be more difficult or more
costly to buy or sell than more liquid or active stocks. This liquidity
risk is a factor of the trading volume of a particular stock, as well as
the size and liquidity of the entire local market. On the whole, foreign
exchanges are smaller and less liquid than the U.S. market. This can make
buying and selling certain shares more difficult and costly. Relatively
small transactions in some instances can have a disproportionately large
effect on the price and supply of shares. In extreme situations, it may
become virtually impossible to sell a stock in an orderly fashion at a
price that approaches our estimate of its value.
Regulatory Risk. Some foreign governments regulate their exchanges less
stringently, and the rights of shareholders may not be
as firmly established.
Currency Risk. The Fund invests in foreign securities denominated in
foreign currencies. This creates the possibility that changes in foreign
exchange rates will affect the value of foreign securities or the U.S.
dollar amount of income or gain received on these securities.
Futures and Options. The Fund may invest, to a limited extent, in stock index
futures or options, which are types of derivatives. The Fund will not use these
derivatives for speculative purposes or as leveraged investments that magnify
the gains or losses of an investment. The Fund invests in derivatives to keep
cash on hand to meet shareholder redemptions or other needs while maintaining
exposure to the stock market. Risks associated with derivatives include:
the risk that the derivative will not fully offset the underlying positions
the risk that derivatives used for risk management may not have the
intended effects and may result in losses or missed opportunities the risk
that the Fund cannot sell the derivative because of an illiquid secondary
market
If the Fund invests in futures contracts and options on futures contracts for
nonhedging purposes, the margin and premiums required to make those investments
will not exceed 5% of the Fund's net asset value after taking into account
unrealized profits and losses on the contracts. Futures contracts and options on
futures contracts used for nonhedging purposes involve greater risks than stock
investments.
Secondary Risks
Euro Risk. On January 1, 1999, eleven countries of the European Economic and
Monetary Union (EMU) began implementing a plan to replace their national
currencies with a new currency, the euro. Full conversion to the euro is slated
to occur by July 1, 2002.
Although it is impossible to predict the impact of the conversion to the euro on
the Fund, the risks may include: changes in the relative strength and
value of the U.S. dollar or other major currencies; adverse effects on the
business or financial condition of European issuers that the Fund holds in
its portfolio; that the systems used to purchase and sell euro-denominated
securities may not work; uncertainty about how existing financial
contracts will be treated after euro implementation; and unpredictable
effects on trade and commerce generally.
These and other factors could increase volatility in financial markets worldwide
and could adversely affect the value of securities held by the Fund.
Year 2000 Risk. As with most businesses, the Fund faces the risk that the
computer systems of its Investment Adviser and other companies on which it
relies for service or in which it invests will not accommodate the
changeover necessary from dates in the year 1999 to dates in the year 2000.
These risks could adversely affect: the companies in which the Fund
invests, which could impact the value of the Fund's investments; our
ability to service your Fund account, including our ability to meet your
requests to buy and sell Fund shares; and our ability to trade securities
held by the Fund or to accurately price securities held by the Fund.
We are working both internally and with our business partners and service
providers to address this problem. If we--or our business partners, service
providers, government agencies or other market participants--do not succeed, it
could materially affect shareholder services or the value of the Fund's shares.
Pricing Risk. We value securities in the Fund at their stated market value if
price quotations are available and, if not, by the method that most accurately
reflects their current worth in the judgment of the Board of Trustees. This
procedure implies an unavoidable risk--the risk that our prices are higher or
lower than the prices that the securities might actually command if we sold
them. If we have valued the securities too highly, you may end up paying too
much for Fund shares when you buy. If we underestimate their price, you may not
receive the full market value for your Fund shares when you sell.
<PAGE>
MANAGEMENT OF THE FUND
Board of Trustees. The Fund's shareholders, voting in proportion to the number
of shares each owns, elect a Board of Trustees, and the Trustees supervise all
the Fund's activities on their behalf. The separate accounts of the Companies
are the shareholders of record of the Fund's shares. Any reference to the
shareholder in this Prospectus technically refers to the Companies' separate
accounts and not to you, the Contract owner.
Investment Adviser. Under the supervision of the Board of Trustees, Bankers
Trust Company, with headquarters at 130 Liberty Street, New York, NY 10006, acts
as the Fund's Investment Adviser. As Investment Adviser, Bankers Trust makes the
Fund's investment decisions and assumes responsibility for the securities the
Fund owns. It buys and sells securities for the Fund and conducts the research
that leads to the purchase and sale decisions. Bankers Trust received a fee of
0.45% of the Fund's average daily net assets for its services in the last fiscal
year.
As of December 31, 1998, Bankers Trust was the eighth largest bank holding
company in the United States, with total assets of approximately $156 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 96 offices in more than 43 countries.
Bankers Trust's officers bring wide experience to managing the Fund. The firm's
own record dates back to its founding as a trust company in 1903. It has
invested retirement assets on behalf of the nation's largest corporations and
institutions for more than 50 years. Today, the assets under its global
management exceed $338 billion. The scope of the firm's capability is broad--it
is a leader in both the active and passive quantitative investment disciplines
and maintains a major presence in stock and bond markets worldwide.
The Investment Adviser is a wholly owned subsidiary of Bankers Trust
Corporation. On November 30, 1998, Bankers Trust Corporation entered into an
Agreement and Plan of Merger with Deutsche Bank AG under which Bankers Trust
Corporation would merge with and into a subsidiary of Deutsche Bank AG. Deutsche
Bank AG is a major global banking institution that is engaged in a wide range of
financial services, including retail and commercial banking, investment banking
and insurance. The transaction is contingent upon various regulatory approvals,
as well as the approval of the Fund's shareholders. If the transaction is
approved and completed, Deutsche Bank AG, as the Investment Adviser's new parent
company, will control the operations of the Investment Adviser. Bankers Trust
believes that, under this new arrangement, the services provided to the Fund
will be maintained at their current level.
Portfolio Managers.
Richard J. Vella, Managing Director of Bankers Trust, is responsible for the
day-to-day management of the Fund's investments: Joined Bankers Trust in
1985 and the Fund at its inception in 1997.
14 years of trading and investment experience.
Bachelor of Science degree in Mechanical Engineering from Rutgers
University, MBA from University of Washington.
Steven Wetter, Vice President of Bankers Trust and Co-Manager of the Fund:
Joined Bankers Trust in 1992 and the Fund at its inception in 1996.
11 years of trading and investment experience.
Bachelor's degree from the University of California at Berkeley, MBA from
the New York University Stern School.
CALCULATING THE FUND'S SHARE PRICE
We calculate the price of the Fund's shares (also known as the "Net Asset Value"
or "NAV") in accordance with the standard formula for valuing mutual fund shares
at the close of regular trading on the New York Stock Exchange every day the
Exchange is open for business.
The formula calls for deducting all of the Fund's liabilities from the total
value of its assets--the market value of the securities it holds, plus its cash
reserves--and dividing the result by the number of shares outstanding. (Note
that prices for securities that trade on foreign exchanges can change
significantly on days when the New York Stock Exchange is closed and you cannot
buy or sell Fund shares. Such price changes in the securities the Fund owns may
ultimately affect the price of Fund shares when the New York Stock Exchange
reopens.)
We value the securities in the Fund at their stated market value if price
quotations are available. When price quotations for a particular security are
not readily available, we determine their value by the method that most
accurately reflects their current worth in the judgment of the Board of
Trustees.
<PAGE>
Open for business: The Exchange is open every week, Monday through Friday,
except when the following holidays are celebrated: New Year's Day, Martin Luther
King, Jr. Day (the third Monday in January), 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 fourth Thursday
in November) and Christmas Day.
DIVIDENDS AND DISTRIBUTIONS
If the Fund earns investment income or recognizes taxable net capital gains, it
is the Fund's policy to distribute to the Companies' separate accounts
substantially all of that taxable income or capital gain on an annual basis.
These distributions are automatically made in the form of additional shares of
the Fund and not cash, unless you, the Contract owner, elect to receive
distributions in cash. The result of automatic reinvestment of distributions is
that the Fund's performance, including the effect of dividends, is reflected in
the cash value of the Contracts you own. Please see the Contract prospectus
accompanying this Prospectus for more information.
TAX CONSIDERATIONS
Because shares of the Fund may be purchased only through Contracts, income
dividends or capital gains distributions from the Fund are taxable, if at all,
to the participating Companies and will be exempt from current taxation of the
Contract owner if left to accumulate within the Contract.
Please see the Contract prospectus accompanying this Prospectus for a
description of the Fund's federal tax impact on you as a Contract owner.
Because each investor's tax circumstances are unique and because the tax laws
are subject to change, we recommend that you consult your tax adviser about your
investment.
BUYING AND SELLING FUND SHARES
The Fund does not sell its shares directly to the public. The Fund continuously
sells its shares to each Company's separate accounts, without a sales charge, at
the next net asset value per share determined after a proper purchase order is
placed with the Company. The Company offers to Contract owners 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 of their Contract owners, as set forth in the
accompanying prospectus for the Contracts. Redemption orders are effected at the
next net asset value per share determined after a proper redemption order is
placed with the Company.
Please see the Contract prospectus that accompanies this Prospectus for a
detailed description of your Contract and its allocation, transfer and
withdrawal provisions.
FINANCIAL HIGHLIGHTS
The table below provides a picture of the Fund's financial performance since
inception. The information selected reflects financial results for a single Fund
share. The total returns in the table represent the rates of return that an
investor would have earned on an investment in the Fund, assuming reinvestment
of all dividends and distributions. This information has been audited by Ernst &
Young LLP, whose report, along with the Fund's financial statements, is included
in the Fund's annual report. The annual report is available free of charge by
calling the customer service center at the telephone number shown in the
accompanying Contract prospectus.
<PAGE>
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Financial Highlights
- -------------------------------------------------------------------------------------------------------------------------
For a share outstanding throughout each period
For the period
August 22, 1997 (1)
Year ended through
December 31 1998 December 31 1997
----------------------- ------------------------
Net asset value, beginning of period $9.34 $10.00
Income (Loss) from Investment Operations:
Net investment income (2) 0.12 0.02
Net realized and unrealized gain (loss)
on investments, futures contracts and
foreign currency transactions 1.89 (0.68)
----------------------- ------------------------
Net increase (decrease) in net asset value
from operations 2.01 (0.66)
----------------------- ------------------------
Less Distributions:
Distributions from net investment income (0.16) 0.00
Distributions from net realized gain on investments (0.01) 0.00
----------------------- ------------------------
Total distributions (0.17) 0.00
Net asset value, end of period $11.18 $9.34
======================= ========================
Total Return (4) 21.60% -6.60%
Ratios / Supplemental Data
Net assets, end of period (in 000s) $35,956 $14,409
Ratios to average net assets:
Net investment income including reimbursement/waiver 1.20% 0.72% (3)
Operating expenses including reimbursement/waiver 0.65% 0.65% (3)
Operating expenses excluding reimbursement/waiver 1.66% 2.75% (3)
Portfolio turnover rate 7% 0% (5)
- --------------
(1) Commencement of operations.
(2) Based on average shares outstanding
(3) Annualized
(4) Total investment return is calculated assuming an initial investment made
at the net asset asset value at the beginning of the period, reinvestment
of all dividends and distributions at net asset value during the period
and redemption on the last day of
the
(5) Less than 1%
</TABLE>
<PAGE>
BACK COVER
Additional information about the Fund's investments is available in the Fund's
annual and semiannual reports to shareholders. In the Fund's annual report, you
will find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year.
You can find more detailed information about the Fund in the current Statement
of Additional Information, dated April 30, 1999, which we have filed
electronically with the Securities and Exchange Commission (SEC) and which is
incorporated by reference into this Prospectus. To receive your free copy of the
Statement of Additional Information, the annual or semiannual report, or if you
have questions about investing in the Fund, call the customer service center at
the telephone number shown in the accompanying Contract prospectus.
You can find reports and other information about the Fund on the SEC website
(http://www.sec.gov), or you can get copies of this information, after payment
of a duplicating fee, by writing to the Public Reference Section of the SEC,
Washington, D.C. 20549-6009. Information about the Fund, including its Statement
of Additional Information, can be reviewed and copied at the SEC's Public
Reference Room in Washington, D.C. For information on the Public Reference Room,
call the SEC at 1-800-SEC-0330.
EAFE(R) Equity Index Fund
BT Insurance Funds Trust
Investment Company Act file number: 811-07507
<PAGE>
PROSPECTUS: APRIL 30, 1999
EQUITY 500 INDEX FUND
With the goal of matching the performance of the Standard & Poor's 500
Composite Stock Price Index, which emphasizes stocks of large U.S.
companies
TRUST: BT INSURANCE FUNDS TRUST
INVESTMENT ADVISER: BANKERS TRUST COMPANY
Like shares of all mutual funds, these securities have not been approved or
disapproved by the Securities and Exchange Commission ("SEC") nor has the SEC
passed upon the accuracy or adequacy of this prospectus. Any representation to
the contrary is a criminal offense.
<PAGE>
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TABLE OF CONTENTS
Equity 500 Index Fund
Overview of the Equity 500 Index Fund
Goal......................................................................................03
Core Strategy.............................................................................03
Investment Policies and Strategies........................................................03
Principal Risks of Investing in the Fund..................................................03
Who Should Consider Investing in the Fund.................................................04
Total Returns, After Fees and Expenses....................................................05
A Detailed Look at the Equity 500 Index Fund
Objective.................................................................................06
Strategy..................................................................................07
Principal Investments.....................................................................07
Investment Process........................................................................08
Portfolio Turnover........................................................................08
Risks.....................................................................................08
Management of the Fund...................................................................10
Calculating the Fund's Share Price........................................................11
Dividends and Distributions...............................................................12
Tax Considerations........................................................................12
Buying and Selling Shares.................................................................12
Financial Highlights......................................................................13
</TABLE>
<PAGE>
Overview
of the Equity 500 Index Fund
Goal: The Fund seeks to match, as closely as possible, before expenses, the
performance of the Standard & Poor's 500 Composite Stock Price Index (the
"S&P 500 Index"), which emphasizes stocks of large U.S. companies. Core
Strategy: The Investment Adviser attempts to invest in stocks and other
securities that are representative of the S&P 500 Index as a whole.
The S&P 500 Index 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 stocks publicly traded in the United States,
most of which are traded on the New York Stock Exchange. It is a model, not an
actual portfolio. Stocks in the S&P 500 Index are weighted according to their
market capitalization (the number of shares outstanding multiplied by the
stock's current price).
INVESTMENT POLICIES AND STRATEGIES
The Fund seeks to match, before expenses, the risk and return characteristics of
the S&P 500 Index. The Fund will invest primarily in common stocks of companies
that comprise the S&P 500 Index, in approximately the same weightings as the S&P
500 Index. The Fund may also use stock index futures and options.
PRINCIPAL RISKS OF INVESTING IN THE FUND
An investment in the Fund could lose money, or the Fund's
performance could trail that of other investments. For example:
Stocks could decline generally or could underperform other
investments. Returns on large U.S. companies' stock could trail
the returns from stocks of medium or small companies. Each type
of
stock tends to go through cycles of overperformance and
underperformance in comparison to the overall stock market. The
Fund may not be able to track closely the performance of the S&P
500 Index for a number of reasons, including the
Fund's costs of buying and selling securities, the flow of money
into and out of the Fund and the underperformance of stocks
selected by the Investment Adviser.
The Fund could suffer losses on its futures and options positions
if they are not well correlated with the securities for which they
are acting as a proxy or if the Fund cannot close out its
positions.
WHO SHOULD CONSIDER INVESTING IN THE FUND
The Fund sells its shares only to separate accounts of various insurance
companies (the "Companies"). Shares are available to the public through the
purchase of certain variable annuity and variable life insurance contracts
("Contract(s)") issued by the Companies. As a Contract owner, your premium
payments are allocated to the Fund through these separate accounts in accordance
with your Contract. Please see the Contract prospectus that accompanies this
Prospectus for a detailed explanation of your Contract.
You should consider investing in the Fund if you are seeking the
following: capital appreciation over the long term; exposure to
the U.S. equity market as represented by larger companies; and
investment returns that track the performance of the S&P 500
Index.
There is, of course, no guarantee that the Fund will realize its goals.
You should not consider investing in the Fund if you are:
pursuing a short-term financial goal;
seeking regular income and stability of principal;
unable to tolerate fluctuations in the value of your investments;
or seeking to outperform the S&P 500 Index.
The Fund by itself does not constitute a balanced investment program.
Diversifying your investments may improve your long-run investment return and
lower the volatility of your overall investment portfolio.
An investment in the Fund is not a deposit of Bankers Trust Company or any other
bank and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
TOTAL RETURNS, AFTER FEES AND EXPENSES
The bar chart and table on this page can help you evaluate the potential risk
and rewards of investing in the Fund by showing changes in the Fund's
performance year to year. The bar chart shows the Fund's actual return for the
full calendar year since the Fund began selling shares on October 1, 1997 (its
inception date). The table compares the Fund's average annual return with the
S&P 500 Index over the last calendar year and since its inception. An index is a
group of securities whose overall performance is used as a standard to measure
investment performance. It does not factor in the costs of buying, selling and
holding stock--costs which are reflected in the Fund's performance results.
These figures also do not include the effect of Contract charges, which would
lower the return shown.
Year-by-Year Returns for Each Full Calendar Year Since Inception
[bar chart]
--------------------
TK
--------------------
--------------------
1998
--------------------
Since inception, the Fund's highest return in any calendar quarter was ____% and
its lowest quarterly return was ____%. Past performance offers no indication of
how the Fund will perform in the future.
Average Annual Returns (as of December 31, 1998)
<TABLE>
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<S> <C> <C>
- -----------------------------------------------------------------------------------------
Since Inception
1 year (October 1, 1997)*
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
Equity 500 Index Fund TK TK
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
S&P 500 Index TK TK
- -----------------------------------------------------------------------------------------
</TABLE>
(A Note on Fees)
As an investor in the Fund, you would incur various operating costs, including
management expenses. You also would incur fees associated with the Contracts you
purchase. Detailed information about the cost of investing in the Fund is
presented in the accompanying prospectus for the Contracts through which the
Fund's shares are offered to you.
A Detailed Look
at the Equity 500 Index Fund
OBJECTIVE
The Fund seeks to match, as closely as possible, before expenses, the
performance of the S&P 500 Index, which emphasizes stocks of large U.S.
companies.
The Fund invests for capital appreciation, not income; any dividend and interest
income is incidental to the pursuit of its objective. While we give priority to
matching the Index's performance, we cannot offer any assurance of achieving
this objective. The Fund's objective is not a fundamental policy. We must notify
shareholders before we change it, but we are not required to seek their approval
to do so.
The Fund is not sponsored, endorsed, sold or promoted by Standard & Poor's
("S&P"). S&P makes no representation or warranty, express or implied, to the
owners of this 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 Index to track general stock market performance. S&P does not
guarantee the accuracy and/or completeness of the S&P 500 Index or any data
included herein.
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.
Index Versus Active Management
Active management involves the investment adviser buying and selling securities
based on research and analysis. Unlike a fund that is actively managed, an index
fund tries to match, as closely as possible, the performance of a target index
by holding either all, or a representative sample, of the securities in the
index. Indexing appeals to many investors for the following reasons:
indexing provides simplicity because it is a straightforward
market-matching strategy; index funds generally provide diversification by
investing in a wide variety of companies and industries; an index fund's
performance is predictable in that the Fund's value is expected to move in
the same direction, up or down, as
the target index;
index funds tend to have lower costs because they do not have many of the
expenses of actively managed funds, such as research;
index funds usually have relatively low trading activity and therefore
brokerage commissions tend to be lower; and index funds generally have low
realization of capital gains.
STRATEGY
To match the risk and return characteristics of the S&P 500 Index as closely as
possible, the Fund invests in a statistically selected sample of the securities
found in the S&P 500 Index, using a process known as "optimization." This
process selects stocks for the Fund so that industry weightings, market
capitalizations and fundamental characteristics (price to book ratios, price to
earnings ratios, debt to asset ratios and dividend yields), closely match those
of the securities in the S&P 500 Index. Over the long term, the Investment
Adviser seeks a correlation between the performance of the Fund, before
expenses, and the S&P 500 Index of 98% or better. (A figure of 100% would
indicate perfect correlation.)
PRINCIPAL INVESTMENTS
The Fund will invest at least 80% of its assets in stocks of companies included
in the S&P 500 Index, except Bankers Trust Corporation. The Fund's securities
are weighted to make the Fund's total investment characteristics similar to
those of the S&P 500 Index as a whole. The Investment Adviser may exclude or may
remove any S&P stock from the Fund, if the Investment Adviser believes that the
stock is illiquid or has impaired financial conditions or other extraordinary
events.
The Fund may hold up to 25% of its assets in short-term debt securities, money
market instruments, stock index futures and options. Futures and options are
considered derivatives because they "derive" their value from a traditional
security (like a stock or bond), asset or index. The Fund intends to buy futures
in anticipation of buying stocks.
Futures contracts and options on futures contracts are used as a low-cost method
of gaining exposure to a particular securities market without investing directly
in those securities. The Fund also invests in derivatives to keep cash on hand
to meet shareholder redemptions or other needs while maintaining exposure to the
stock market.
INVESTMENT PROCESS
The Fund normally does not hold every one of the 500 stocks in the S&P 500
Index. In an effort to run an efficient and effective strategy, the Fund uses
the process of "optimization," a statistical sampling technique. First, the Fund
buys the stocks that make up the larger portions of the Index's value in roughly
the same proportion as the Index. Second, the smaller stocks in the S&P 500
Index are analyzed. In selecting smaller stocks, the Investment Adviser tries to
match the industry and risk characteristics of all of the smaller companies in
the S&P 500 Index without buying all of those stocks. This approach attempts to
maximize the Fund's liquidity and returns while minimizing its costs.
PORTFOLIO TURNOVER
The annual portfolio turnover rate measures the frequency that the Portfolio
sells and replaces the value of its securities within a given period.
Historically, this Fund has had a low portfolio turnover rate.
RISKS
Below we set forth some of the prominent risks associated with investing in
general, with index investing and with investing in large-cap stocks.
Primary Risks
Market Risk. Deteriorating market conditions might cause an overall weakness in
the market that reduces the absolute level of stock prices in that market.
Futures and Options. The Fund may invest, to a limited extent, in stock index
futures or options, which are types of derivatives. The Fund will not use these
derivatives for speculative purposes or as leveraged investments that magnify
the gains or losses of an investment. The Fund invests in derivatives to keep
cash on hand to meet shareholder redemptions or other needs while maintaining
exposure to the stock market. Risks associated with derivatives include:
the risk that the derivative will not fully offset the underlying
positions; derivatives used for risk management may not have the intended
effects and may result in losses or missed opportunities; and the risk that
the Fund cannot sell the derivative because of an illiquid secondary
market. If the Fund invests in futures contracts and options on futures
contracts for non-hedging purposes, the margin and premiums required to
make those investments will not exceed 5% of the Fund's net asset value
after taking into account unrealized profits and losses on the contracts.
Futures contracts and options on futures contracts used for non-hedging
purposes involve greater risks than stock investments.
Tracking Error Risk. There are several reasons that the Fund's performance may
not match the S&P 500 Index exactly: Unlike the S&P 500 Index, the Fund
incurs administrative expenses and transaction costs in trading bonds. The
composition of the S&P 500 Index and the stocks held by the Fund may
occasionally diverge. The timing and magnitude of cash inflows from
investors buying shares could create large balances of uninvested cash.
Conversely, the timing and magnitude of cash outflows to investors selling
shares could require large ready reserves of uninvested cash. Either
situation would likely cause the Fund's performance to deviate from the
"fully invested" S&P 500 Index.
Secondary Risks
Pricing Risk. We value securities in the Fund at their stated market value if
price quotations are available and, if not, by the method that most accurately
reflects their current worth in the judgment of the Board of Trustees. This
procedure implies an unavoidable risk, the risk that our prices are higher or
lower than the prices that the securities might actually command if we sold
them. If we have valued the securities too highly, you may end up paying too
much for Fund shares when you buy. If we underestimate their price, you may not
receive the full market value for your Fund shares when you sell.
Year 2000 Risk. As with most businesses, the Fund faces the risk that the
computer systems of its Investment Adviser and other companies on which it
relies for service or in which it invests will not accommodate the changeovers
necessary from dates in the year 1999 to dates in the year 2000. These risks
could adversely affect:
The companies in which the Fund invests, which could impact the value of
the Fund's investments;
Our ability to service your Fund account, including our ability
to meet your requests to buy and sell Fund shares; and Our
ability to trade securities held by the Fund or to accurately
price securities held by the Fund.
We are working both internally and with our business partners and service
providers to address this problem. If we - or our business partners, service
providers, government agencies or other market participants - do not succeed, it
could materially affect shareholder services or it could affect the value of the
Fund's shares.
MANAGEMENT OF THE FUND
Board of Trustees. The Fund's shareholders, voting in proportion to the number
of shares each owns, elect a Board of Trustees, and the Trustees supervise all
the Fund's activities on their behalf. The separate accounts of the Companies
are the shareholders of record of the Fund's shares. Any reference to the
shareholder in this Prospectus technically refers to the Companies' separate
accounts and not to you, the Contract owner.
Investment Adviser. Under the supervision of the Board of Trustees, Bankers
Trust Company, with headquarters at 130 Liberty Street, New York, NY 10006, acts
as the Fund's Investment Adviser. As Investment Adviser, Bankers Trust makes the
Fund's investment decisions and assumes responsibility for the securities the
Fund owns. It buys and sells securities for the Fund and conducts the research
that leads to the purchase and sale decisions. Bankers Trust received a fee of
0.20% of the Fund's average daily net assets for its services in the last fiscal
year.
As of December 31, 1998, Bankers Trust was the eighth largest bank holding
company in the United States with total assets of approximately $156 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 96 offices in more than 43 countries.
Bankers Trust's officers bring wide experience to managing both the Fund and its
Portfolio. The firm's own record dates back to its founding as a trust company
in 1903. It has invested retirement assets on behalf of the nation's largest
corporations and institutions for more than 50 years. Today, the assets under
its global management total $338 billion. The scope of the firm's capability is
broad: It is a leader in both the active and passive quantitative investment
disciplines and maintains a major presence in stock and bond markets worldwide.
The Investment Adviser is a wholly owned subsidiary of Bankers Trust
Corporation. Bankers Trust Corporation has entered into an Agreement and Plan of
Merger with Deutsche Bank AG, dated as of November 30, 1998, under which Bankers
Trust Corporation would merge with and into a subsidiary of Deutsche Bank AG.
Deutsche Bank AG is a major global banking institution that is engaged in a wide
range of financial services, including retail and commercial banking, investment
banking and insurance. The transaction is contingent upon various regulatory
approvals, as well as the approval of the Fund's shareholders. If the
transaction is approved and completed, Deutsche Bank AG, as the Investment
Adviser's new parent company, will control the operations of the Investment
Adviser. Bankers Trust believes that, under this new arrangement, the services
provided to the Fund will be maintained at their current level.
Portfolio Manager.
Frank Salerno, Managing Director of Bankers Trust, is responsible for
the day-to-day management of the Fund's investments: Joined
Bankers Trust in 1981 and the Fund at its inception in 1997.
16 years of investment industry experience.
Bachelor's degree from Syracuse University, MBA from New York
University.
CALCULATING THE FUND'S SHARE PRICE
We calculate the daily price of the Fund's shares (also known as the "Net Asset
Value" or "NAV") in accordance with the standard formula for valuing mutual fund
shares at the close of regular trading on the New York Stock Exchange every day
the Exchange is open for business.
The formula calls for deducting all of the Fund's liabilities from the total
value of its assets--the market value of the securities it holds, plus its cash
reserves--and dividing the result by the number of shares outstanding.
We value the securities in the Fund at their stated market value if price
quotations are available. When price quotations for a particular security are
not readily available, we determine their value by the method that most
accurately reflects their current worth in the judgment of the Board of
Trustees. Open for business: The Exchange is open every week, Monday through
Friday, except when the following holidays are celebrated: New Year's Day,
Martin Luther King, Jr. Day (the third Monday in January), 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
fourth Thursday in November) and Christmas Day.
DIVIDENDS AND DISTRIBUTIONS
If the Fund earns investment income or recognizes taxable net capital gains, it
is the Fund's policy to distribute to the Companies' separate accounts
substantially all of that taxable income or capital gain on an annual basis.
These distributions are automatically made in the form of additional shares of
the Fund and not cash, unless you, the Contract owner, elect to receive
distributions in cash. The result of automatic reinvestment of distributions is
that the Fund's performance, including the effect of dividends, is reflected in
the cash value of the Contracts you own. Please see the Contract prospectus
accompanying this Prospectus for more information.
TAX CONSIDERATIONS
Because shares of the Fund may be purchased only through Contracts, income
dividends or capital gains distributions from the Fund are taxable, if at all,
to the participating Companies and will be exempt from current taxation of the
Contract owner if left to accumulate within the Contract.
Please see the Contract prospectus accompanying this Prospectus for a
description of the Fund's federal tax impact on you as a Contract owner.
Because each investor's tax circumstances are unique and because the tax laws
are subject to change, we recommend that you consult your tax adviser about your
investment.
BUYING AND SELLING FUND SHARES
The Fund does not sell its shares directly to the public. The Fund continuously
sells its shares to each Company's separate accounts, without a sales charge, at
the next net asset value per share determined after a proper purchase order is
placed with the Company. The Company offers to Contract owners 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 of their Contract owners, as set forth in the
accompanying prospectus for the Contracts. Redemption orders are effected at the
next net asset value per share determined after a proper redemption order is
placed with the Company.
Please see the Contract prospectus that accompanies this Prospectus for a
detailed description of your Contract and its allocation, transfer and
withdrawal provisions.
FINANCIAL HIGHLIGHTS
The table below provides a picture of the Fund's financial performance since
inception. The information selected reflects financial results for a single Fund
share. The total returns in the table represent the rate of return that an
investor would have earned on an investment in the Fund, assuming reinvestment
of all dividends and distributions. This information has been audited by Ernst &
Young LLP, whose report, along with the Fund's financial statements, is included
in the Fund's annual report. The annual report is available free of charge by
calling the customer service center at the telephone number shown in the
accompanying Contract prospectus.
<PAGE>
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Financial Highlights
- -------------------------------------------------------------------------------------------------------------------------------
For a share outstanding throughout each period
For the period
October 1, 1997 (1)
Year ended through
December 31 1998 December 31 1997
---------------------- -----------------------
Net asset value, beginning of period $10.19 $10.00
Income from Investment Operations:
Net investment income 0.07 0.03 (2)
Net realized and unrealized gain
on investments and futures contracts 2.84 0.16
---------------------- -----------------------
Net increase in net asset value
from operations 2.91 0.19
---------------------- -----------------------
Less Distributions:
Distributions from net investment income (0.05) 0.00
Distributions from net realized gain on investments (0.32) 0.00
---------------------- -----------------------
Total distributions (0.37) 0.00
Net asset value, end of period $12.73 $10.19
====================== =======================
Total Return (4) 28.71% 1.90%
Ratios / Supplemental Data
Net assets, end of period (in 000s) $49,691 $11,760
Ratios to average net assets:
Net investment income including reimbursement/waiver 1.37% 1.51% (3)
Operating expenses including reimbursement/waiver 0.30% 0.30% (3)
Operating expenses excluding reimbursement/waiver 1.19% 2.78% (3)
Portfolio turnover rate 36% 7%
- --------------
(1) Commencement of operations.
(2) Based on average shares outstanding
(3) Annualized
(4) Total investment return is calculated assuming an initial investment made at
the net asset asset value at the beginning of the period, reinvestment of all
dividends and distributions at net asset value during the period and redemption
on the last day of the period. Total return calculated for a period of less than
one year is not annualized.
</TABLE>
<PAGE>
BACK COVER
Additional information about the Fund's investments and performance is available
in the Fund's annual and semi-annual reports to shareholders. In the Fund's
annual report, you will find a discussion of the market conditions and
investment strategies that significantly affected the Fund's performance during
its last fiscal year.
You can find more detailed information about the Fund in the current Statement
of Additional Information, dated April 30, 1999, which we have filed
electronically with the Securities and Exchange Commission (SEC) and which is
incorporated by reference into this Prospectus. To receive your free copy of the
Statement of Additional Information, the annual or semi-annual report, or if you
have questions about investing in the Fund, call the customer service center at
the telephone number shown in the accompanying Contract prospectus.
You can find reports and other information about the Fund on the SEC website
(http://www.sec.gov), or you can get copies of this information, after payment
of a duplicating fee, by writing to the Public Reference Section of the SEC,
Washington, D.C. 20549-6009. Information about the Fund, including its Statement
of Additional Information, can be reviewed and copied at the SEC's Public
Reference Room in Washington, D.C. For information on the Public Reference Room,
call the SEC at 1-800-SEC-0330.
Equity 500 Index Fund
BT Insurance Funds Trust
Investment Company Act file number: 811-07507
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PROSPECTUS: APRIL 30, 1999
U.S. Bond Index Fund
With the goal of matching the performance of the Lehman Brothers Aggregate Bond
Index, which is an index of government and corporate investment grade debt
securities.
TRUST: BT INSURANCE FUNDS TRUST
INVESTMENT ADVISER: BANKERS TRUST COMPANY
Like shares of all mutual funds, these securities have not been approved or
disapproved by the Securities and Exchange Commission ("SEC") nor has the SEC
passed upon the accuracy or adequacy of this prospectus. Any representation to
the contrary is a criminal offense.
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TABLE OF CONTENTS
U.S. Bond Index Fund
Overview of the U.S. Bond Index Fund
Goal......................................................................................03
Core Strategy.............................................................................03
Investment Policies and Strategies........................................................03
Principal Risks of Investing in the Fund..................................................03
Who Should Consider Investing in the Fund.................................................04
A Detailed Look at the U.S. Bond Index Fund
Objective.................................................................................05
Strategy..................................................................................05
Principal Investments.....................................................................06
Investment Process........................................................................06
Portfolio Turnover........................................................................07
Risks.....................................................................................07
Management of the Fund...................................................................09
Calculating the Fund's Share Price........................................................10
Dividends and Distributions...............................................................11
Tax Considerations........................................................................11
Buying and Selling Shares.................................................................12
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Overview
of the U.S. Bond Index Fund
Goal: The Fund seeks to match, as closely as possible, before expenses, the
performance of the Lehman Brothers Aggregate Bond Index (the "Lehman Bond
Index"), which emphasizes government mortgage-backed securities and corporate
investment grade debt securities.
Core Strategy: The Investment Adviser intends to invest under normal
circumstances at least 80% of the Fund's assets in debt securities of the Lehman
Bond Index as a whole.
The Lehman Brothers Aggregate Bond Index is one of the most widely accepted
benchmarks of bond market total return. It includes more than 6,000 taxable
securities, divided into four classes: U.S. Treasury and agency securities,
corporate bonds, bonds issued outside the United States but payable in U.S.
dollars, and mortgage-backed securities. It is a model, not an actual portfolio.
All of the bonds on the Lehman Bond Index have maturities of one year or more at
the time of their issue.
INVESTMENT POLICIES AND STRATEGIES
The Fund seeks to match, before expenses, the risk and return characteristics of
the Lehman Bond Index. The Fund will invest primarily in debt securities of
companies that comprise the Lehman Bond Index, in approximately the same
weightings as the Lehman Bond Index. The Fund may also invest in securities
index futures contracts and related options.
PRINCIPAL RISKS OF INVESTING IN THE FUND
An investment in the Fund could lose money, or the Fund's performance could
trail that of other investments. For example: The performance of the bonds
that the Investment Adviser has selected could underperform that of the
Lehman Bond Index.
The bond market could decline in value as a result of a rise in interest
rates.
The Fund may not be able to track closely the performance of the Lehman
Bond Index for a number of reasons, including the Fund's costs of buying
and selling securities and the flow of money into and out of the Fund.
The Fund could suffer losses if its futures and options positions are not
well correlated with those of other investments or it cannot close out its
positions.
WHO SHOULD CONSIDER INVESTING IN THE FUND
The Fund sells its shares only to separate accounts of various insurance
companies (the "Companies"). Shares are available to the public through the
purchase of certain variable annuity and variable life insurance contracts
("Contract(s)") issued by the Companies. As a Contract owner, your premium
payments are allocated to the Fund through these separate accounts in accordance
with your Contract. Please see the Contract prospectus that accompanies this
Prospectus for a detailed explanation of your Contract.
You should consider investing in the Fund if you want to invest in the fixed
income market generally without regard to particular types of issuers, sectors,
or debt securities. Such investments in the past have offered current income.
There is, of course, no guarantee that the Fund will realize its goal.
You should not consider investing in the U.S. Bond Index Fund if you are
pursuing a short-term financial goal or are investing to achieve capital
appreciation.
The Fund by itself does not constitute a balanced investment program. It can,
however, provide a complementary investment for investors seeking a more
balanced asset mix. Diversifying your investments may improve your long-run
investment return and lower the volatility of your overall investment portfolio.
An index is a group of securities whose overall performance is used as a
standard to measure investment performance. It does not factor in the costs of
buying, selling and holding bonds--costs that are reflected in the Fund's
performance results.
An investment in the U.S. Bond Index Fund is not a deposit of Bankers Trust
Company or any other bank, and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency.
(A note on Fees)
As an investor in the Fund, you would incur various operating costs, including
management expenses. You also would incur fees associated with the Contracts you
purchase. Detailed information about the cost of investing in the Fund is
presented in the accompanying prospectus for the Contracts through which the
Fund's shares are offered to you.
The Fund has not commenced operations as of the date of this Prospectus;
therefore, no performance information is being presented to you.
A Detailed Look
at the U.S. Bond Index Fund
OBJECTIVE
The Fund seeks to match, as closely as possible, before expenses, the
performance of the Lehman Bond Index. While we give priority to matching the
Index's performance, we cannot offer any assurance of achieving this objective.
The Fund's objective is not a fundamental policy. We must notify shareholders
before we change it, but we are not required to seek their approval to do so.
Index Versus Active Management
Active management involves the investment adviser buying and selling securities
based on research and analysis. Unlike a fund that is actively managed, an index
fund tries to match, as closely as possible, the performance of a target index
by holding either all, or a representative sample, of the securities in the
index. Indexing appeals to many investors for the following reasons:
indexing provides simplicity because it is a straightforward
market-matching strategy; index funds generally provide diversification by
investing in a wide variety of companies and industries; an index fund's
performance is predictable in that the Fund's value is expected to move in
the same direction, up or down, as
the target index;
index funds tend to have lower costs because they do not have many of the
expenses of actively managed funds such as research; and
index funds generally have low realization of capital gains.
STRATEGY
The Fund attempts to match the investment performance of the Lehman Bond Index
over time by investing in a statistically selected sample of the securities in
the Lehman Bond Index.
PRINCIPAL INVESTMENTS
Under normal circumstances, we pursue the Fund's objective by investing at least
80% of the Fund's assets in securities that are included in the Lehman Bond
Index. The Fund's securities are weighted to make the Fund's total investment
characteristics similar to those of the Lehman Bond Index as a whole. Over the
long term, the Investment Adviser seeks a correlation between the performance of
the Fund, before expenses, and the Lehman Bond Index of 95% or better. (A figure
of 100% would indicate perfect correlation.)
The Fund may hold up to 25% of its assets in short-term debt securities, money
market instruments, stock index futures and options. Futures and options are
considered derivatives because they "derive" their value from a traditional
security (like a stock or bond), asset or index. The Fund intends to buy futures
in anticipation of buying stocks.
Futures contracts and options on futures contracts are used as a low-cost method
of gaining exposure to a particular securities market without investing directly
in those securities. The Fund also invests in derivatives to keep cash on hand
to meet shareholder redemptions or other needs while maintaining exposure to the
stock market.
INVESTMENT PROCESS
The Fund normally does not hold every one of the 6,000 securities in the Lehman
Bond Index. Instead it invests in a representative sample of the securities that
make up the Lehman Bond Index, which tracks four major classes of investment
grade fixed-income securities. The chart below shows the proportion of the
market value of the Index as of [date] that each class of securities has
recently constituted. The Fund also attempts to match the Lehman Bond Index's
duration of [years], an intermediate term. This duration has tended to make the
Fund's returns higher but more volatile than short-term securities found in
money market funds although less volatile than long-term bonds.
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Class of securities % of Market Value of Index
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U.S. Treasury and agency securities 49
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Mortgage-backed securities 30
- --------------------------------------------------------------------- -------------------------------------
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Corporate bonds 16
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Bonds issued outside the U.S. but payable in U.S. dollars 4
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- --------------------------------------------------------------------- -------------------------------------
Other debt securities 1
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PORTFOLIO TURNOVER
The annual portfolio turnover rate measures the frequency that the Fund sells
and replaces the value of its securities within a given period. We anticipate
that the Fund will have a low portfolio turnover rate.
RISKS
Below we set forth some of the prominent risks associated with investing in
general, with index investing and with investing in bonds.
Primary Risks
Market Risk. Deteriorating market conditions might cause an overall weakness in
the market that reduces the absolute level of securities prices in that market.
Developments in a particular class of bonds or the stock market could also
adversely affect the Fund by reducing the relative attractiveness of bonds as an
investment. Investment grade debt securities similar to those held by the Fund
have experienced a moderate level of short-term price fluctuation.
Tracking Error. There are several reasons that the Fund's performance may not
match the Lehman Bond Index exactly: Unlike the Lehman Bond Index, the
Fund incurs administrative expenses and transaction costs in trading
bonds. The composition of the Lehman Bond Index and the bonds held by the
Fund may occasionally diverge. The timing and magnitude of cash inflows
from investors buying shares could create balances of uninvested cash.
Conversely, the
timing and magnitude of cash outflows to investors selling shares could
require ready reserves of uninvested cash. Either situation would likely
cause the Fund's performance to deviate from the "fully invested" Lehman
Bond Index.
Interest Rate Risk. Interest rate risk is the risk that fixed-income securities
will decline in value because of changes in interest rates. Generally,
investments subject to interest rate risk will decrease in value when interest
rates rise and increase in value when interest rates decline.
Credit Risk. An investor purchasing bonds faces the risk that the
creditworthiness of the issuer may decline, causing the value of its bonds to
decline. In addition, the issuers may not be able to make timely payments on the
interest and principal on the bonds they have issued.
Prepayment Risk. When a bond issuer, such as an issuer of mortgage-backed
securities, retains the right to pay off a high yielding bond before it comes
due, the Fund may have no choice but to reinvest the proceeds at lower interest
rates. Thus, prepayment may reduce the Fund's income. It may also create a
capital gains tax liability, because bond issuers usually pay a premium for the
right to pay off bonds early.
Futures and Options. The Fund may invest, to a limited extent, in securities
index futures or options, which are types of derivatives. The Fund will not use
these derivatives for speculative purposes or as leveraged investments that
magnify the gains or losses of an investment. The Fund invests in derivatives to
keep cash on hand to meet shareholder redemptions or other needs while
maintaining exposure to the stock market. Risks associated with derivatives
include:
the risk that the derivative will not fully offset the underlying
positions; the risk that derivatives used for risk management may not have
the intended effects and may result in losses or missed opportunities; and
the risk that the Fund cannot sell the derivative because of an illiquid
secondary market.
If the fund invests in futures contracts and options on futures contracts for
nonhedging purposes, the margin and premiums required to make those investments
will not exceed 5% of the Fund's net asset value after taking into account
unrealized profits and losses on the contracts. Futures contracts and options on
futures contracts used for nonhedging purposes involve greater risks than other
investments.
Secondary Risk
Pricing Risk. We value securities in the Fund at their stated market value if
price quotations are available and, if not, by the method that most accurately
reflects their current worth in the judgment of the Board of Trustees. This
procedure implies an unavoidable risk, the risk that our prices are higher or
lower than the prices that the securities might actually command if we sold
them. If we have valued the securities too highly, you may end up paying too
much for Fund shares when you buy. If we underestimate their price, you may not
receive the full market value for your Fund shares when you sell.
Year 2000 Risk. As with most businesses, the Fund faces the risk that the
computer systems of its Investment Adviser and other companies on which it
relies for service or in which it invests will not accommodate the
changeover necessary from dates in the year 1999 to dates in the year 2000.
These risks could adversely affect: the companies in which the Fund
invests, which could impact the value of the Fund's investments; our
ability to service your Fund account, including our ability to meet your
requests to buy and sell Fund shares; and our ability to trade securities
held by the Fund or to accurately price securities held by the Fund.
We are working both internally and with our business partners and service
providers to address this problem. If we--or our business partners, service
providers, government agencies or other market participants--do not succeed, it
could materially affect shareholder services or the value of the Fund's shares.
MANAGEMENT OF THE FUND
Board of Trustees. The Fund's shareholders, voting in proportion to the number
of shares each owns, elect a Board of Trustees, and the Trustees supervise all
the Fund's activities on their behalf. The separate accounts of the Companies
are the shareholders of record of the Fund's shares. Any reference to the
shareholder in this Prospectus technically refers to the Companies' separate
accounts and not to you, the Contract owner.
Investment Adviser. Under the supervision of the Board of Trustees, Bankers
Trust Company, with headquarters at 130 Liberty Street, New York, NY 10006, acts
as the Fund's Investment Adviser. As Investment Adviser, Bankers Trust makes the
Fund's investment decisions and assumes responsibility for the securities the
Fund owns. It buys and sells securities for the Fund and conducts the research
that leads to the purchase and sale decisions. Bankers Trust is entitled to
receive a fee of 0.15% of the Fund's average daily net assets for its services.
As of December 31, 1998, Bankers Trust was the eighth largest bank holding
company in the United States, with total assets of approximately $156 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 96 offices in more than 43 countries.
Bankers Trust's officers bring wide experience to managing the Fund. The firm's
own record dates back to its founding as a trust company in 1903. It has
invested retirement assets on behalf of the nation's largest corporations and
institutions for more than 50 years. Today, the assets under its global
management exceed $338 billion. The scope of the firm's capability is broad--it
is a leader in both the active and passive quantitative investment disciplines
and maintains a major presence in stock and bond markets worldwide.
The Investment Adviser is a wholly owned subsidiary of Bankers Trust
Corporation. On November 30, 1998, Bankers Trust Corporation entered into an
Agreement and Plan of Merger with Deutsche Bank AG under which Bankers Trust
Corporation would merge with and into a subsidiary of Deutsche Bank AG. Deutsche
Bank AG is a major global banking institution that is engaged in a wide range of
financial services, including retail and commercial banking, investment banking
and insurance. The transaction is contingent upon various regulatory approvals,
as well as the approval of the Fund's shareholders. If the transaction is
approved and completed, Deutsche Bank AG, as the Investment Adviser's new parent
company, will control the operations of the Investment Adviser. Bankers Trust
believes that, under this new arrangement, the services provided to the Fund
will be maintained at their current level.
Portfolio Manager
Louis R. D'Arienzo, Principal of Bankers Trust, is responsible for the
day-to-day management of the Fund. Joined Bankers Trust in 1981 16 years
of investment experience Bachelor's degree in Finance from New York
University
CALCULATING THE FUND'S SHARE PRICE
We calculate the daily price of the Fund's shares (also known as the "Net Asset
Value" or "NAV") in accordance with the standard formula for valuing mutual fund
shares at the close of regular trading on the New York Stock Exchange every day
the Exchange is open for business.
The formula calls for deducting all of the Fund's liabilities from the total
value of its assets--the market value of the securities it holds, plus its cash
reserves--and dividing the result by the number of shares outstanding.
We value the securities in the Fund at their stated market value if price
quotations are available. When price quotations for a particular security are
not readily available, we determine their value by the method that most
accurately reflects their current worth in the judgment of the Board of
Trustees.
Open for business: The Exchange is open every week, Monday through Friday,
except when the following holidays are celebrated: New Year's Day, Martin Luther
King, Jr. Day (the third Monday in January), 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 fourth Thursday
in November) and Christmas Day.
DIVIDENDS AND DISTRIBUTIONS
If the Fund earns investment income or recognizes taxable net capital gains, it
is the Fund's policy to distribute to the Companies' separate accounts
substantially all of that taxable income or capital gain on an annual basis.
These distributions are automatically made in the form of additional shares of
the Fund and not cash, unless you, the Contract owner, elect to receive
distributions in cash. The result of automatic reinvestment of distributions is
that the Fund's performance, including the effect of dividends, is reflected in
the cash value of the Contracts you own. Please see the Contract prospectus
accompanying this Prospectus for more information.
TAX CONSIDERATIONS
Because shares of the Fund may be purchased only through Contracts, income
dividends or capital gains distributions from the Fund are taxable, if at all,
to the participating Companies and will be exempt from current taxation of the
Contract owner if left to accumulate within the Contract.
Please see the Contract prospectus accompanying this Prospectus for a
description of the Fund's federal tax impact on you as a Contract owner.
Because each investor's tax circumstances are unique and because the tax laws
are subject to change, we recommend that you consult your tax adviser about your
investment.
<PAGE>
BUYING AND SELLING SHARES
The Fund does not sell its shares directly to the public. The Fund continuously
sells its shares to each Company's separate accounts, without a sales charge, at
the next net asset value per share determined after a proper purchase order is
placed with the Company. The Company offers to Contract owners 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 of their Contract owners, as set forth in the
accompanying prospectus for the Contracts. Redemption orders are effected at the
next net asset value per share determined after a proper redemption order is
placed with the Company.
Please see the Contracts prospectus that accompanies this Prospectus for a
detailed description of your Contract and its allocation, transfer and
withdrawal provisions.
FINANCIAL HIGHLIGHTS
Because the Fund has not yet commenced operations, it has no financial
performance information to present to you in this Prospectus.
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BACK COVER
After the Fund commences operations, additional information about the Fund's
investments will be available in the Fund's annual and semiannual reports to
shareholders. In the Fund's annual report, you will find a discussion of the
market conditions and investment strategies that significantly affected the
Fund's performance during its last fiscal year.
You can find more detailed information about the Fund in the current Statement
of Additional Information, dated April 30, 1999, which we have filed
electronically with the Securities and Exchange Commission (SEC) and which is
incorporated by reference into this Prospectus. To receive your free copy of the
Statement of Additional Information, the annual or semiannual report, or if you
have questions about investing in the Fund, call the customer service center at
the telephone number shown in the accompanying Contract prospectus.
You can find reports and other information about the Fund on the SEC website
(http://www.sec.gov), or you can get copies of this information, after payment
of a duplicating fee, by writing to the Public Reference Section of the SEC,
Washington, D.C. 20549-6009. Information about the Fund, including its Statement
of Additional Information, can be reviewed and copied at the SEC's Public
Reference Room in Washington, D.C. For information on the Public Reference Room,
call the SEC at 1-800-SEC-0330.
U.S. Bond Index Fund
BT Insurance Funds Trust
Investment Company Act file number: 811-07507
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Subject to Completion, Dated February 25, 1999
STATEMENT OF ADDITIONAL INFORMATION April 30, 1999
BT INSURANCE FUNDS TRUST
Small Cap Fund
BT Insurance Funds Trust (the "Trust") is an open-end management investment
company comprised of several funds. The Small Cap Fund (the "Fund") is a
separate series of the Trust. This Statement of Additional Information describes
the Fund's Shares.
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's shares is First Data Distributors, Inc. (the
"Distributor" or "First Data Distributors").
The Prospectus for the Fund is dated April 30, 1999. The Prospectus provides the
basic information investors should know before investing. 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. You may
request a copy of the prospectus or a paper copy of this SAI, if you have
received it electronically, free of charge by calling the Customer Service
Center at the telephone number shown in the Contract prospectus. This SAI is not
an offer for the Fund for which an investor has not received a Prospectus. This
SAI is not an offer of any Fund for which an investor has not received a
Prospectus. Capitalized terms not otherwise defined in this SAI have the
meanings accorded to them in the Fund's Prospectus. The financial statements for
the Fund for the fiscal year ended September 30, 1998, are incorporated herein
by reference to the Annual Report to shareholders for the Fund dated September
30, 1998. A copy of the Fund's Annual Report may be obtained without charge by
calling the Customer Service Center at the telephone number shown in the
Contract prospectus.
BANKERS TRUST COMPANY
Investment Adviser of the Fund
FIRST DATA DISTRIBUTORS, INC.
Distributor
4400 Computer Drive
Westborough, MA 01581
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TABLE OF CONTENTS
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS....................................................................... 3
Investment Objective............................................................................................. 3
Investment Policies.............................................................................................. 3
Additional Risk Factors........................................................................................ 12
Investment Restrictions........................................................................................ 14
Portfolio Transactions and Brokerage Commissions............................................................... 15
PERFORMANCE INFORMATION............................................................................................. 16
Standard Performance Information............................................................................... 16
Comparison of Fund Performance................................................................................. 17
Economic and Market Information................................................................................ 18
VALUATION OF SECURITIES; REDEMPTIONS AND PURCHASES IN KIND.......................................................... 18
Valuation of Securities........................................................................................ 18
Purchase and Redemption of Shares.............................................................................. 19
Redemptions and Purchases in Kind.............................................................................. 19
Trading in Foreign Securities............................................................................... 19
MANAGEMENT OF THE TRUST............................................................................................. 20
Trustees and Officers.......................................................................................... 20
Investment Adviser............................................................................................. 21
Administrator....................................................................................................... 22
Distributor.................................................................................................... 23
Custodian and Transfer Agent................................................................................... 23
Expenses....................................................................................................... 23
Use of Name.................................................................................................... 23
Banking Regulatory Matters..................................................................................... 23
Counsel and Independent Accountants............................................................................ 23
ORGANIZATION OF THE TRUST........................................................................................... 24
TAXATION............................................................................................................ 24
Taxation of the Fund........................................................................................... 24
Distributions.................................................................................................. 25
Other Taxation................................................................................................. 25
Foreign Withholding Taxes...................................................................................... 25
FINANCIAL STATEMENTS................................................................................................ 25
APPENDIX............................................................................................................ 26
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INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
Investment Objective
Small Cap Fund's investment objective is long-term capital growth.
The production of any current income is secondary to the Fund's investment
objective and there can, of course, be no assurance that the Fund will achieve
its investment objective.
Investment Policies
Equity Securities. As used herein, "equity securities" are defined as common
stock, preferred stock, trust or limited partnership interests, rights and
warrants to subscribe to or purchase such securities, sponsored or unsponsored
ADRs, EDRs, GDRs, 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. Common stocks, the most familiar type, represent an
equity (ownership) interest in a corporation. Although equity securities have a
history of long-term growth in value, their prices fluctuate based on changes in
a company's financial condition and on overall market and economic conditions.
Smaller companies are especially sensitive to these factors.
Debt Securities. Although not a principal investment, the Fund may invest in
debt securities. Bonds and other debt instruments are used by issuers to borrow
money from investors. The issuer pays the investor a fixed or variable rate of
interest, and must repay the amount borrowed at maturity. Some debt securities,
such as zero coupon bonds, do not pay current interest, but are purchased at a
discount from their face values. Debt securities, loans, and other direct debt
have varying degrees of quality and varying levels of sensitivity to changes in
interest rates. Longer-term bonds are generally more sensitive to interest rate
changes than short-term bonds.
Lower-quality foreign government debt securities are often considered to be
speculative and involve greater risk of default or price changes, or they may
already be in default. These risks are in addition to the general risks
associated with foreign securities.
Convertible Securities. A convertible security is a bond or preferred stock that
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.
Preferred Stock. Preferred stock has a preference in liquidation (and, generally
dividends) over common stock but is subordinated in liquidation to debt. As a
general rule the market value of preferred stocks with fixed dividend rates and
no conversion rights varies inversely with interest rates and perceived credit
risk, with the price determined by the dividend rate. Some preferred stocks are
convertible into other securities, for example common stock, at a fixed price
and ratio or upon the occurrence of certain events. The market price of
convertible preferred stocks generally reflects an element of conversion value.
Because many preferred stocks lack a fixed maturity date, these securities
generally fluctuate substantially in value when interest rates change; such
fluctuations often exceed those of long-term bonds of the same issuer. Some
preferred stocks pay an adjustable dividend that may be based on an index,
formula, auction procedure or other dividend rate reset mechanism. In the
absence of credit deterioration, adjustable rate preferred stocks tend to have
more stable market values than fixed rate preferred stocks.
All preferred stocks are also subject to the same types of credit risks of the
issuer as corporate bonds. In addition, because preferred stock is junior to
debt securities and other obligations of an issuer, deterioration in the credit
rating of the issuer will cause greater changes in the value of a preferred
stock than in a more senior debt security with similar yield characteristics.
Preferred stocks may be rated by Standard & Poor's Ratings Group ("S&P") and
Moody's Investors Services, Inc. ("Moody's") although there is no minimum rating
which a preferred stock must have (and a preferred stock may not be rated) to be
an eligible investment for the Fund. The Adviser expects, however, that
generally the preferred stocks in which the Fund invests will be rated at least
CCC by S&P or Caa by Moody's or, if unrated, of comparable quality in the
opinion of the Adviser. Preferred stocks rated CCC by S&P are regarded as
predominantly speculative with respect to the issuer's capacity to pay preferred
stock obligations and represent the highest degree of speculation among
securities rated between BB and CCC; preferred stocks rated Caa by Moody's are
likely to be in arrears on dividend payments. Moody's rating with respect to
preferred stocks does not purport to indicate the future status of payments of
dividends.
Warrants. Warrants are instruments that 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.
U.S. Government Securities. U.S. government securities are high-quality
debt securities issued or guaranteed by the U.S. Treasury or by an agency
or instrumentality of the U.S. government. Not all U.S. government
securities are backed by the full faith and credit of the United States.
For example, securities issued by the Farm Credit Banks or by the Federal
National Mortgage Association are supported by the instrumentality's right
to borrow money from the U.S. Treasury under certain circumstances.
However, securities issued by other agencies or instrumentalities are
supported only by the credit of the entity that issued them.
ADRs, GDRs and EDRs. American Depository Receipts ("ADRs"), Global Depository
Receipts ("GDRs"), and European Depository Receipts ("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.
Zero Coupon Bonds. Zero coupon bonds are the separate income or principal
components of a debt instrument. These involve risks that are similar to those
of other debt securities, although they may be more volatile, and certain zero
coupon bonds move in the same direction as interest rates.
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.
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 (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.
Rule 144A Securities are 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 15% limit on illiquid securities. Under the supervision of the Board of
Trustees of the Fund, the Adviser determines the liquidity of restricted
securities and, through reports from the Adviser, 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.
<PAGE>
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).
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
fluctuations during this period and no income accrues to the Fund until
settlement takes place. The Fund identifies, as part of a segregated account,
cash or liquid securities in an amount at least equal to these commitments.
Lending of Portfolio Securities. The Fund is permitted to lend up to 30% of the
total value of its securities. The Fund will not lend securities to bankers
Trust or its affiliates. These loans must be secured continuously by cash or
equivalent collateral or by a letter of credit at least equal to the market
value of the securities loaned plus 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 financial organizations, the Fund is subject to risks, which like those
associated with other extensions of credit, include delays in recovery and
possible loss of rights in the collateral should the borrower fail financially.
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 at
one price and simultaneously agrees to sell it back at a higher price at a
future date. Delays or losses could result if the other party to the agreement
defaults or becomes insolvent.
Reverse Repurchase Agreements. In a reverse repurchase agreement, the Fund
temporarily transfers possession of a portfolio instrument to another party in
return for cash. This could increase the risk of fluctuation in the Fund's yield
or in the market value of its assets. A reverse repurchase agreement is a form
of borrowing and will be counted toward the Fund's borrowing restrictions.
Investment Companies. 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 registered investment companies that in turn
are authorized to invest in the securities of such countries. Investments in
other investment companies may also be made for other purposes, such as noted
below under "Short-Term Instruments," are limited in amount by the Investment
Company Act of 1940, as amended (the "1940 Act") (except the Fund may exceed the
applicable percentage limits to the extent permitted by an exemptive order of
the SEC), and 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.
Short-Term Instruments. The Fund intends to stay invested in the securities
described herein to the extent practical in light of its objective and long-term
investment perspective. However, the Fund may invest up to 35% of its total
assets in high quality short-term investments with remaining maturities of 397
days or less, or in money market mutual funds, to meet anticipated redemptions
and expenses for day-to-day operating purposes and up to 100% of its total
assets when, in the Adviser's opinion, it is advisable to adopt a temporary
defensive position because of unusual and adverse conditions affecting the
respective markets. 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 invest in short-term instruments for a
limited time pending availability of such portfolio securities. Short-term
instruments consist of U.S. and non-U.S.: (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 the Adviser; (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 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.
Lending of Portfolio Securities. The Fund has the authority to lend up to 30% of
the total value of its securities to brokers, dealers and other financial
organizations. 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. The Fund will not lend securities to
the Adviser or its affiliates. By lending its securities, the 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
interest paid by the borrower when irrevocable letters of credit and U.S.
government obligations are used as collateral. During the term of the loan, the
Fund continues to bear the risk of fluctuations in the price of the loaned
securities. 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% 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 substitute payments in respect of all
dividends, interest or other distributions on the 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. In accordance with approval received from the SEC, 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 the securities lending transactions as
compensation for this service.
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. 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. The Adviser will use
derivatives only in circumstances where they offer the most efficient means of
improving the risk/reward profile of the Fund and when consistent with the
Fund's investment objective and policies. The use of derivatives for non-hedging
purposes may be considered speculative.
Currency Exchange Transactions. 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 currency exchange transactions to convert to
and from different currencies and to convert 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 currency exchange market or uses
forward contracts to purchase or sell foreign currencies.
Forward Currency Exchange Contracts. 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
brokerages) and their customers. A forward foreign currency exchange contract
may not have a deposit requirement and may be traded at a net price without
commission. The Fund maintains with its custodian a segregated account of cash
or liquid securities 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.
<PAGE>
While these contracts are not presently regulated by the Commodity Futures
Trading Commission ("CFTC"), the CFTC may in the future assert authority to
regulate forward contracts. In such event the Fund's ability to utilize forward
contracts 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 contract to
hedge or cross-hedge its assets. Also, with regard to the 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 poor correlation may exist between movements in the
exchange rates of the foreign currencies underlying the 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.
Options on Foreign Currencies. The 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, the 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, the 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.
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.
The Fund may write options on foreign currencies for the same types of hedging
purposes. For example, where the 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 options 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, the 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.
The Fund may write covered call options on foreign currencies. A call option
written on a foreign currency by the 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 or liquid securities in a
segregated account with its custodian.
<PAGE>
The Fund also may 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 liquid securities in an amount not less than the value of the
underlying foreign currency in U.S. dollars marked to market daily.
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 underlying
currency. The Fund pays brokerage commissions or spreads in connection with its
options transactions.
Options on Securities. 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. The Fund may
also 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. In addition the Fund may continue to hold a stock which might
otherwise have been sold to protect against depreciation in the market price of
the stock.
A put option sold by the Fund is covered when, among other things, cash or
securities acceptable to the broker are place in a segregated account to fulfill
the obligations undertaken.
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.
<PAGE>
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 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.
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. 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 Fund's Trustees. 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." Unless the Trustees conclude otherwise, the Fund
intends to treat OTC options as not readily marketable and therefore subject to
the Fund's 15% limitation on investment in illiquid securities.
Options on Securities Indices. In addition to options on securities, the Fund
may also purchase and write (sell) call and put options on domestic and foreign
stock exchanges, in lieu of direct investment in the underlying securities for
hedging purposes. 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."
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.
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.
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 the 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. 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 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.
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.
Futures Contracts and Options on Futures Contracts.
General. The successful use of futures contracts and options thereon 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.
Futures Contracts. Futures contracts are contracts to purchase or sell a fixed
amount of an underlying instrument, commodity or index at a fixed time and place
in the future. 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 clear through their clearing corporations. The Fund may enter into
contracts for the purchase or sale for future delivery of fixed-income
securities, foreign currencies, or financial indices including any index of U.S.
government securities, foreign government securities or corporate debt
securities. 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, Government National
Mortgage Association ("GNMA") 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 governments other than the U.S.
government.
Futures contracts on foreign currencies may be used to hedge against
securities that are denominated in foreign currencies.
At the same time a futures contract is entered into, the Fund must allocate cash
or securities as a deposit payment ("initial margin"). The initial margin
deposits are set by exchanges and may range between 1% and 10% 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 (other than those that settle in cash such as index
futures) by their terms call for the actual delivery or acquisition of the
instrument underlying the contract, in most cases the contractual obligation is
fulfilled by offset before the date of the contract without having to make or
take delivery of the instrument underlying the contract. The offsetting of a
contractual obligation is accomplished by entering into an opposite position in
the identical futures contract on the commodities exchange on which the futures
contract was entered into (or a linked exchange). Such a transaction, which is
effected through a member of an exchange, cancels the obligation to make or take
delivery of the instrument underlying the contract. 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 enters into futures contracts.
The assets in the segregated asset account maintained to cover the Fund's
obligations with respect to such futures contracts will consist of cash or
securities acceptable to the broker 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 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 most
participants entering into offsetting transactions rather than making or taking
delivery. To the extent that many 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 lending 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 or currency exchange
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. For example, when the Fund
is not fully invested it may purchase a call option on an interest rate
sensitive futures contract to hedge against a potential price increase on debt
securities due to declining interest rates. 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 an interest rate sensitive futures contract to hedge its portfolio against
the risk of a decline in the price of debt securities and to rising interest
rates.
The writing of a call option on a futures contract may constitute a partial
hedge against declining prices of portfolio securities which are the same as or
correlate with the security or currency of 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, 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 may constitute a partial hedge against increasing prices of
intended portfolio securities which are the same as or correlate with 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 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.
<PAGE>
Futures Contracts on Securities Indices. The Fund may enter into futures
contracts providing for cash settlement based upon changes in the value of an
index of domestic or foreign securities. This investment technique is designed
as a low-cost method of gaining exposure to a particular securities market
without investing directly in those securities or 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.
In general, each transaction in futures contracts on a securities index involves
the establishment of a position which the Adviser believes 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 on securities indices would be entered into for
hedging purposes only, such transactions do involve certain risks. These risks
include a lack of correlation between the futures contract and the foreign
equity market being hedged, and incorrect assessments of the market trends which
may result in poorer overall performance than if a futures contract had not been
entered into. Futures may fail as hedging techniques in cases where the price
movements of the securities underlying the futures do not follow the price
movements of the portfolio securities subject to the hedge. The loss from
investing in futures transactions is potentially unlimited. Gains and losses on
investments in futures depend on the portfolio manager's ability to predict
correctly the direction of stock prices, interest rates, and other economic
factors. The Fund will likely be unable to control losses by closing its
position where a liquid secondary market does not exist.
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 segregating with the
Fund's Custodian or futures commission merchant liquid securities in an amount
at all times equal to or exceeding the Fund's commitment with respect to these
instruments or contracts.
Investment Restriction on Futures Transactions. 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 net assets of the Fund.
Additional Risk Factors
In addition to the risks discussed above, the Fund's investments may be subject
to the following risk factors:
Investing in Foreign Securities. The Fund will, under normal market conditions,
invest a significant portion of its assets 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 or (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 or gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency or 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 Untied 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 portfolio liquidity. Finally, there may be less government
supervision and regulation of securities exchanges, brokers and issuers in
foreign countries than in the United States.
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 S&P 500. 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 prices as large company stocks decline.
Options on Futures Contracts, Forward Contracts and Options on Foreign
Currencies. Unlike transactions entered into by the 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 principals, 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. 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.
Forward Contracts and options on foreign currencies traded over-the-counter
involve liquidity and credit risks which may not be present in the case of
exchange-traded currency options. 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.
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 the 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.
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 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.
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, the Adviser also makes its own
evaluation of these securities, subject to review by the Board of Trustees.
After purchase by the 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 the Fund to eliminate the obligation from its portfolio, but
the Adviser will consider such an event in its determination of whether the Fund
should continue to hold the obligation. A description of the ratings is included
in the Appendix herein.
<PAGE>
Investment Restrictions
Fundamental Policies. The following investment restrictions are "fundamental
policies" of the 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 1940 Act, and as used
in this SAI, 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.
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.
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
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 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 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, 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.
Additional Restrictions. These are non-fundamental policies. In order
to comply with certain statutes and policies, the Fund will not as a matter of
operating policy (except that such policies may be changed by the Board of
Trustees):
(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 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;
(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);
(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.
There will be no violation of any investment restriction (except with
respect to fundamental investment restriction (1) above) if that
restriction is complied with at the time the relevant action is taken,
notwithstanding a later change in the market value of an investment, in
net or total assets or in the change of securities rating of the
investment, or any other later change.
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 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 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, 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 Conduct Rules of the National
Association of Securities Dealers, Inc. and such other policies as the Trustees
of the Fund may determine, the Adviser may consider sales of shares of the Trust
and of other investment company clients of the Adviser as a factor in the
selection of broker-dealers to execute portfolio transactions. The Adviser 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. The Adviser 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 Fund 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.
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. For mutual funds
performance is commonly measured as total return. The Fund's performance is
affected by its expenses. These performance figures are calculated in the
following manner:
Total return: 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. 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: Total returns are based on past results and are not
an indication of future performance. 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, but also on
changes in the current value of such securities and on changes in the
expenses of the Fund. These factors and possible differences in the
methods used to calculate total return should be considered when
comparing the total return of the Fund to total returns published for
other investment companies or other investment vehicles.
Total return reflects the performance of both principal and income.
<PAGE>
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. The Fund's performance may
be compared to the performance of various indices and investments for which
reliable data is available. The Fund's performance may also be compared to
averages, performance rankings, or other information prepared by recognized
mutual fund statistical services. 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, a weekly Asian newspaper that often reviews U.S.
mutual funds investing internationally.
Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds investing abroad.
Changing Times, The Kiplinger Magazine, a monthly investment advisory
publication that periodically features the performance of a variety of
securities.
Consumer Digest, a monthly business/financial magazine that includes a "Money
Watch" section featuring financial news.
Financial Times, Europe's business newspaper, which features from time to time
articles on international or country-specific funds.
Financial World, a general business/financial magazine that includes a "Market
Watch" department reporting on activities in the mutual fund industry.
Forbes, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the performance
of a variety of mutual funds.
Global Investor, a European publication that periodically reviews the
performance of U.S. mutual funds investing internationally.
Investor's Daily, a daily newspaper that features financial, economic and
business news.
Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a weekly
publication of industry-wide mutual fund averages by type of fund.
Money, a monthly magazine that from time to time features both specific funds
and the mutual fund industry as a whole.
Morningstar Inc., a publisher of financial information and mutual fund research.
New York Times, a nationally distributed newspaper which regularly covers
financial news.
Personal Investing News, a monthly news publication that often reports on
investment opportunities and market conditions.
Personal Investor, a monthly investment advisory publication that includes a
"Mutual Funds Outlook" section reporting on mutual fund performance measures,
yields, indices and portfolio holdings.
Success, a monthly magazine targeted to the world of entrepreneurs and growing
business, often featuring mutual fund performance data.
U.S. News and World Report, a national business weekly that periodically
reports mutual fund performance data.
ValueLine, a biweekly publication that reports on the largest 15,000 mutual
funds.
Wall Street Journal, a Dow Jones and Company, Inc. newspaper which
regularly covers financial news.
Weisenberger Investment Companies Services, an annual compendium of information
about mutual funds and other investment companies, including comparative data on
funds' backgrounds, management policies, salient features, management results,
income and dividend records, and price ranges.
Working Women, a monthly publication that features a "Financial Workshop"
section reporting on the mutual fund/financial industry.
Economic and Market Information
Advertising and sales literature of the Fund may include discussions of
economic, financial and political developments and their effect on the
securities market. Such discussions may take the form of commentary on these
developments by Fund portfolio managers and their views and analysis on how such
developments could affect the Fund. In addition, advertising and sales
literature may quote statistics and give general information about the mutual
fund industry, including the growth of the industry, from sources such as the
Investment Company Institute ("ICI").
VALUATION OF SECURITIES; REDEMPTIONS AND PURCHASES IN KIND
Valuation of Securities
The Fund is open for business each day the New York Stock Exchange, Inc.
("NYSE") is open (a "Valuation Day"). The Fund's net asset value ("NAV") per
share is calculated as of the close of regular trading on the NYSE, which is
currently 4:00 p.m., Eastern time (the "Valuation Time"). The NAV per share is
computed by dividing the value of the Fund's assets, less all liabilities
attributable to the shares, by the total number of shares outstanding.
A NAV for the 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 is 0.005 (1/2 of 1%) or less or shareholder transactions are
otherwise insubstantially affected, further action is not required.
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.
The Fund's securities and other assets are valued primarily on the basis of
market quotations or, if quotations are not readily available, by a method which
the Fund's Board of Trustees believes accurately reflects fair value. 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,
under the supervision of the Board of Trustees, will value such securities based
upon all relevant factors as outlined in FRR 1.
<PAGE>
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
Contract owners 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 Contract owners. Contract owners 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 Contract owner'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 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.
Redemptions and Purchases in Kind
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 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.
Each investor in the Fund may add to or reduce their investment in the Fund on
each day the Fund determines its net asset value. At the close of each such
business day, the value of each investor's beneficial interest in the Fund will
be determined by multiplying the net asset value of the Fund by the percentage,
effective for that day, which represents that investor's share of the aggregate
beneficial interests in the Fund. Any additions or withdrawals which are to be
effected as of the close of business on that day will then be effected. The
investor's percentage of the aggregate beneficial interests in the Fund will
then be recomputed as the percentage equal to the fraction (i) the numerator of
which is the value of such investor's investment in the Fund as of the close of
business on such day plus or minus, as the case may be, the amount of net
additions to or withdrawals from the investor's investment in the Fund effected
as of the close of business on such day, and (ii) the denominator of which is
the aggregate net asset value of the Fund as of the close of business on such
day plus or minus, as the case may be, the amount of net additions to or
withdrawals from the aggregate investments in the Fund by all investors in the
Fund. The percentage so determined will then be applied to determine the value
of the investor's interest in the Fund as the close of business on the following
business day.
The Fund may, at its own option, accept securities in payment for shares. The
securities delivered in payment for shares are valued by the method described
under "Valuation of Securities" as of the day the Fund receives the securities.
This is a taxable transaction to the shareholder. Securities may be accepted in
payment for shares only if they are, in the judgment of Bankers Trust,
appropriate investments for the Fund. In addition, securities accepted in
payment for shares must: (i) meet the investment objective and policies of the
Fund; (ii) be acquired by the Fund for investment and not for resale; (iii) be
liquid securities which are not restricted as to transfer either by law or
liquidity of market; and (iv) if stock, have a value which is readily
ascertainable as evidenced by a listing on a stock exchange, over-the-counter
market or by readily available market quotations from a dealer in such
securities. When securities are used as payment for shares or as a redemption in
kind from the fund, the transaction fee will not be assessed. However, the
shareholder will be charged the costs associated with receiving or delivering
the securities. These costs include security movement costs and taxes and
registration costs. The Fund reserves the right to accept or reject at its own
option any and all securities offered in payment for its shares.
Trading in Foreign Securities
Trading in foreign cities may be completed at times which vary from the closing
of the New York Stock Exchange ("NYSE"). In computing the net asset values, the
Fund values foreign securities at the latest closing price on the exchange on
which they are traded immediately prior to the closing of the NYSE. Similarly,
foreign securities quoted in foreign currencies are translated into U.S.
dollars at the foreign exchanges.
Occasionally, events that affect values and exchange rates may occur between the
times at which they are determined and the closing of the NYSE. If such events
materially affect the value of portfolio securities, these securities may be
valued at their fair value as determined in good faith by the Trustees, although
the actual calculation may be done by others.
MANAGEMENT OF THE TRUST
The Trust is governed by a Board of Trustees which is responsible for
protecting the interests of investors. None of the executive officers of the
Trust or the Fund devotes full time to the affairs of the Trust or the Fund.
The Board of Trustees is comprised 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, their birthdates, their principal
occupations during the past five years, and addresses are set forth below. Their
titles may have varied during that period. Unless otherwise indicated, the
address of each Trustee and officer is 101 Federal Street, Boston, Massachusetts
02110.
<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, 47 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, 55 Trustee Chairman of North American Properties
2015 West Main Street Group since January 1987.
Stamford, CT 06902
James S. Pasman, Jr., 68 Trustee Retired; President and Chief Operations
29 The Trillium Officer of National Intergroup Inc.
Pittsburgh, PA 15238 (1989-1991).
William E. Small, 57 Trustee and President Independent Consultant (1996-present);
Formerly Executive Vice President of
First Data Investor Services Group Inc.
("Investor Services Group") (1993-1996).
Elizabeth Russell, 36 Vice President and Secretary Counsel of Investor Services Group
since 1994; Assistant Vice President
and Counsel, The Boston Company
Advisors, Inc. (1993-1994).
Gerald J. Holland, __ Treasurer Vice President of Investor Services
Group since 1994; Senior Vice President
of Finance and Administration for
Delaware Management Company, Inc and
its affiliates prior to 1994.
</TABLE>
Mr. Holland and Ms. 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 September
30, 1998, was as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
(1) (2) (3) (4) (5)
Pension or Retirement Total Compensation
Aggregate Benefits Accrued as Estimated Annual from Registrant and
Name of Compensation Part of Benefits Fund Complex
Board Member from Fund* Fund's Expenses Upon Retirement
Robert R. Coby $ N/A N/A $
Desmond G. FitzGerald $ N/A N/A $
James S. Pasman, Jr. $ N/A N/A $
William E. Small $ N/A N/A $
* Amount does not include reimbursed expenses for attending Board meetings,
which amounted to $____ for all Trustees as a group.
As of _________, 1999 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).
As of ______, __, 1999, the following shareholders of record owned 5% or
more of the outstanding shares of the Fund: [TO BE PROVIDED]
</TABLE>
Name and Address Percentage Owned
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 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
market. As of December 31, 1998, Bankers Trust Corporation was the eighth
largest bank holding company in the United States with total assets of over $156
billion. 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 $338 billion in assets under management globally.
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 Fund. Bankers Trust
will: (i) act in strict conformity with the Fund'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 Fund's business and affairs; and (vi) supervise the performance of
professional services provided by others.
Bankers Trust, subject to the supervision and direction of the Board of Trustees
of the Fund, 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 investment adviser. All orders for investment transactions on behalf
of the Fund are placed by the Adviser 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.
The Investment Adviser is a wholly owned subsidiary of Bankers Trust
Corporation. On November 30, 1998, Bankers Trust Corporation entered into an
Agreement and Plan of Merger with Deutsche Bank AG under which Bankers Trust
Corporation would merge with and into a subsidiary of Deutsche Bank AG. Deutsche
Bank AG is a major global banking institution that is engaged in a wide range of
financial services, including retail and commercial banking, investment banking
and insurance. The transaction is contingent upon various regulatory approvals,
as well as the approval of the Fund's shareholders. If the transaction is
approved and completed, Deutsche Bank AG, as the Investment Adviser's new parent
company, will control the operations of the Investment Adviser. Bankers Trust
believes that, under this new arrangement, the services provided to the Fund
will be maintained at their current level.
Bankers Trust bears all expenses in connection with the performance of services
under the Management Agreement. The Trust and the Fund bear 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, or any of its 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 or the Fund; and any extraordinary expenses.
The Investment Management Agreement provides for the Fund to pay Bankers Trust a
fee, accrued daily and paid monthly, equal on an annual basis to 0.75% of the
average daily net assets of the Fund.
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 persons issue, deal,
trade and invest for their own accounts and are among the leading market
participants with respect to various types of such securities. Bankers Trust has
informed the Fund that, in making its investment decisions, it 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.
Administrator
Investor Services Group, 101 Federal Street, Boston, Massachusetts 02110, 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 objective 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 Trust 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.
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, 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.
Expenses
In addition to the fees of Bankers Trust, the Fund is responsible for the
payment of all 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 Contract owners, 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 Contract owner servicing, distribution of reports to Contract owners and
prospectus printing and postage will be borne by the relevant Company.
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 adviser 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 Advisory Agreement and
other activities for the Fund and 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.
Counsel and Independent Accountants
Willkie Farr & Gallagher, 787 Seventh Avenue, New York, New York 10019-6099,
serves as Counsel to the Trust and the Fund. Ernst & Young LLP, 2001 Market
Street, Philadelphia. Pennsylvania 19103 acts as Independent Accountants of the
Trust and the Fund.
ORGANIZATION OF THE TRUST
The Trust was organized on January 19, 1996, under the laws of the Commonwealth
of Massachusetts. The Fund is a separate series of the Trust. The Trust offers
shares of beneficial interest of the Fund and the Trust's other series, par
value $0.001 per share. The shares of some 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
obligation.
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 Contract owners 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
Contract owners' 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 _____, 1999 the Company deemed to be a control
person of the Fund was ________.]
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 annuity or variable life
insurance policies issued by the Companies through their respective separate
accounts. The Fund does not currently foresee any disadvantages to Contract
owners 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 Contract owners. 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
Contract owners will likely increase due to the loss of economies of scale
benefits that can be provided to mutual funds with substantial assets.
TAXATION
Taxation of the Fund
The Fund intends to continue to qualify annually 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 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 Fund also does not
anticipate paying any excise taxes. The Fund's dividends and distributions will
not qualify for the dividends-received deduction for corporations.
If for any taxable year the Fund does not qualify for the special federal income
tax treatment afforded regulated investment companies, all of its taxable income
will be subject to federal income tax at regular corporate rates (without any
deduction for distributions to its shareholders). In such event, dividend
distributions would be taxable to shareholders to the extent of current
accumulated earnings and profits, and would be eligible for the dividends
received deduction for corporations in the case of corporate shareholders.
The Fund's investment in Section 1256 contracts, such as regulated futures
contracts, most forward currency forward contracts traded in the interbank
market and options on most stock indices, are subject to special tax rules. All
section 1256 contracts held by the Fund at the end of its taxable year are
required to be marked to their market value, and any unrealized gain or loss on
those positions will be included in the Fund's income as if each position had
been sold for its fair market value at the end of the taxable year. The
resulting gain or loss will be combined with any gain or loss realized by the
Fund from positions in section 1256 contracts closed during the taxable year.
Provided such positions were held as capital assets and were not part of a
"hedging transaction" nor part of a "straddle," 60% of the resulting net gain or
loss will be treated as long-term capital gain or loss, and 40% of such net gain
or loss will be treated as short-term capital gain or loss, regardless of the
period of time the positions were actually held by the Fund.
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 prospectus 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
The Fund distributes substantially all of its net income and capital gains to
shareholders each year. The Fund distributes income dividends annually. In
addition, the Fund will distribute net capital gains, if any, at least annually
and may make additional capital gains distributions at other times, if required,
to remain in compliance with the applicable tax regulations. Unless a
shareholder instructs the Fund to pay such dividends and distributions in cash,
they will be automatically reinvested in additional shares of the Fund. The
prospectus for a Company's variable annuity or variable life insurance policies
describe the frequency of distributions to Contract owners and the federal
income tax treatment of distributions form such contracts to Contract owners.
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.
Foreign Withholding Taxes
Income received by the Fund from investments in foreign securities may be
subject to withholding and other taxes imposed by foreign countries.
FINANCIAL STATEMENTS
The financial statements for the Fund for the period ended September 30, 1998,
are incorporated herein by reference to the Fund's Annual Report dated September
30, 1998. A copy of the Fund's Annual Report may be obtained without charge by
contacting the Customer Service Center at the telephone number shown in the
contract Prospectus.
<PAGE>
APPENDIX
Description of Moody's Corporate Bond Ratings:
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edge."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa securities.
A - Bonds rated A possess many favorable investment attributes and are to be
considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa - Bonds rated Baa are considered as medium-grade obligations, i.e. they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such, bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba - Bonds rated Ba are judged to have speculative elements. Their future cannot
be considered as well assured. Often the protection of interest and principal
payments may be very moderate and thereby not well safeguarded during both (good
and bad times over the future). Uncertainty of position characterizes bonds in
this class.
B - Bonds rated B generally lack characteristics of a desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked short-comings.
C - Bonds rated C are the lowest-rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Moody's applies numerical modifiers, 1, 2, and 3, in each generic rating
classification from Aa through B in its corporate bond system. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
Description of S&P Corporate Bond Ratings:
AAA - Debt rated AAA has the highest rating assigned by Standard & Poor's to a
debt obligation. Capacity to pay interest and repay principal is extremely
strong.
AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher-rated issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to weakened capacity to pay interest and repay principal for debt
in this category than in higher-rated categories.
BB - Debt rate BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments.
B - Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB- rating.
CCC - Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal.
CC - Debt rated CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating.
C - The rating C is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC- debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed but debt service
payments are continued.
CI - The rating CI is reserved for income bonds on which no interest is being
paid.
D - Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating will also be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
Description of S&P commercial paper ratings:
Commercial paper rated A-1 by S&P indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted A-1+.
Description of Moody's commercial paper ratings:
The rating Prime-1 is the highest commercial paper rating assigned by Moody's.
Issuers rated Prime-1 (or related supporting institutions) are considered to
have a superior capacity for repayment of short-term promissory obligations.
Description of S&P Municipal Bond Ratings:
AAA - Prime - These are obligations of the highest quality. They have the
strongest capacity for timely payment of debt service.
General Obligations Bonds - In a period of economic stress, the issuers will
suffer the smallest declines in income and will be least susceptible to
autonomous decline. Debt burden is moderate. A strong revenue structure appears
more than adequate to meet future expenditure requirements. Quality of
management appears superior.
Revenue Bonds - Debt service coverage has been, and is expected to remain,
substantial, stability of the pledged revenues is also exceptionally strong due
to the competitive position of the municipal enterprise or to the nature of the
revenues. Basic security provisions (including rate covenant, earnings test for
issuance of additional bonds and debt service reserve requirements) are
rigorous. There is evidence of superior management.
AA - High Grade - The investment characteristics of bonds in this group are only
slightly less marked than those of the prime quality issues. Bonds rated AA have
the second strongest capacity for payment of debt service.
A - Good Grade - Principal and interest payments on bonds in this category are
regarded as safe although the bonds are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than bonds in higher
rated categories. This rating describes the third strongest capacity for payment
of debt service. Regarding municipal bonds, the rating differs from the two
higher ratings because:
General Obligation Bonds - There is some weakness, either in the local economic
base, in debt burden, in the balance between revenues and expenditures, or in
quality of management. Under certain adverse circumstances, any one such
weakness might impair the ability of the issuer to meet debt obligations at some
future date.
Revenue Bonds - Debt service coverage is good, but not exceptional. Stability of
the pledged revenues could show some variations because of increased competition
or economic influences on revenues. Basic security provisions, while
satisfactory, are less stringent. Management performance appearance appears
adequate.
S&P's letter ratings may be modified by the addition of a plus or a minus sign,
which is used to show relative standing within the major rating categories,
except in the AAA rating category.
Description of Moody's Municipal Bond Ratings:
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge". Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities, or fluctuation of protective elements
may be of greater amplitude, or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Moody's may apply the numerical modifier in each generic rating classification
from Aa through B. The modifier 1 indicates that the security within its generic
rating classification possesses the strongest investment attributes.
Description of S&P Municipal Note Ratings:
Municipal notes with maturities of three years or less are usually given note
ratings (designated SP-1, or -2) to distinguish more clearly the credit quality
of notes as compared to bonds. Notes rated SP-1 have a very strong or strong
capacity to pay principal and interest. Those issues determined to possess
overwhelming safety characteristics are given the designation of SP-1. Notes
rates SP-2 have a satisfactory capacity to pay principal and interest.
Description of Moody's Municipal Note Ratings:
Moody's ratings for state and municipal notes and other short-term loans are
designated Moody's Investment Grade (MIG) and for variable rate demand
obligations are designated Variable Moody's Investment Grade (VMIG). This
distinction recognizes the differences between short-term credit risk and
long-term risk. Loans bearing the designation MIG 1/VMIG 1 are of the best
quality, enjoying strong protection from established cash flows of funds for
their servicing or from established cash flows of funds for their servicing or
from established and broad-based access to the market for refinancing, or both.
Loans bearing the designation MIG2/VMIG2 are of high quality, with ample margins
of protection, although not as large as the preceding group.
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 ratings 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 tread.
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: leasing
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 rates 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.
<PAGE>
Investment Adviser
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 Prospectus, its
Statements of Additional Information or its 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. 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>
Subject to Completion, Dated February 25, 1999
STATEMENT OF ADDITIONAL INFORMATION
April 30, 1999
BT INSURANCE FUNDS TRUST
International Equity Fund
BT Insurance Funds Trust (the "Trust") is an open-end management investment
company comprised of several funds. The International Equity Fund (the "Fund")
is a separate series of the Trust. This Statement of Additional Information
describes the Fund's shares.
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's shares is First Data Distributors, Inc. (the
"Distributor" or "First Data Distributors").
The Prospectus for the Fund, dated April 30, 1999, provides the basic
information investors should know before investing. 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 Prospectus. You may request a copy of the
prospectus or a paper copy of this SAI, if you have received it electronically,
free of charge by calling the Customer Service Center at the telephone number
shown in the Contract prospectus. This SAI is not an offer for the Fund for
which an investor has not received a Prospectus. Capitalized terms not otherwise
defined in this SAI have the meanings accorded to them in the Fund's Prospectus.
The financial statements for the Fund for the fiscal period ended September 30,
1998, are incorporated herein by reference to the Annual Report to shareholders
for the Fund dated September 30, 1998. A copy of the Fund's Annual Report may be
obtained without charge by calling the Customer Service Center at the telephone
number shown in the Contract prospectus.
BANKERS TRUST COMPANY
Investment Adviser of The Fund
FIRST DATA DISTRIBUTORS, INC.
Distributor
4400 Computer Drive
Westborough, MA 01581
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
TABLE OF CONTENTS
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS................................................................... 3
Investment Objective........................................................................................... 3
Investment Policies............................................................................................ 3
Additional Risk Factors....................................................................................... 12
Investment Restrictions....................................................................................... 14
Portfolio Transactions and Brokerage Commissions.............................................................. 15
PERFORMANCE INFORMATION............................................................................................ 16
Standard Performance Information.............................................................................. 16
Comparison of Fund Performance................................................................................ 17
Economic and Market Information............................................................................... 18
VALUATION OF SECURITIES; REDEMPTIONS AND PURCHASES IN KIND......................................................... 18
Valuation of Securities....................................................................................... 18
Purchase and Redemption of Shares............................................................................. 19
Redemptions and Purchases in Kind............................................................................. 19
Trading in Foreign Securities................................................................................. 19
MANAGEMENT OF THE TRUST............................................................................................ 20
Trustees and Officers......................................................................................... 20
Investment Adviser............................................................................................ 21
Administrator................................................................................................. 22
Distributor................................................................................................... 23
Custodian and Transfer Agent.................................................................................. 23
Expenses...................................................................................................... 23
Use of Name................................................................................................... 23
Banking Regulatory Matters.................................................................................... 23
Counsel and Independent Accountants........................................................................... 24
ORGANIZATION OF THE TRUST.......................................................................................... 24
TAXATION........................................................................................................... 24
Taxation of the Fund.......................................................................................... 24
Distributions................................................................................................. 25
Other Taxation................................................................................................ 25
Foreign Withholding Taxes..................................................................................... 25
FINANCIAL STATEMENTS............................................................................................... 25
APPENDIX........................................................................................................... 26
</TABLE>
<PAGE>
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
Investment Objective
The investment objective of the Fund is long-term capital appreciation. Under
normal circumstances, the Fund invests at least 65% of its assets in stocks and
other securities with equity characteristics of companies primarily based in
developed countries outside the United States. The production of income is
incidental to this objective. There can, of course, be no assurance that the
Fund will achieve its investment objective.
Investment Policies
Under normal circumstances, the Fund invests at least 65% of the value of its
total assets in stocks and other securities with equity characteristics of
companies primarily based in developed countries outside the United States.
However, the Fund may also invest in emerging market securities and 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.
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, managerial
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.
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,
in addition to investment in restricted or unlisted securities.
ADRs, GDRs and EDRs. American Depositary Receipts ("ADRs"), Global Depositary
Receipts ("GDRs"), and European Depositary Receipts ("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.
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.
For a description of commercial paper ratings, see the Appendix.
Short-Term Instruments. The Fund intends to stay invested in equity securities
to the extent practical in light of its objective and long-term investment
perspective. However, up to 35% of 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; for
day-to-day operating purposes; and 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. In addition, when
in Bankers Trust's opinion, it is advisable to adopt a temporary defensive
position because of unusual and adverse conditions affecting the equity markets,
up to 100% of the Fund's assets may be invested in such short-term instruments.
Short-term instruments consist of U.S. and non U.S.: (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
Service, 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 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 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.
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 is also 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 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 Adviser will use derivatives only in
circumstances where the Adviser 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.
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.
<PAGE>
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 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 the 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.
Bankers Trust will monitor the liquidity of Rule 144A securities in the 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). 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 identifies, as part of a segregated account,
cash or 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.
Lending of Portfolio Securities. The Fund has the authority to lend up to 30% of
the total value of its portfolio securities to brokers, dealers and other
financial organizations. 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. The Fund will not lend securities to
Bankers Trust, ICC Distributors 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. During the term of the loan,
the Fund continues to bear the risk of fluctuations in the price of the loaned
securities. 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 % 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 Board of Trustees must terminate the loan
and regain the right to vote the securities. 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, in the meantime, the value of the
securities repurchased or lent had changed, 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 Investment Company Act of 1940, as amended ("1940
Act").
Investment Companies. 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 may also be made for other purposes, such as noted herein
under "Short-Term Instruments", and are limited in amount by the 1940 Act,
(unless permitted to exceed these limitations by an exemptive order of the SEC,
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.
<PAGE>
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 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. In
addition the Fund may continue to hold a stock which might otherwise have been
sold to protect against depreciation in the market price of the stock.
A put option sold by the Fund is covered when, among other things, cash or
securities acceptable to the broker are placed in a segregated account to
fulfill the obligations undertaken. 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 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 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 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.
<PAGE>
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. 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 which the Fund enters into such options transactions under the
general supervision of the Fund's Trustees. 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." Unless the Trustees conclude otherwise, the Fund
intends to treat OTC options as not readily marketable and therefore subject to
the Fund's 15% limitation on investment in illiquid securities.
Options on Securities Indices. In addition to options on securities, the 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 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 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 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.
Options on Foreign Securities 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 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.
<PAGE>
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 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.
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 currency exchange transactions to convert to
and from different currencies and to convert 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 currency exchange market or uses
forward contracts to purchase or sell foreign currencies.
Forward Currency Exchange Contracts. A forward 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 brokerages) and
their customers. A forward currency exchange contract may not have a deposit
requirement and may be traded at a net price without commission. The Fund
maintains with its custodian a segregated account of cash or liquid securities
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 currency hedging transactions in an attempt to protect
against changes in currency exchange rates between the trade and settlement
dates of specific securities transactions or changes in 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 currency hedging transactions with respect to security
transactions; however, the Adviser believes that it is important to have the
flexibility to enter into 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 Commodity Futures
Trading Commission ("CFTC,") the CFTC may in the future assert authority to
regulate forward contracts. In such event the Fund's ability to utilize forward
contracts 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.
<PAGE>
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 or cross-hedge its assets. Also, with regard to the 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 the 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.
Options on Foreign Currencies. The 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, the 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, the 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.
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.
The Fund may write options on foreign currencies for the same types of hedging
purposes. For example, where the 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 options 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, the 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.
The Fund may write covered call options on foreign currencies. A call option
written on a foreign currency by the 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 or liquid securities in a
segregated account with its custodian.
The Fund also may 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 liquid securities in an amount not less than the value of the
underlying foreign currency in U.S. dollars marked to market daily.
<PAGE>
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 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. The Fund intends to treat OTC Options as not readily marketable and
therefore subject to the Fund's 15% limit on illiquid securities.
Futures Contracts and Options on Futures Contracts.
General. The successful use of futures contracts and options thereon 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.
Futures Contracts. Futures contracts are contracts to purchase or sell a fixed
amount of an underlying instrument, commodity or index at a fixed time and place
in the future. 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 exchanges, and
clear through their clearing corporations. The Fund may enter into contracts for
the purchase or sale for future delivery of fixed-income securities, foreign
currencies, or financial indices including any index of U.S. government
securities, foreign government securities or corporate debt securities. 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, Government National Mortgage Association
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 governments other than the U.S. government. Futures contracts on
foreign currencies may be used to hedge against securities that are denominated
in foreign currencies.
At the same time a futures contract is entered into, the Fund must allocate cash
or securities as a deposit payment ("initial margin"). The initial margin
deposits are set by exchanges and may range between 1% and 10% 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 (other than those that settle in cash such as index
futures) by their terms call for the actual delivery or acquisition of the
instrument underlying the contract, in most cases the contractual obligation is
fulfilled by offset before the date of the contract without having to make or
take delivery of the instrument underlying the contract. The offsetting of a
contractual obligation is accomplished by entering into an opposite position in
the identical futures contract on the commodities exchange on which the futures
contract was entered into (or a linked exchange). Such a transaction, which is
effected through a member of an exchange, cancels the obligation to make or take
delivery of the instrument underlying the contract. 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 enters into futures contracts.
The assets in the segregated asset account maintained to cover the Fund's
obligations with respect to such futures contracts will consist of cash or
securities acceptable to the broker 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 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 most
participants entering into offsetting transactions rather than making or taking
delivery. To the extent that many 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 lending 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 or currency exchange
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. For example, when the Fund is not fully invested it may
purchase a call option on an interest rate sensitive futures contract to hedge
against a potential price increase on debt securities due to declining interest
rates. 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 an interest rate sensitive
futures contract to hedge its portfolio against the risk of a decline in the
prices of debt securities due to rising interest rates.
The writing of a call option on a futures contract may constitute a partial
hedge against declining prices of portfolio securities which are the same as or
correlate with the security or currency which is deliverable upon exercise of
the futures contract. If the futures price at expiration of the option is below
the exercise price, 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 may
constitute 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 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.
Futures Contracts on Domestic and Foreign Securities Indices. The Fund may enter
into futures contracts providing for cash settlement based upon changes in the
value of an index of domestic or foreign securities. This investment technique
may be used as a low-cost method of gaining exposure to a particular securities
market without investing directly in those securities or 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.
When used for hedging purposes, each transaction in futures contracts on a
securities index involves the establishment of a position which the Adviser
believes 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 on securities indices would be entered into for
hedging purposes only, such transactions do involve certain risks. These risks
include a lack of correlation between the futures contract and the foreign
equity market being hedged, and incorrect assessments of market trends which may
result in poorer overall performance than if a futures contract had not been
entered into.
<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 segregating with the
Fund's Custodian or futures commission merchant liquid securities in an amount
at all times equal to or exceeding the Fund's commitment with respect to these
instruments or contracts.
Investment Restrictions on Futures Transactions. 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 Fund's net asset value, after taking into account unrealized profits and
unrealized losses on any such contracts.
Additional Risk Factors
In addition to the risks discussed above, the Fund's investments may be subject
to the following risk factors:
Foreign Securities. The Fund will, under normal market conditions, invest a
significant portion of its assets in foreign securities. 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.
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, the Fund is authorized to enter into certain foreign currency
exchange transactions.
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.
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,
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, Malaysia, Mexico, Morocco, Nicaragua, Nigeria,
Pakistan, Peru, 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 above 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.
<PAGE>
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 securities 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.
Options on Futures Contracts, Forward Contracts and Options on Foreign
Currencies. Unlike transactions entered into by the 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 principals, 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. 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.
Forward Contracts and options on foreign currencies traded over-the-counter
involve liquidity and credit risks which may not be present in the case of
exchange-traded currency options. 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.
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 (the "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 the 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.
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 the Fund's
ability to act upon economic events occurring in foreign markets during
non-business 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.
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, the Adviser also makes its own
evaluation of these securities, subject to review by the Board of Trustees.
After purchase by the 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 the Fund to eliminate the obligation from its portfolio, but
the Adviser will consider such an event in its determination of whether the Fund
should continue to hold the obligation. A description of the ratings used herein
and in the Fund's Prospectuses is set forth in the Appendix to this SAI.
<PAGE>
Investment Restrictions
Fundamental Policies. The following investment restrictions are "fundamental
policies" of the 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 1940 Act, and as used
in this SAI, 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.
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.
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 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 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 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, 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.
Additional Restrictions. These are non-fundamental policies. In order to comply
with certain statutes and policies, the Fund will not as a matter of operating
policy (except that such policies may be changed by the Board of Trustees):
(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;
<PAGE>
(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 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;
(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);
(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.
There will be no violation of any investment restriction (except with respect to
fundamental investment restriction (1) above) if that restriction is complied
with at the time the relevant action is taken, notwithstanding a later change in
the market value of an investment, in net or total assets, or in the change of
securities rating of the investment, or any other later change.
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 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 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 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 Conduct Rules of the National
Association of Securities Dealers, Inc. and such other policies as the Trustees
of the Fund may determine, the Adviser may consider sales of shares of the Trust
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.
<PAGE>
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 Fund 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.
PERFORMANCE INFORMATION
Standard Performance Information
From time to time, quotations of the Fund's performance may be included in
advertisements, sales literature shareholder reports or other communications to
shareholders or prospective shareholders. For mutual funds, performance is
commonly measured as total return. The Fund's performance is affected by its
expenses. 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 public offering price of shares of the Fund will
vary based not only on the type, quality and maturities of the securities held,
but also on changes in the current value of such securities and on changes in
the expenses of the Fund. These factors and possible differences in the methods
used to calculate total return should be considered when comparing the total
return of the Fund to total returns published for other investment companies or
other investment vehicles.
Total return reflects the performance of both principal and income.
Performance information may include the Fund's investment results and/or
comparisons of its investment results to the Morgan Stanley Capital
International Europe, Australia, Far East ("MSCI EAFE") Index, the Morgan
Stanley Capital International Gross Domestic Product weighted EAFE Index, the
Lipper International Average, or various other 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 herein. 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 Shares. The Shares' "total return" refers to the change in the value of
an investment in the Shares over a stated period based on any change in net
asset value per Share and including the value of any Shares purchased 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 gains 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 Shares' expenses.
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. The Fund's performance may
be compared to the performance of various indices and investments for which
reliable data is available. The Fund's performance may also be compared to
averages, performance rankings, or other information prepared by recognized
mutual fund statistical services. 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 could include the following:
Asian Wall Street Journal, a weekly Asian newspaper that often reviews U.S.
mutual funds investing internationally.
Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds investing abroad.
Changing Times, The Kiplinger Magazine, a monthly investment advisory
publication that periodically features the performance of a variety of
securities.
Consumer Digest, a monthly business/financial magazine that includes a "Money
Watch" section featuring financial news.
Financial Times, Europe's business newspaper, which features from time to time
articles on international or country-specific funds.
Financial World, a general business/financial magazine that includes a "Market
Watch" department reporting on activities in the mutual fund industry.
Forbes, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the performance
of a variety of mutual funds.
Global Investor, a European publication that periodically reviews the
performance of U.S. mutual funds investing internationally.
Investor's Daily, a daily newspaper that features financial, economic and
business news.
Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a weekly
publication of industry-wide mutual fund averages by type of fund.
Money, a monthly magazine that from time to time features both specific funds
and the mutual fund industry as a whole.
Morningstar, Inc., a publisher of financial information and mutual fund
research.
New York Times, a nationally distributed newspaper which regularly covers
financial news.
Personal Investing News, a monthly news publication that often reports on
investment opportunities and market conditions.
Personal Investor, a monthly investment advisory publication that includes a
"Mutual Funds Outlook" section reporting on mutual fund performance measures,
yields, indices and portfolio holdings.
<PAGE>
Success, a monthly magazine targeted to the world of entrepreneurs and growing
business, often featuring mutual fund performance data.
U.S. News and World Report, a national business weekly that periodically
reports mutual fund performance data.
Value Line, a biweekly publication that reports on the largest 15,000 mutual
funds.
Wall Street Journal, a Dow Jones and Company, Inc. newspaper which
regularly covers financial news.
Weisenberger Investment Companies Services, an annual compendium of information
about mutual funds and other investment companies, including comparative data on
funds' backgrounds, management policies, salient features, management results,
income and dividend records, and price ranges.
Working Women, a monthly publication that features a "Financial Workshop"
section reporting on the mutual fund/financial industry.
Economic and Market Information
Advertising and sales literature of the Fund may include discussions of
economic, financial and political developments and their effect on the
securities market. Such discussions may take the form of commentary on these
developments by Fund portfolio managers and their views and analysis on how such
developments could affect the Fund. In addition, advertising and sales
literature may quote statistics and give general information about the mutual
fund industry, including the growth of the industry, from sources such as the
Investment Company Institute ("ICI").
VALUATION OF SECURITIES; REDEMPTIONS AND PURCHASES IN KIND
Valuation of Securities
The Fund is open for business each day the New York Stock Exchange, Inc.
("NYSE") is open (a "Valuation Day"). The Fund's net asset value ("NAV") per
share is calculated as of the close of regular trading on the NYSE, which is
currently 4:00 p.m., Eastern time (the "Valuation Time"). The NAV per share is
computed by dividing the value of the Fund's assets, less all liabilities
attributable to the shares, by the total number of shares outstanding.
A NAV for the 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 is 0.005 (1/2 of 1%) or less or shareholder transactions are
otherwise insubstantially affected, further action is not required.
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.
The Fund's securities and other assets are valued primarily on the basis of
market quotations or, if quotations are not readily available, by a method which
the Fund's Board of Trustees believes accurately reflects fair value. 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,
under the supervision of the Board of Trustees, will value such securities based
upon all relevant factors as outlined in FRR 1.
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
Contract owners 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 Contract owners. Contract owners 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 Contract owner'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 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.
Redemptions and Purchases in Kind
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.
Each investor in the Fund may add to or reduce their investment in the Fund on
each day the Fund determines its net asset value. At the close of each such
business day, the value of each investor's beneficial interest in the Fund will
be determined by multiplying the net asset value of the Fund by the percentage,
effective for that day, which represents that investor's share of the aggregate
beneficial interests in the Fund. Any additions or withdrawals which are to be
effected as of the close of business on that day will then be effected. The
investor's percentage of the aggregate beneficial interests in the Fund will
then be recomputed as the percentage equal to the fraction (i) the numerator of
which is the value of such investor's investment in the Fund as of the close of
business on such day plus or minus, as the case may be, the amount of net
additions to or withdrawals from the investor's investment in the Fund effected
as of the close of business on such day, and (ii) the denominator of which is
the aggregate net asset value of the Fund as of the close of business on such
day plus or minus, as the case may be, the amount of net additions to or
withdrawals from the aggregate investments in the Fund by all investors in the
Fund. The percentage so determined will then be applied to determine the value
of the investor's interest in the Fund as the close of business on the following
business day.
The Fund may, at its own option, accept securities in payment for shares. The
securities delivered in payment for shares are valued by the method described
under "Valuation of Securities" as of the day the Fund receives the securities.
This is a taxable transaction to the shareholder. Securities may be accepted in
payment for shares only if they are, in the judgment of Bankers Trust,
appropriate investments for the Fund. In addition, securities accepted in
payment for shares must: (i) meet the investment objective and policies of the
Fund; (ii) be acquired by the Fund for investment and not for resale; (iii) be
liquid securities which are not restricted as to transfer either by law or
liquidity of market; and (iv) if stock, have a value which is readily
ascertainable as evidenced by a listing on a stock exchange, over-the-counter
market or by readily available market quotations from a dealer in such
securities. When securities are used as payment for shares or as a redemption in
kind from the fund, the transaction fee will not be assessed. However, the
shareholder will be charged the costs associated with receiving or delivering
the securities. These costs include security movement costs and taxes and
registration costs. The Fund reserves the right to accept or reject at its own
option any and all securities offered in payment for its shares.
Trading in Foreign Securities
Trading in foreign cities may be completed at times which vary from the closing
of the New York Stock Exchange ("NYSE"). In computing the net asset values, the
Fund values foreign securities at the latest closing price on the exchange on
which they are traded immediately prior to the closing of the NYSE. Similarly,
foreign securities quoted in foreign currencies are translated into U.S.
dollars at the foreign exchanges.
Occasionally, events that affect values and exchange rates may occur between the
times at which they are determined and the closing of the NYSE. If such events
materially affect the value of portfolio securities, these securities may be
valued at their fair value as determined in good faith by the Trustees, although
the actual calculation may be done by others.
MANAGEMENT OF THE TRUST
The Trust is governed by a Board of Trustees which is responsible for
protecting the interests of investors. None of the executive officers of the
Trust or the Fund devotes full time to the affairs of the Trust or the Fund.
The Board of Trustees is comprised 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, their birthdates, their principal
occupations during the past five years, and addresses are set forth below. Their
titles may have varied during that period. Unless otherwise indicated, the
address of each Trustee and officer is 101 Federal Street, Boston, Massachusetts
02110.
<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, 47 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, 55 Trustee Chairman of North American Properties
2015 West Main Street Group since January 1987.
Stamford, CT 06902
James S. Pasman, Jr., 68 Trustee Retired; President and Chief Operations
29 The Trillium Officer of National Intergroup Inc.
Pittsburgh, PA 15238 (1989-1991).
William E. Small, 57 Trustee and President Independent Consultant (1996-present);
Formerly Executive Vice President of
First Data Investor Services Group Inc.
("Investor Services Group") (1993-1996).
Elizabeth Russell, 36 Vice President and Secretary Counsel of Investor Services Group
since 1994; Assistant Vice President
and Counsel, The Boston Company
Advisors, Inc. (1993-1994).
Gerald J. Holland, __ Treasurer Vice President of Investor Services
Group since 1994; Senior Vice President
of Finance and Administration for
Delaware Management Company, Inc and
its affiliates prior to 1994.
</TABLE>
Mr. Holland and Ms. 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 September
30, 1998, was as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
(1) (2) (3) (4) (5)
Pension or Retirement Total Compensation
Aggregate Benefits Accrued as Estimated Annual from Registrant and
Name of Compensation Part of Benefits Fund Complex
Board Member from Fund* Fund's Expenses Upon Retirement
Robert R. Coby $ N/A N/A $
Desmond G. FitzGerald $ N/A N/A $
James S. Pasman, Jr. $ N/A N/A $
William E. Small $ N/A N/A $
* Amount does not include reimbursed expenses for attending Board meetings,
which amounted to $____ for all Trustees as a group.
As of _________, 1999 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).
As of ______, __, 1999, the following shareholders of record owned 5% or
more of the outstanding shares of the Fund: [TO BE
PROVIDED]
</TABLE>
Name and Address Percentage Owned
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 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
market. As of December 31, 1998, Bankers Trust Corporation was the eighth
largest bank holding company in the United States with total assets of over $156
billion. 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 $338 billion in assets under management globally.
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 Fund. Bankers Trust
will: (i) act in strict conformity with the Fund'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 Fund's business and affairs; and (vi) supervise the performance of
professional services provided by others.
Bankers Trust, subject to the supervision and direction of the Board of Trustees
of the Fund, 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 investment adviser. All orders for investment transactions on behalf
of the Fund are placed by the Adviser 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.
The Investment Adviser is a wholly owned subsidiary of Bankers Trust
Corporation. On November 30, 1998, Bankers Trust Corporation entered into an
Agreement and Plan of Merger with Deutsche Bank AG under which Bankers Trust
Corporation would merge with and into a subsidiary of Deutsche Bank AG. Deutsche
Bank AG is a major global banking institution that is engaged in a wide range of
financial services, including retail and commercial banking, investment banking
and insurance. The transaction is contingent upon various regulatory approvals,
as well as the approval of the Fund's shareholders. If the transaction is
approved and completed, Deutsche Bank AG, as the Investment Adviser's new parent
company, will control the operations of the Investment Adviser. Bankers Trust
believes that, under this new arrangement, the services provided to the Fund
will be maintained at their current level.
Bankers Trust bears all expenses in connection with the performance of services
under the Management Agreement. The Trust and the Fund bear 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, or any of its 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 or the Fund; and any extraordinary expenses.
The Investment Management Agreement provides for the Fund to pay Bankers Trust a
fee, accrued daily and paid monthly, equal on an annual basis to 0.98% of the
average daily net assets of the Fund.
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 persons issue, deal,
trade and invest for their own accounts and are among the leading market
participants with respect to various types of such securities. Bankers Trust has
informed the Fund that, in making its investment decisions, it 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.
Administrator
Investor Services Group, 101 Federal Street, Boston, Massachusetts 02110,
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 objective 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 Trust 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.
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, 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.
Expenses
In addition to the fees of Bankers Trust, the Fund is responsible for the
payment of all 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 Contract owners, 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 Contract owner servicing, distribution of reports to Contract owners and
prospectus printing and postage will be borne by the relevant Company.
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 adviser 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 Advisory 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.
Counsel and Independent Accountants
Willkie Farr & Gallagher, 787 Seventh Avenue, New York, New York 10019-6099,
serves as Counsel to the Trust and the Fund. Ernst & Young LLP, 2001 Market
Street, Philadelphia. Pennsylvania 19103 acts as Independent Accountants of the
Trust and the Fund.
ORGANIZATION OF THE TRUST
The Trust was organized on January 19, 1996, under the laws of the Commonwealth
of Massachusetts. The Fund is a separate series of the Trust. The Trust offers
shares of beneficial interest of the Fund and the Trust's other series, par
value $0.001 per share. The shares of some 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
obligation.
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 Contract owners 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
Contract owners' 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 _____, 1999 the Company deemed to be a control
person of the Fund was ________.]
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 annuity or variable life
insurance policies issued by the Companies through their respective separate
accounts. The Fund does not currently foresee any disadvantages to Contract
owners 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 Contract owners. 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
Contract owners will likely increase due to the loss of economies of scale
benefits that can be provided to mutual funds with substantial assets.
TAXATION
Taxation of the Fund
The Fund intends to continue to qualify annually 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 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 Fund also does not
anticipate paying any excise taxes. The Fund's dividends and distributions will
not qualify for the dividends-received deduction for corporations.
If for any taxable year the Fund does not qualify for the special federal income
tax treatment afforded regulated investment companies, all of its taxable income
will be subject to federal income tax at regular corporate rates (without any
deduction for distributions to its shareholders). In such event, dividend
distributions would be taxable to shareholders to the extent of current
accumulated earnings and profits, and would be eligible for the dividends
received deduction for corporations in the case of corporate shareholders.
The Fund's investment in Section 1256 contracts, such as regulated futures
contracts, most forward currency forward contracts traded in the interbank
market and options on most stock indices, are subject to special tax rules. All
section 1256 contracts held by the Fund at the end of its taxable year are
required to be marked to their market value, and any unrealized gain or loss on
those positions will be included in the Fund's income as if each position had
been sold for its fair market value at the end of the taxable year. The
resulting gain or loss will be combined with any gain or loss realized by the
Fund from positions in section 1256 contracts closed during the taxable year.
Provided such positions were held as capital assets and were not part of a
"hedging transaction" nor part of a "straddle," 60% of the resulting net gain or
loss will be treated as long-term capital gain or loss, and 40% of such net gain
or loss will be treated as short-term capital gain or loss, regardless of the
period of time the positions were actually held by the Fund.
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 prospectus 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
The Fund distributes substantially all of its net income and capital gains to
shareholders each year. The Fund distributes income dividends annually. In
addition, the Fund will distribute net capital gains, if any, at least annually
and may make additional capital gains distributions at other times, if required,
to remain in compliance with the applicable tax regulations. Unless a
shareholder instructs the Fund to pay such dividends and distributions in cash,
they will be automatically reinvested in additional shares of the Fund. The
prospectus for a Company's variable annuity or variable life insurance policies
describe the frequency of distributions to Contract owners and the federal
income tax treatment of distributions form such contracts to Contract owners.
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.
Foreign Withholding Taxes
Income received by the Fund from investments in foreign securities may be
subject to withholding and other taxes imposed by foreign countries.
FINANCIAL STATEMENTS
The financial statements for the Fund for the period ended September 30, 1998,
are incorporated herein by reference to the Fund's Annual Reports dated
September 30, 1998. A copy of the Fund's Annual Report may be obtained without
charge by contacting the Customer Service Center at the telephone number shown
in the contract Prospectus.
<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.
<PAGE>
Investment Adviser
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 Prospectus, its
Statements of Additional Information or its 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. 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>
G:\shared\boslegal\clients\bankers\peas\1999\comb2new.doc
Subject to Completion, Dated February 25, 1999
STATEMENT OF ADDITIONAL INFORMATION
April 30, 1999
BT INSURANCE FUNDS TRUST
Equity 500 Index Fund
U.S. Bond Index Fund
Small Cap Index Fund
EAFE(R) Equity Index Fund
BT Insurance Funds Trust (the "Trust") is comprised of several funds. The funds
listed above (each, a "Fund" and together the "Funds") are each a series of the
Trust. This Statement of Additional Information describes the Funds' Shares.
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 adviser
of the Funds is Bankers Trust Company (the "Adviser" or "Bankers Trust"). The
distributor of the Funds' shares is First Data Distributors, Inc. (the
"Distributor" or "First Data Distributors").
The Prospectus for each Fund, dated April 30, 1999, provides the basic
information investors should know before investing. This Statement of Additional
Information ("SAI"), which is not a Prospectus, is intended to provide
additional information regarding the activities and operations of the Trust and
should be read in conjunction with the Prospectuses. You may request a copy of a
Prospectus or a paper copy of this SAI, if you have received it electronically,
free of charge by calling the Customer Service Center at the telephone number
shown in the Contract prospectus. This SAI is not an offer of any Fund for which
an investor has not received a Prospectus. Capitalized terms not otherwise
defined in this Statement of Additional Information have the meanings accorded
to them in each Fund's Prospectus. The financial statements for each Fund for
the fiscal year ended December 31, 1998, are incorporated herein by reference to
the Annual Report to shareholders for each Fund dated December 31, 1998. A copy
of each Fund's Annual Report may be obtained without charge by calling the
Customer Service Center at the telephone number shown in the Contract
prospectus.
[GRAPHIC OMITTED]
BANKERS TRUST COMPANY
Investment Adviser of each Fund
FIRST DATA DISTRIBUTORS, INC.
Distributor
4400 Computer Drive
Westborough, MA 01581
<PAGE>
TABLE OF CONTENTS
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS 05
Investment Objectives 05
Investment Policies 05
Equity Securities 05
Debt Securities 05
Medium- and Small-Capitalization Stocks05
Convertible Securities 05
U.S. Government Obligations 06
Short-Term Instruments 06
Certificates of Deposit and Bankers' Acceptances 06
Commercial Paper 06
Derivatives 07
Illiquid Securities 07
When-Issued and Delayed Delivery Securities 08
Lending of Portfolio Securities 08
Repurchase Agreements 08
Reverse Repurchase Agreements 08
Warrants 08
Swap Agreements 09
Ginnie Mae Certificates 10
Fannie Mae Certificates 10
Freddie Mac Certificates 10
Adjustable Rate Mortgages - Interest Rate Indices 10
Asset-Backed Securities 11
Mortgage-Backed Securities and Asset-Backed Securities--
Types of Credit Support 11
Stripped Mortgage-Backed Securities 12
Options on Securities 12
Options on Securities Indices 13
Currency Exchange Transactions 14
Forward Currency Exchange Contracts 14
Options on Foreign Currencies 15
Futures Contracts and Options on Futures Contracts16
General 16
Futures Contracts 16
Options on Futures Contracts 17
Asset Coverage 18
Additional Risk Factors 18
Fixed Income Security Risk 18
Foreign Securities: Special Considerations Concerning
the Pacific Basin 18
Options on Futures Contracts, Forward Contracts and Options on Foreign
Currencies 19
Rating Services 20
Investment Restrictions 20
Fundamental Policies 20
Additional Restrictions 22
Portfolio Transactions and Brokerage Commissions 23
PERFORMANCE INFORMATION 25
Standard Performance Information 25
Comparison of Fund Performance 26
Economic and Market Information 27
VALUATION OF SECURITIES; REDEMPTIONS AND PURCHASES IN KIND 27 Valuation of
Securities 27 Purchase and Redemption of Shares 28 Redemptions and Purchases
in Kind 28 Trading in Foreign Securities 29
MANAGEMENT OF THE TRUST 29
Trustees and Officers 30
Investment Adviser 31
Administrator 33
Distributor 34
Custodian and Transfer Agent 34
Expenses 34
Use of Name 34
Banking Regulatory Matters 34
Counsel and Independent Accountants 35
ORGANIZATION OF THE TRUST 35
TAXATION 36
Taxation of the Funds 36
Distributions 37
Other Taxation 37
Foreign Withholding Taxes 37
FINANCIAL STATEMENTS 37
APPENDIX 38
<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
Investment Objectives
The following is a description of each Fund's investment objective. There can,
of course, be no assurance that any Fund will achieve its investment objective.
Equity 500 Index Fund seeks to match, as closely as possible, before the
deduction of expenses, the performance of the Standard & Poor's 500 Composite
Stock Price Index (the "S&P 500"), which emphasizes stocks of large U.S.
companies.
U.S. Bond Index Fund seeks to match, as closely as possible, before the
deduction of expenses, the performance of the Lehman Brothers Aggregate Bond
Index (the "Aggregate Bond Index").
Small Cap Index Fund seeks to match, as closely as possible, before the
deduction of expenses, the performance of the Russell 2000 Small Stock Index
(the "Russell 2000"), which emphasizes stocks of small U.S. companies.
EAFE(R) Equity Index Fund seeks to match, as closely as possible, before the
deduction of expenses, the performance of the Morgan Stanley Capital
International Europe, Australasia, Far East (EAFE(R)) Index (the "EAFE(R)
Index").
Investment Policies
The following is a discussion of the various investments of and techniques
employed by each Fund.
Equity Securities. With the exception of the U.S. Bond Index Fund, each 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. As used herein, "equity securities" are defined as
common stock, preferred stock, trust or limited partnership interests, rights
and warrants to subscribe to or purchase such securities, sponsored or
unsponsored ADRs, EDRs, GDRs, 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. Common stocks, the most familiar type,
represent an equity (ownership) interest in a corporation. They may or may not
pay dividends or carry voting rights. Common stock occupies the most junior
position in a company's capital structure. Although equity securities have a
history of long-term growth in value, their prices fluctuate based on changes in
a company's financial condition and on overall market and economic conditions.
Smaller companies are especially sensitive to these factors.
Debt Securities. Bonds and other debt instruments are used by issuers to borrow
money from investors. The issuer pays the investor a fixed or variable rate of
interest, and must repay the amount borrowed at maturity. Some debt securities,
such as zero coupon bonds, do not pay current interest, but are purchased at a
discount from their face values. Debt securities, loans, and other direct debt
have varying degrees of quality and varying levels of sensitivity to changes in
interest rates. Longer-term bonds are generally more sensitive to interest rate
changes than short-term bonds.
Medium- and Small-Capitalization Stocks. The Small Cap Index Fund may invest 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 "S&P 500". 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
larger company stocks rise, or rise in prices as large company stock decline.
Convertible Securities. A convertible security is 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.
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.
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.
U.S. Government Obligations. Each 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, each 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 each 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 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.
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, the Fund may hold short-term investments (or shares of
money market mutual funds) 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 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 banker's 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.
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.
For a description of commercial paper ratings, see Appendix A to this SAI.
Derivatives. Each 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. 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. The Adviser will use
derivatives only in circumstances where they offer the most efficient means of
improving the risk/reward profile of the Fund and when consistent with the
Fund's investment objective and policies. The use of derivatives for non-hedging
purposes may be considered speculative.
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.
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.
Rule 144A Securities are 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
each Fund's 15% limit on illiquid securities. Under the supervision of the Board
of Trustees of the Funds, the Adviser determines the liquidity of restricted
securities and, through reports from the Adviser, the Board will monitor trading
activity in restricted securities. If institutional trading in restricted
securities were to decline, the liquidity of the Funds could be adversely
affected.
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).
When-Issued and Delayed Delivery Securities. Each Fund may purchase securities
on a when-issued or delayed delivery basis. 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 a Fund until settlement takes place. At
the time a 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, each Fund identifies, as part
of a segregated account, cash or liquid securities, in an amount at least equal
to such commitments. On delivery dates for such transactions, each Fund will
meet its obligations from maturities or sales of the securities held in the
segregated account and/or from cash flow. If a 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 portfolio obligation, incur a gain or loss due
to market fluctuation. It is the current policy of each 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.
Lending of Portfolio Securities. Each Fund has the authority to lend up to 30%
of the total value of its 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 substitute payments in respect of all dividends,
interest or other distributions on the 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.
Cash collateral may be invested in a money market fund managed by Bankers Trust
(or its affiliates) and Bankers Trust may serve as a 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, a Fund buys a security at one
price 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 a repurchase
agreement, the Fund could experience delays in recovering either its cash or
selling securities subject to the repurchase agreement. To the extent that, in
the meantime, the value of the securities repurchased had decreased or the value
of the securities 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.
Reverse Repurchase Agreements. The Funds 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 a Fund enters into a reverse repurchase agreement it
will place in a segregated custodial account cash, 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 a Fund may decline below the
repurchase price of those securities. Reverse repurchase agreements are
considered to be borrowings by a Fund.
Warrants. Each Fund (except the Equity 500 Index Fund) may invest in warrants
with respect to 5% of its assets (2% with respect to warrants not listed on the
New York Stock Exchange or American Stock Exchange). 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.
Swap Agreements. Each Fund (except the Equity 500 Index Fund) may enter into
swap agreements to the extent that obligations under such agreements represent
not more than 10% of the Fund's total assets. 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, in a particular
foreign currency, 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. A 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"). A 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.
Whether the use of swap agreements will be successful in furthering its
investment objective 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, a 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. A Fund will minimize this risk by entering into
agreements that mark to market no less frequently than quarterly. In addition, a
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. 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 a
Fund's ability to terminate existing swap agreements or to realize amounts to be
received under such agreements. Swap agreements also bear the risk that a 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.
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"). 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, natural person, or regulated foreign 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.
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 V 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 U.S. Bond Index 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 ("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 Federal Home Loan Mortgage Corporation ("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 U.S. Bond Index 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 U.S. Bond
Index 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 U.S. Bond Index 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 U.S. Bond Index 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" (multiple class securities with one or
more classes subordinate to other classes as to the payment of principal thereof
and interest thereon, with the result that defaults on the underlying assets are
borne first by the holders of the subordinated class), 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 that which 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.
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 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 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. A 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." A 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, a 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 a 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. A 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 a 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 a Fund for the purpose of affirmatively
benefiting from a decline in the price of securities which the Fund does not
own. A 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 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. 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, a 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 a Fund enters into such options transactions under the general
supervision of the Fund's Trustees. Unless the Board of Trustees conclude
otherwise, each Fund intends to treat OTC options as not readily marketable and
therefore subject to each Fund's 15% limit on investments in illiquid
securities.
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."
EAFE(R) Equity Index 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.
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 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.
Currency Exchange Transactions. Because each 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, each Fund
from time to time may enter into currency exchange transactions to convert to
and from different currencies and to convert 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 currency exchange market or uses
forward contracts to purchase or sell foreign currencies.
Forward Currency Exchange Contracts. A forward 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
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 brokerages) and their
customers. A forward currency exchange contract may not have a deposit
requirement and may be 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 currency exchange
contract. Neither spot transactions nor forward currency exchange contracts
eliminate fluctuations in the prices of the Fund's securities or in exchange
rates, or prevent loss if the prices of these securities should decline.
Each Fund may enter into currency hedging transactions in an attempt to protect
against changes in currency exchange rates between the trade and settlement
dates of specific securities transactions or changes in 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 currency hedging transactions with respect to security
transactions; however, the Adviser believes that it is important to have the
flexibility to enter into 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 a
Fund's ability to utilize forward contracts 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 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 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
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.
Options on Foreign Currencies. The EAFE(R) Equity Index 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, the 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, the EAFE(R) Equity Index 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.
The EAFE(R) Equity Index Fund may write options on foreign currencies for the
same types of hedging purposes. For example, where the 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 options 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, the EAFE(R) Equity
Index 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.
The EAFE(R) Equity Index Fund may write covered call options on foreign
currencies. A call option written on a foreign currency by the 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 or liquid
securities in a segregated account with its custodian.
The EAFE(R) Equity Index Fund also may 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 liquid securities in an amount
not less than the value of the underlying foreign currency in U.S. dollars
marked to market daily.
<PAGE>
Futures Contracts and Options on Futures Contracts
General. The successful use of futures contracts and options thereon 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.
Successful use of futures contracts 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 a 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, a 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. Futures contracts are contracts to purchase or sell a fixed
amount of an underlying instrument, commodity or index at a fixed time and place
in the future. 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 exchanges and
clear through their clearing corporations. Each Fund may enter into contracts
for the purchase or sale for future delivery of fixed-income securities, foreign
currencies, or financial indices including any index of U.S. Government
securities, foreign government securities or corporate debt securities. Each
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. A Fund may also
enter into futures contracts which are based on bonds issued by governments
other than the U.S. government. Futures contracts on foreign currencies may be
used to hedge against securities that are denominated in foreign currencies.
At the same time a futures contract is entered into, a Fund must allocate cash
or securities as a deposit payment ("initial margin"). Initial margin deposits
are set by exchanges and may range between 1% and 10% 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 (other than those that settle in cash such as index
futures) by their terms call for the actual delivery or acquisition of the
instrument underlying the contract, in most cases the contractual obligation is
fulfilled by offset before the date of the contract without having to make or
take delivery of the instrument underlying the contract. The offsetting of a
contractual obligation is accomplished by entering into an opposite position in
the identical futures contract on the commodities exchange on which the futures
contract was entered into (or a linked exchange). Such a transaction, which is
effected through a member of an exchange, cancels the obligation to make or take
delivery of the instrument underlying the contract. 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 enters into 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, a 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. A 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 a 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
contracts could be liquidated and the Fund could then buy debt securities on the
cash market. The assets in the segregated asset account maintained to cover the
Fund's obligations with respect to such futures contracts will consist of cash
or securities acceptable to the broker 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 most
participants entering into offsetting transactions rather than making or taking
delivery. To the extent that many 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 or currency exchange 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 Portfolio
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. For example, when a Fund is not fully invested it may
purchase a call option on an interest rate sensitive futures contract to hedge
against a potential price increase on debt securities due to declining interest
rates. 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 an interest rate sensitive futures
contract to hedge its portfolio against the risk of a decline in the price of
debt securities due to rising interest rates.
The writing of a call option on a futures contract may constitute a partial
hedge against declining prices of portfolio securities which are the same as or
correlate with 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 portfolio holdings. The writing of a put option on a
futures contract may constitute a partial hedge against increasing prices of
intended portfolio securities which are the same as or correlate with 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 a 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 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.
Asset Coverage. To assure that a 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, a Fund will
cover such transactions, as required under applicable interpretations of the
SEC, either by owning the underlying securities or by segregating with the
Fund's Custodian or futures commission merchant liquid securities in an amount
at all times equal to or exceeding the Fund's commitment with respect to these
instruments or contracts.
The Board of Trustees of each Fund has adopted the policy that futures contracts
and options on futures contracts may be used as a hedge and may also use stock
index futures on a continual basis to equitize cash so that a Fund may maintain
100% equity exposure. In compliance with current CFTC regulations, a 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 Fund's net asset value, after taking into
account unrealized profits and unrealized losses on any such contracts.
Additional Risk Factors
In addition to the risks discussed above, the Funds' investments may be subject
to the following risk factors:
Fixed Income Security Risk. Fixed income securities expose the Fund to four
types of risk: (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 period 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.
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 many issuers may be held by a limited number of
persons and financial institutions, which may limit the number of shares
available for investment by a 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 a Fund's ability to acquire or dispose of
securities at the price and time it wishes to do so. The EAFE(R) Equity Index
Fund's inability to dispose fully and promptly of positions 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 which may result
in trading volatility and difficulties in the settlement and recording of
transactions, and in interpreting and applying the relevant law and regulations.
The EAFE(R) Equity Index 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.
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 principals, 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. 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.
Forward contracts and options on foreign currencies traded over-the-counter
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.
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 (the "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.
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 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.
Rating Services. The ratings of Moody's and S&P represent their opinions as to
the quality of the Municipal Obligations and other 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, the Adviser
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 the Adviser will consider such an event in its determination of
whether a Fund should continue to hold the obligation. A description of the
ratings categories of Moody's and S&P is set forth in the Appendix to this SAI.
Investment Restrictions
Fundamental Policies. The following investment restrictions are "fundamental
policies" of each Fund and may not be changed with respect to a Fund 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, means, with respect to each 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, EAFE(R)Equity Index Fund, Equity 500
Index Fund and Small Cap Index 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.
As a matter of fundamental policy , U.S. Bond Index 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 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 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;
(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 Restrictions.
In order to comply with certain statutes and policies, the EAFE(R) Equity Index
Fund, Equity 500 Index Fund and Small Cap Index Fund will not, as a matter of
operating policy (except such policies may be changed by the Board of Trustees):
(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.
In order to comply with certain statutes and policies, the U.S. Bond Index Fund
will not, as a matter of operating policy (except such policies may be changed
by the Board of Trustees):
(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
is not traded flat or in default as to interest or principal;
(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 restrictions or policies (except
with respect to fundamental investment restriction (1) above) if that
restriction is complied with at the time the relevant action is taken
notwithstanding a later change in the market value of an investment, in net or
total assets, or in the change of securities rating of the investment, or any
other later change.
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 a 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 Conduct Rules of the National
Association of Securities Dealers, Inc. and such other policies as the Trustees
of a Fund 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 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 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 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.
For the fiscal year ended December 31, 1998, and for the period from October 1,
1997 (commencement of operations) to December 31, 1997, Equity 500 Index Fund
paid brokerage commissions in the amount of $_____ and $____, respectively.
For the fiscal year ended December 31, 1998 and for the period from August 25,
1997 (commencement of operations) to December 31, 1997, the Small Cap Index Fund
paid brokerage commissions in the amount of $_____ and $_____, respectively.
For the fiscal year ended December 31, 1998 and for the period from August 22,
1997 (commencement of operations) to December 31, 1997, the EAFE(R) Equity Index
Fund paid brokerage commissions in the amount of $_____ and $_____,
respectively.
<PAGE>
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. Mutual fund performance
is commonly measured as total return and/or yield. Each Fund's performance is
affected by its expenses. These performance figures are calculated in the
following manner:
Yield: 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 for a 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.
Income calculated for the purposes of calculating a Fund's yield
differs from income as determined for other accounting purposes.
Because of the different accounting methods used, and because of the
compounding assumed in yield calculations, the yield quoted for a Fund
may differ from the rate of distributions of the Fund paid over the
same period or the rate of income reported in the Fund's financial
statements. This difference may be significant for a Fund investing in
a Fund whose investments are denominated in foreign currencies.
Total return: Total return is the change in value of an investment in a
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. 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.
Unlike some bank deposits or other investments which pay a fixed yield
for a stated period of time, the total return of a Fund will vary
depending upon interest rates, the current market value of the
securities held by the corresponding Fund and changes in the expenses
of the Fund. In addition, during certain periods for which total return
may be provided, Bankers Trust may have voluntarily agreed to waive
portions of its fees, or reimburse certain operating expenses of a
Fund, on a month-to-month basis. Such waivers will have the effect of
increasing such Fund's net income (and therefore its yield and total
return) during the period such waivers are in effect.
Performance Results: Total returns and yields are based on past results
and are not an indication of future performance. 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 corresponding 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. 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:
Asian Wall Street Journal, a weekly Asian newspaper that often reviews U.S.
mutual funds investing internationally.
Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds investing abroad.
Changing Times, The Kiplinger Magazine, a monthly investment advisory
publication that periodically features the performance of a variety of
securities.
Consumer Digest, a monthly business/financial magazine that includes a "Money
Watch" section featuring financial news.
Financial Times, Europe's business newspaper, which features from time to time
articles on international or country-specific funds.
Financial World, a general business/financial magazine that includes a "Market
Watch" department reporting on activities in the mutual fund industry.
Forbes, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the performance
of a variety of mutual funds.
Global Investor, a European publication that periodically reviews the
performance of U.S. mutual funds investing internationally.
Investor's Daily, a daily newspaper that features financial, economic and
business news.
Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a weekly
publication of industry-wide mutual fund averages by type of fund.
Money, a monthly magazine that from time to time features both specific funds
and the mutual fund industry as a whole.
Morningstar Inc., a publisher of financial information and mutual fund research.
New York Times, a nationally distributed newspaper which regularly covers
financial news.
Personal Investing News, a monthly news publication that often reports on
investment opportunities and market conditions.
Personal Investor, a monthly investment advisory publication that includes a
"Mutual Funds Outlook" section reporting on mutual fund performance measures,
yields, indices and portfolio holdings.
Success, a monthly magazine targeted to the world of entrepreneurs and growing
business, often featuring mutual fund performance data.
U.S. News and World Report, a national business weekly that periodically
reports mutual fund performance data.
Value Line, a biweekly publication that reports on the largest 15,000 mutual
funds.
Wall Street Journal, a Dow Jones and Company, Inc. newspaper which
regularly covers financial news.
Weisenberger Investment Companies Services, an annual compendium of information
about mutual funds and other investment companies, including comparative data on
funds' backgrounds, management policies, salient features, management results,
income and dividend records, and price ranges.
Working Women, a monthly publication that features a "Financial Workshop"
section reporting on the mutual fund/financial industry.
Economic and Market Information
Advertising and sales literature of a Fund may include discussions of economic,
financial and political developments and their effect on the securities market.
Such discussions may take the form of commentary on these developments by Fund
portfolio managers and their views and analysis on how such developments could
affect the Funds. In addition, advertising and sales literature may quote
statistics and give general information about the mutual fund industry,
including the growth of the industry, from sources such as the Investment
Company Institute ("ICI").
VALUATION OF SECURITIES; REDEMPTIONS AND PURCHASES IN KIND
Valuation of Securities
Each Fund is open for business each day the New York Stock Exchange, Inc.
("NYSE") is open (a "Valuation Day"). Each Fund's net asset value ("NAV") per
share is calculated as of the close of regular trading on the NYSE, which is
currently 4:00 p.m., Eastern time (the "Valuation Time"). The NAV per share is
computed by dividing the value of each Fund's assets, less all liabilities
attributable to the shares, by the total number of shares outstanding.
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 is 0.005 (1/2 of 1%) or less or shareholder transactions are
otherwise insubstantially affected, further action is not required.
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.
Each Fund's securities and other assets are valued primarily on the basis of
market quotations or, if quotations are not readily available, by a method which
the Fund's Board of Trustees believes accurately reflects fair value. 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, under the
supervision of the Board of Trustees, will value such securities based upon all
relevant factors as outlined in FRR 1.
Purchase and Redemption of Shares
Shares of each 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
Contract owners 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 Contract owners. Contract owners 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 each Fund's prospectus. Each Fund and the Distributor reserve the
right to reject any purchase order for shares of a Fund. Payment for redeemed
shares will ordinarily be made within seven (7) business days after a 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
Contract owner's request in proper form.
Each 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 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.
Redemptions and Purchases in Kind
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
a 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.
Each investor in a Fund may add to or reduce its investment in the Fund on each
day the Fund determines its net asset value. At the close of each such business
day, the value of each investor's beneficial interest in the Fund will be
determined by multiplying the net asset value of the Fund by the percentage,
effective for that day, which represents that investor's share of the aggregate
beneficial interests in the Fund. Any additions or withdrawals which are to be
effected as of the close of business on that day will then be effected. The
investor's percentage of the aggregate beneficial interests in the Fund will
then be recomputed as the percentage equal to the fraction (i) the numerator of
which is the value of such investor's investment in the Fund as of the close of
business on such day plus or minus, as the case may be, the amount of net
additions to or withdrawals from the investor's investment in the Fund effected
as of the close of business on such day, and (ii) the denominator of which is
the aggregate net asset value of the Fund as of the close of business on such
day plus or minus, as the case may be, the amount of net additions to or
withdrawals from the aggregate investments in the Fund by all investors in the
Fund. The percentage so determined will then be applied to determine the value
of the investor's interest in the Fund as the close of business on the following
business day.
Each Fund may, at its own option, accept securities in payment for shares. The
securities delivered in payment for shares are valued by the method described
under "Valuation of Securities" as of the day the Fund receives the securities.
This is a taxable transaction to the shareholder. Securities may be accepted in
payment for shares only if they are, in the judgment of Bankers Trust,
appropriate investments for the Fund. In addition, securities accepted in
payment for shares must: (i) meet the investment objective and policies of the
acquiring Fund; (ii) be acquired by the applicable Fund for investment and not
for resale; (iii) be liquid securities which are not restricted as to transfer
either by law or liquidity of market; and (iv) if stock, have a value which is
readily ascertainable as evidenced by a listing on a stock exchange,
over-the-counter market or by readily available market quotations from a dealer
in such securities. When securities are used as payment for shares or as a
redemption in kind from the fund, the transaction fee will not be assessed.
However, the shareholder will be charged the costs associated with receiving or
delivering the securities. These costs include security movement costs and taxes
and registration costs. Each Fund reserves the right to accept or reject at its
own option any and all securities offered in payment for its shares.
Trading in Foreign Securities
With respect to the EAFE(R) Equity Index Fund, trading in foreign cities may be
completed at times which vary from the closing of the NYSE. In computing the net
asset values, the Funds value foreign securities at the latest closing price on
the exchange on which they are traded immediately prior to the closing of the
NYSE. Similarly, foreign securities quoted in foreign currencies are translated
into U.S. dollars at the foreign exchange rates.
Occasionally, events that affect values and exchange rates may occur between the
times at which they are determined and the closing of the NYSE. If such events
materially affect the value of portfolio securities, these securities may be
valued at their fair value as determined in good faith by the Trustees, although
the actual calculation may be done by others.
MANAGEMENT OF THE TRUST
The Trust is governed by a Board of Trustees which is responsible for protecting
the interests of investors. None of the executive officers of the Trust or the
Funds devotes full time to the affairs of the Trust or the Funds.
The Board of Trustees is comprised of persons experienced in financial matters
who meet throughout the year to oversee the activities of the Funds. In
addition, the Trustees review contractual arrangements with companies that
provide services to the Funds and review the Funds' performance.
The Trustees and officers of the Trust, their birthdates, their principal
occupations during the past five years, and addresses are set forth below. Their
titles may have varied during that period. Unless otherwise indicated, the
address of each Trustee and officer is 101 Federal Street, Boston, Massachusetts
02110.
<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, 47 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, 55 Trustee Chairman of North American Properties
2015 West Main Street Group since January 1987.
Stamford, CT 06902
James S. Pasman, Jr., 68 Trustee Retired; President and Chief Operations
29 The Trillium Officer of National Intergroup Inc.
Pittsburgh, PA 15238 (1989-1991).
William E. Small, 57 Trustee and President Independent Consultant (1996-present);
Formerly Executive Vice President of
First Data Investor Services Group Inc.
("Investor Services Group") (1993-1996).
Elizabeth Russell, 36 Vice President and Secretary Counsel of Investor Services Group
since 1994; Assistant Vice President
and Counsel, The Boston Company
Advisors, Inc. (1993-1994).
Gerald J. Holland, __ Treasurer Vice President of Investor Services
Group since 1994; Senior Vice President
of Finance and Administration for
Delaware Management Company, Inc and
its affiliates prior to 1994.
Mr. Holland and Ms. 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.
</TABLE>
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,
1998, was as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
(1) (2) (3) (4) (5)
Pension or Retirement Total Compensation
Aggregate Benefits Accrued as Estimated Annual from Registrant and
Name of Compensation Part of Benefits Fund Complex
Board Member from Fund* Fund's Expenses Upon Retirement
Robert R. Coby $ N/A N/A $
Desmond G. FitzGerald $ N/A N/A $
James S. Pasman, Jr. $ N/A N/A $
William E. Small $ N/A N/A $
</TABLE>
* Amount does not include reimbursed expenses for attending Board meetings,
which amounted to $____ for all Trustees as a group.
As of _________, 1999 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).
Through its separate accounts, the Companies are the Fund's sole stockholders of
record.
As of ______, __, 1999, the following shareholders of record owned 5% or more
of the outstanding shares of the
Equity 500 Index Fund: [TO BE PROVIDED]
Name and Address Percentage Owned
As of ______, __, 1999, the following shareholders of record owned 5% or
more of the outstanding Shares of the EAFE(R) Equity Index Fund: [TO BE
PROVIDED]
Name and Address Percentage Owned
As of ______, __, 1999, the following shareholders of record owned 5% or
more of the outstanding Shares of the Small Cap Index Fund: [TO BE
PROVIDED]
Name and Address Percentage Owned
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 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
market. As of December 31, 1998, Bankers Trust Corporation was the eighth
largest bank holding company in the United States with total assets of over $156
billion. 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 $338 billion in assets under management globally.
Under the terms of each Fund's investment management agreement with Bankers
Trust (the "Management Agreements"), Bankers Trust manages each Fund subject to
the supervision and direction of the Board of Trustees of each Fund. Bankers
Trust will: (i) act in strict conformity with each Fund'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 Funds' business and affairs; and (vi)
supervise the performance of professional services provided by others.
Bankers Trust, subject to the supervision and direction of the Board of Trustees
of each Fund, manages each 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 investment adviser. All orders for investment
transactions on behalf of a Fund are placed by the Adviser 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. A Fund will not invest in obligations for which Bankers Trust
or any of its affiliates is the ultimate obligor or accepting bank. Each Fund
may, however, invest in the obligations of correspondents and customers of
Bankers Trust.
The Investment Adviser is a wholly owned subsidiary of Bankers Trust
Corporation. On November 30, 1998, Bankers Trust Corporation entered into an
Agreement and Plan of Merger with Deutsche Bank AG under which Bankers Trust
Corporation would merge with and into a subsidiary of Deutsche Bank AG. Deutsche
Bank AG is a major global banking institution that is engaged in a wide range of
financial services, including retail and commercial banking, investment banking
and insurance. The transaction is contingent upon various regulatory approvals,
as well as the approval of the Fund's shareholders. If the transaction is
approved and completed, Deutsche Bank AG, as the Investment Adviser's new parent
company, will control the operations of the Investment Adviser. Bankers Trust
believes that, under this new arrangement, the services provided to the Fund
will be maintained at their current level.
Bankers Trust bears all expenses in connection with the performance of services
under each Management Agreement. The Trust and 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, or any of its 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 or the Fund; and any extraordinary expenses.
The Investment Management Agreements provide for each Fund to pay Bankers Trust
a fee, accrued daily and paid monthly, equal on an annual basis to 0.15% of the
average daily net assets of the U.S. Bond Index Fund, 0.20% of the average daily
net assets of the Equity 500 Index Fund, 0.35% of the average daily net assets
of the Small Cap Index Fund and 0.45% of the average daily net assets of the
EAFE(R) Equity Index Fund. Bankers Trust has voluntarily undertaken to waive the
fees and to reimburse the Funds for certain expenses so that the Equity 500
Index Fund, Small Cap Index Fund and EAFE(R) Equity Index Fund total operating
expenses will not exceed 0.30%, 0.45% and 0.65%, respectively. Bankers Trust may
not recoup any of its waived investment advisory fees. Such waivers by Bankers
Trust shall stay in effect for at least 12 months.
For the fiscal year ended December 31, 1998, and for the period from October 1,
1997 (commencement of operations) to December 31, 1997, Bankers Trust earned
$_____ and $_____, respectively, as compensation for investment advisory
services provided to the Equity 500 Index Fund. During the same periods, Bankers
Trust reimbursed $_____ and $______, respectively, to the Fund to cover
expenses.
For the fiscal year ended December 31, 1998 and for the period from August 25,
1997 (commencement of operations) to December 31, 1997, Bankers Trust earned
$_____ and $_____, respectively, for investment advisory services provided to
the Small Cap Index Fund. During the same periods, Bankers Trust reimbursed
$_____ and $_____, respectively, to the Fund to cover expenses.
For the fiscal years ended December 31, 1998 and for the period from August 22,
1997 (commencement of operations) to December 31, 1997, Bankers Trust earned
$_____ and $_____, respectively, for investment advisory services provided to
the EAFE(R) Equity Index Fund. During the same periods, Bankers Trust reimbursed
$_____ and $_____, respectively, to the Fund to cover 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 persons issue, deal,
trade and invest in securities for their own accounts and are among the leading
market participants with respect to various types of such securities. Bankers
Trust has informed the Funds that, in making its investment decisions, it 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.
Administrator
Investor Services Group, 101 Federal Street, Boston, Massachusetts 02110, serves
as administrator of the Funds. 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 Trust 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.
For the fiscal year ended December 31, 1998, and for the period from August 25,
1997 (commencement of operations) to December 31, 1997, Small Cap Index Fund
paid Investor Services Group $_____ and $_____, respectively as compensation for
administrative and other services provided to Small Cap Index Fund.
For the fiscal year ended December 31, 1998, and for the period from August 22,
1997 (commencement of operations to December 31, 1997, EAFE(R) Equity Index Fund
paid Investor Services Group $_____ and $_____, respectively, as compensation
for administrative and other services provided to EAFE(R) Equity Index Fund.
For the fiscal year ended December 31, 1998, and for the period from October 1,
1997 (commencement of operations) to December 31, 1997, Equity 500 Index Fund
paid Investor Services Group $_____ and $_____, respectively, for administrative
and other services provided to the Equity 500 Index Fund.
Distributor
First Data Distributors, Inc. (the "Distributor") serves as distributor of the
Funds' 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, 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.
Expenses
In addition to the fees of Bankers Trust, the Funds are responsible for the
payment of all other expenses incurred in the operation of each Fund, which
include, among other things, expenses for legal and independent auditor's
services, charges of each 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 Contract owners, each 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 each Fund's net asset value per
share, expenses involved in registering and maintaining the registration of the
Funds' shares with the SEC and qualifying each 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 Contract owner servicing, distribution of reports to Contract owners and
prospectus printing and postage will be borne by the relevant Company.
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 adviser 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
Trust. 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, 787 Seventh Avenue, New York, New York 10019-6099,
serves as Counsel to the Trust and the Funds. Ernst & Young LLP, 2001 Market
Street, Philadelphia, Pennsylvania 19103 acts as Independent Accountants of the
Trust and each Fund.
ORGANIZATION OF THE TRUST
The Trust was organized on January 19, 1996, under the laws of the Commonwealth
of Massachusetts. The Funds are separate series of the Trust. The Trust offers
shares of beneficial interest of the Funds and the Trust's other series, par
value $0.001 per share. The shares of some 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
obligation.
Through its separate accounts, the Companies are the Funds' sole stockholders of
record. Therefore under the 1940 Act, Companies owning 25% or more of the
outstanding securities of a 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 Contract owners 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
Contract owners' interests in the Funds 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 _____, 1999 the Company deemed to be a control
person of ______ Fund was ________.]
Each share of the Funds 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.
Each Fund is only available to owners of variable annuity or variable life
insurance policies issued by the Companies through their respective separate
accounts. Each Fund does not currently foresee any disadvantages to Contract
owners 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 Contract owners. If a material irreconcilable conflict arises,
one or more separate accounts may withdraw their investment in a Fund. This
could possibly force a 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
Contract owners will likely increase due to the loss of economies of scale
benefits that can be provided to mutual funds with substantial assets.
As of _______ __, 1999, the following shareholders of record owned 25% or
more of the voting securities of the Equity 500 Index Fund, and, therefore,
may, for certain purposes, be deemed to control the Fund and be able to
affect the outcome of certain matters presented for a vote of its
shareholders: [TO BE PROVIDED]
As of _______ __, 1999, the following shareholders of record owned 25% or
more of the voting securities of the Small Cap Index Fund, and, therefore,
may, for certain purposes, be deemed to control the Fund and be able to
affect the outcome of certain matters presented for a vote of its
shareholders: [TO BE PROVIDED]
As of _______ __, 1999, the following shareholders of record owned 25% or
more of the voting securities of the EAFE(R) Equity Index Fund, and,
therefore, may, for certain purposes, be deemed to control the Fund and be
able to affect the outcome of certain matters presented for a vote of its
shareholders: [TO BE PROVIDED]
TAXATION
Taxation of the Funds
Each Fund intends to continue to qualify annually as a regulated investment
company under 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 shareholders. 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 Funds also do not
anticipate paying any excise taxes. The Funds' dividends and distributions will
not qualify for the dividends-received deduction for corporations.
If for any taxable year a Fund does not qualify for the special federal income
tax treatment afforded regulated investment companies, all of its taxable income
will be subject to federal income tax at regular corporate rates (without any
deduction for distributions to its shareholders). In such event, dividend
distributions would be taxable to shareholders to the extent of current
accumulated earnings and profits, and would be eligible for the dividends
received deduction for corporations in the case of corporate shareholders.
A Fund's investment in Section 1256 contracts, such as regulated futures
contracts, most forward currency forward contracts traded in the interbank
market and options on most stock indices, are subject to special tax rules. All
section 1256 contracts held by a Fund at the end of its taxable year are
required to be marked to their market value, and any unrealized gain or loss on
those positions will be included in the Fund's income as if each position had
been sold for its fair market value at the end of the taxable year. The
resulting gain or loss will be combined with any gain or loss realized by the
Fund from positions in section 1256 contracts closed during the taxable year.
Provided such positions were held as capital assets and were not part of a
"hedging transaction" nor part of a "straddle," 60% of the resulting net gain or
loss will be treated as long-term capital gain or loss, and 40% of such net gain
or loss will be treated as short-term capital gain or loss, regardless of the
period of time the positions were actually held by the Fund.
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 prospectus 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 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 each 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 a
Fund should consult a qualified tax adviser.
Distributions
Each Fund distributes substantially all of its net income and capital gains to
shareholders each year. Each Fund (except the U.S. Bond Index Fund) distributes
income dividends annually. U.S. Bond Index Fund declares income dividends daily
and distributes such dividends monthly. In addition, each Fund will distribute
net capital gains, if any, at least annually and may make additional capital
gains distributions at other times, if required, to remain in compliance with
the applicable tax regulations. Unless a shareholder instructs the Trust to pay
such dividends and distributions in cash, they will be automatically reinvested
in additional shares of the Fund that paid the dividend or distribution. The
prospectus for a Company's variable annuity or variable life insurance policies
describe the frequency of distributions to Contract owners and the federal
income tax treatment of distributions form such contracts to Contract owners.
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.
Foreign Withholding Taxes
Income received by a Fund from investments in foreign securities may be subject
to withholding and other taxes imposed by foreign countries.
FINANCIAL STATEMENTS
The financial statements for the Funds for the period ended December 31, 1998
(other than U.S. Bond Index Fund which has not commenced operations as of the
date of this SAI), are incorporated herein by reference to the Funds' Annual
Reports dated December 31, 1998. A copy of a Fund's Annual Report may be
obtained without charge by contacting the Customer Service Center at the
telephone number shown in the contract Prospectus.
<PAGE>
APPENDIX
Description of Moody's Corporate Bond Ratings:
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edge."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa securities.
A - Bonds rated A possess many favorable investment attributes and are to be
considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa - Bonds rated Baa are considered as medium-grade obligations, i.e. they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such, bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba - Bonds rated Ba are judged to have speculative elements. Their future cannot
be considered as well assured. Often the protection of interest and principal
payments may be very moderate and thereby not well safeguarded during both (good
and bad times over the future. Uncertainty of position characterizes bonds in
this class.
B - Bonds rated B generally lack characteristics of a desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked short-comings.
C - Bonds rated C are the lowest-rated class of bonds and issued so rated can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
Moody's applies numerical modifiers, 1, 2, and 3, in each generic rating
classification from Aa through B in its corporate bond system. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
Description of S&P's Corporate Bond Ratings:
AAA - Debt rated AAA has the highest rating assigned by S&P to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.
AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher-rated issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to weakened capacity to pay interest and repay principal for debt
in this category than in higher-rated categories.
BB - Debt rate BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments.
B - Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB- rating.
CCC - Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal.
CC - Debt rated CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating.
C -The rating C is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC- debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed but debt service
payments are continued.
CI - The rating CI is reserved for income bonds on which no interest is being
paid.
D - Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating will also be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
<PAGE>
Investment Adviser of each 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 Trust's Prospectuses, its
Statements of Additional Information or the Trust's official sales literature in
connection with the offering of the Trust'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 Prospectuses nor this SAI constitutes an
offer in any state in which, or to any person to whom, such offer may not
lawfully be made.
--------------------
Cusips:
05576L700
05576L809
05576L882
05576L874
055922751
COMBADV400 (4/98)
- --------
<PAGE>
PART C. OTHER INFORMATION
Item 23. Exhibits
Description
a 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.
b 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.
c Not Applicable.
d(1) 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.
d(2) 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.
d(3) 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(4) 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.
e 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.
f Not Applicable.
<PAGE>
Exhibit
Number Description
g(1) 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.
g(2) The Delegation Agreement, dated March 6,
1998, between Registrant and Bankers Trust
Company is filed herein as Exhibit g(2).
h(1) The Transfer Agency and Services Agreement, dated December 10, 1998,
between Registrant and First Data Investor Services Group, Inc. is filed
herein as Exhibit h(1).
h(2) The Administration Agreement, dated December 10, 1998, between
Registrant and First Data Investor Services Group, Inc. is filed
herein as Exhibit h(2).
i Not Applicable.
j(1) Consent of Independent Auditors to be filed by subsequent amendment.
j(2) 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.
k Not Applicable.
l(1) 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.
l(2) 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.
l(3) 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.
<PAGE>
Exhibit
Number Description
l(4) 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.
m Not Applicable.
n Financial Data Schedules for the Small Cap
Index Fund, EAFE(R) Equity Index Fund and
Equity 500 Index Fund are filed herein as
Exhibit n.
o Not Applicable.
Item 24. Persons Controlled by or Under Common Control with Registrant
Not Applicable.
Item 25. 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 26. 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 ("IBM"), Old
Orchard Road, Armonk, NY 10504. Director, Bankers Trust; Retired Senior Vice
President and Director, IBM; 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, Amherst College; and Chairman, Colonial Williamsburg Foundation.
Richard H. Daniel, Bankers Trust, 130 Liberty Street, New York, New York 10006.
Vice Chairman and Chief Financial Officer, Bankers Trust and Bankers Trust
Corporation; Beneficial owner, General Partner, Daniel Brothers, Daniel Lingo &
Assoc., Daniel Pelt & Assoc.; and beneficial owner, Rhea C. Daniel Trust.
Philip A. Griffiths, Bankers Trust, 130 Liberty Street, New York, New York
10006. Director, Institute for Advanced Study; Director, Bankers Trust;
Chairman, Committee on Science, Engineering and Public Policy of the National
Academies of Sciences and Engineering & the Institute of Medicine; Chairman and
member, Nominations Committee and Committee on Science and Engineering
Indicators, National Science Board; and 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; 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; 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, Bankers Trust, 130 Liberty Street, New York, New York 10006.
Chief Information Officer and Executive Vice President, Bankers Trust
Corporation; Senior Managing Director, Bankers Trust.
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; Director, The News Corporation Limited; Director,
Sola International Inc.; and Chairman, WWP Group plc.
Frank N. Newman, Bankers Trust, 130 Liberty Street, New York, New York 10006.
Chairman of the Board, Chief Executive Officer and President, Bankers Trust
Corporation and Bankers Trust; Director, Bankers Trust; Director, Dow-Jones,
Inc.; and Director, Carnegie Hall.
N.J. Nicholas Jr., 745 Fifth Avenue, New York, NY 10020. Director, Bankers
Trust; 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, The Palmer Group;
Director, Bankers Trust; 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, 130 Liberty Street, New York, New York 10006.
Chairman of the Board and Chief Executive Officer, Continental Grain Company;
Director, Bankers Trust; 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, Bankers Trust, Office of the Secretary, 130 Liberty
Street, New York, NY
10006. Director, Bankers Trust; Director, CVS Corporation; Director,
Community Foundation for Palm
Beach and Martin Counties; Trustee Emeritus, Cornell University.
George J. Vojta, Bankers Trust, 130 Liberty Street, New York, NY 10006. Vice
Chairman, Bankers Trust Corporation and Bankers Trust; Director, Bankers Trust;
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, 130 Liberty Street, New York, New York 10006.
Director, Bankers Trust; 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, 130 Liberty Street, New York, New York 10006.
Senior Managing Director and General Counsel, Bankers Trust Corporation and
Bankers Trust; Director, 1136 Tenants Corporation; and Director, ABA Securities
Association.
<PAGE>
Item 27. Principal Underwriters
(a) In addition to BT Insurance Funds Trust, First Data Distributors, Inc.
(the "Distributor") currently acts as distributor for ABN AMRO Funds,
Alleghany Funds, First Choice Funds Trust, Forward Funds, Inc., Galaxy Fund
II, Galaxy VIP Fund, IAA Trust Asset Allocation Fund, Inc., IAA Trust
Growth Fund, Inc., IAA Trust Tax Exempt Bond Fund, Inc., IAA Trust Taxable
Fixed Income Series Fund, Inc., IBJ Funds Trust, ICM Series Trust, Light
Index Fund, Inc., LKCM Funds, Matthews International Funds, McM Funds,
Metropolitan West Funds, Panorama Trust, RWB/WPG U.S. Large Stock Fund,
Smith Breeden Series Fund, Smith Breeden Trust, Stratton Growth Fund, Inc.,
Stratton Monthly Dividend REIT Shares, Inc., The Galaxy Fund, The Govett
Funds, Inc., The Potomac Funds, The Sports Funds Trust, The Stratton Funds,
Inc., Tomorrow Funds Retirement Trust, Trainer, Wortham First Mutual Funds,
Undiscovered Managers Funds, Weiss, Peck & Greer Funds Trust, Weiss, Peck &
Greer International Fund, Wilshire Target Funds, Inc., Worldwide Index
Funds, WPG Growth Fund, WPG Growth and Income Fund and WPG Tudor Fund. 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 27 (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.
Item 28. 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.
101 Federal Street
Boston, MA 02110
Item 29. Management Services
Not Applicable.
Item 30. Undertakings
Not Applicable.
<PAGE>
INDEX TO EXHIBITS
Exhibit Number Exhibit
g(2) Delegation Agreement between Registrant and Bankers Trust Company.
h(1) Transfer Agency and Services Agreement between Registrant and First
Data
Investor Services Group, Inc.
h(2) Administration Agreement between Registrant and First Data Investor
Services
Group, Inc.
n Financial Data Schedules for the Small Cap Index Fund, EAFE(R) 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 has duly
caused this Post-Effective Amendment No. 7 to its Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Boston and the Commonwealth of Massachusetts on this 26th day of February,
1999.
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 Post-Effective Amendment No. 7 to the Registration Statement has been
signed by the following persons in the capacities and on the date indicated:
<TABLE>
<CAPTION>
<S> <C> <C>
Signatures Title Date
* President and Trustee February 26, 1999
- ------------------------------
William E. Small
/s/Gerald J. Holland Treasurer February 26, 1999
Gerald J. Holland
* Trustee February 26, 1999
- ------------------------------
Robert R. Coby
* Trustee February 26, 1999
- ------------------------------
Desmond G. Fitzgerald
* Trustee February 26, 1999
- ------------------------------
James S. Pasman
* 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.
</TABLE>
<PAGE>
19
Exhibit g(2)
March 6, 1998
Board of Trustees
BT Insurance Funds Trust
Re: Delegation of Responsibilities as a Foreign Custody Manager
Dear Sirs:
WHEREAS, the Board of Trustees of each Fund listed on Appendix A (each
a "Fund" and, collectively, the "Funds") has appointed Bankers Trust Company, a
New York banking corporation, acting through its custody unit (the "Delegate")
as the custodian of the Fund's assets pursuant to a Custodian Agreement, dated
as of July 1, 1996; and
WHEREAS, a Fund may from time to time determine to invest and maintain
some or all of its assets outside of the United States.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, pursuant to the provisions of Rule 17f-5(b) under the
Investment Company Act of 1940, as amended ( the "1940 Act"), and subject to the
terms and conditions set forth herein, you (the "Board") on behalf of the Funds
hereby delegate, and the Delegate hereby agrees to accept and assume certain
responsibilities described herein concerning custody of (1) the Fund's
investments for which the primary market is outside of the United States and (2)
such cash and cash equivalents as are reasonably necessary to effect the Fund's
transactions in such investments (such investments and cash shall hereinafter be
referred to collectively as "Assets").
1. Representations of the Parties
The Delegate represents and warrants that it is a US Bank within the
meaning of Rule 17f-5(a)(7) under the 1940 Act and has the power and authority
to execute, deliver and perform this Agreement.
The Board represents and warrants that it has determined that it is
reasonable to rely on the Delegate to perform the responsibilities delegated by
this Agreement and has duly authorized the execution and delivery of this
Agreement on behalf of the Fund.
2. Jurisdictions Covered
The authority delegated by this Agreement applies with respect to
Assets held in the jurisdictions covered by the Delegate's subcustodial network
which are currently listed in Appendix B. Jurisdictions may be added by
instructions from the Board or a Fund's investment adviser which are accepted by
the Delegate. The Delegate's responsibility and authority with respect to
jurisdictions so added shall commence on the date of, or set forth in the
instructions.
<PAGE>
The Delegate may inform the Funds and clients generally of additions to its
subcustodial network by means of facsimile or similar means.
Each of the Board and the Delegate may withdraw its delegation or its
acceptance of such delegation with respect to any jurisdiction upon written
notice to the Delegate or the Board, as the case may be. The Board's withdrawal
of delegation shall be effective thirty (30) days after providing such notice to
the Delegate and the Delegate's withdrawal of acceptance shall be effective
sixty (60) days after providing such notice to the Board. Thereafter, the
Delegate shall have no further responsibility or authority under this Agreement
with respect to the jurisdiction or jurisdictions as to which authority or
acceptance of delegation is so withdrawn.
3. Delegation of Authority to Act as Foreign Custody Manager
(a) Subject to the provisions of this Agreement and the requirements of
applicable law, including Rule 17f-5 under the 1940 Act, the Delegate is
authorized to place and maintain Assets in the care of any Eligible Foreign
Custodian or Custodians within the meaning of Rule 17f-5(a)(1) of the 1940 Act
in each jurisdiction in which this Agreement applies and to enter into on behalf
of the Fund such written contract or contracts governing the Fund's foreign
custody arrangements with such Eligible Foreign Custodian or Custodians as the
Delegate deems appropriate.
(b) In addition, subject to the requirements of the 1940 Act and any
other applicable law or regulation, the Delegate is authorized to place and
maintain Assets in the care of any person (a "Permissible Foreign Custodian")
with which Assets may be placed and maintained outside of the United States
under the 1940 Act or in accordance with other regulations thereof and to enter
into on behalf of the Fund such written contract governing the Fund's foreign
custody arrangements with such Permissible Foreign Custodian as the Delegate
deems appropriate.
(c) The authority granted in (a) and (b) of this paragraph 3 shall
include subject to the same limitations set forth therein the authority to
withdraw Assets from an Eligible Foreign Custodian or Permissible Foreign
Custodian in any jurisdiction in which this Agreement applies and place and
maintain the Assets so withdrawn in the care of another Eligible Foreign
Custodian or Permissible Foreign Custodian in the same jurisdiction and to enter
into appropriate written contracts governing the Fund's foreign custody
arrangements with such Eligible Foreign Custodian or Permissible Foreign
Custodian.
4. Monitoring of Eligible Foreign Custodians and Contracts
In each case in which the Delegate has exercised the authority
delegated under this Agreement under Sections 3(a) and 3(b) to place Assets with
an Eligible Foreign Custodian, the Delegate is authorized to, and shall on
behalf of the Fund, establish a system to monitor the appropriateness of
maintaining the Fund's Assets with such Eligible Foreign Custodian and the
contract with such Eligible Foreign Custodian.
<PAGE>
5. Guidelines and Procedures for the Exercise of Delegated Authority
a. Board's Conclusive Determination Regarding Country Risk.
In exercising its delegated authority under this Agreement, the
Delegate may assume, for all purposes, that the Board (or the Fund's investment
adviser, which may be Bankers Trust Company acting through its advisory division
or affiliates, pursuant to authority delegated by the Board) has considered and,
pursuant to its fiduciary duties to the Fund and its shareholders, determined to
accept such country risk as is incurred by placing and maintaining Assets in the
jurisdictions to which this Agreement applies. In exercising its delegated
authority under this Agreement, the Delegate may also assume that the Board (or
the Fund's investment adviser pursuant to authority delegated by the Board) has,
and will continue to monitor such country risk to the extent that the Board
deems necessary or appropriate. Nothing in this Agreement shall require the
Delegate to make any selection or to engage in any monitoring on behalf of the
Fund that would entail the consideration of country risk. For purposes of this
Section 5(a), country risk means all factors reasonably related to the systemic
risk of holding assets in a particular country, including, without limitation,
such country's financial infrastructure (including any compulsory securities
depositories (as hereinafter defined) operating in such country); prevailing
custody and settlement practices; and laws and regulations applicable to the
safekeeping and recovery of assets held in custody. A compulsory securities
depository is a securities depository within the meaning of Rule 17f-5(a)(6)
under the 1940 Act the use of which is (i) mandatory by law or regulation or
(ii) in practice mandatory because (x) securities cannot be withdrawn from the
depository or (y) maintaining securities outside of the depository is not
consistent with prevailing custodial practices.
b. Selection of Eligible Foreign Custodians.
In exercising the authority delegated under this Agreement to place
Assets with an Eligible Foreign Custodian, the Delegate shall determine that
Assets will be held by such Eligible Foreign Custodian subject to reasonable
care based on the standards applicable to custodians in the market in which the
Assets will be held after considering all factors relevant to the safekeeping of
such Assets, including, without limitation, those set forth in Rule 17f-5(c)(1)
of the 1940 Act.
c. Evaluation of Written Contracts.
In exercising the authority delegated under this Agreement to enter
into written contracts governing the Fund's foreign custody arrangements with an
Eligible Foreign Custodian, the Delegate shall determine that such contracts
(or, in the case of a securities depository other than a compulsory securities
depository, such contract, the rules or established practices and procedures of
such depository, or any combination of the foregoing) provide reasonable care
for Assets based on the standards applicable to Eligible Foreign Custodians in
the relevant market and include the following provisions (or provisions which
provide, in their entirety, the same or a greater level of care and protection):
<PAGE>
indemnification or insurance arrangements (or a combination of
the foregoing) that will adequately protect the Funds against the
risk of loss of Assets held in accordance with the contract;
a prohibition against the Fund's Assets being subject to any
right, charge, security interest, lien or claim of any kind in
favor of the Eligible Foreign Custodian or its creditors, except a
claim of payment for the safe custody or administration of a
Funds's Assets or, in the case of cash deposits, liens or rights
in favor of creditors of such Eligible Foreign Custodian arising
under bankruptcy, insolvency or similar laws;
that beneficial ownership of a Fund's Assets will be freely
transferable without the payment of money or value other than for
safe custody or administration;
maintenance of adequate records identifying a Fund's Assets as
belonging to the Fund or as being held by a third party for the
benefit of the Fund and that a Fund's independent accountants will
be given access to those records (or confirmation of their
contents); and
that the Delegate will receive sufficient and timely periodic
reports with respect to the safekeeping of a Fund's Assets,
including, but not limited to, notification of any transfer to or
from the Fund's account or a third party account containing the
Fund's Assets.
6. Standard of Care
In exercising the authority delegated under this Agreement, the
Delegate will exercise reasonable care, prudence and diligence such as a person
having responsibility for safekeeping the Funds' Assets would exercise but
subject to the provisions of this Agreement, including, without limitation,
paragraph 5(b) above.
7. Notification of Custodial Placement
The Delegate agrees to provide written reports notifying the Board of
the placement of Assets with a particular Eligible Foreign Custodian or
Permissible Foreign Custodian and of any material change in the Fund's foreign
custody arrangements. Such reports shall be provided to the Board annually (or
more frequently as the parties may agree), except that the Delegate shall report
to the Board any matter that the Delegate believes warrants the Board's prompt
attention.
8. Effectiveness and Termination
This Agreement shall become effective as of the date set forth above
upon the execution and delivery of this Agreement or a counterpart thereof by
each party thereto to the other party. This Agreement may be terminated at any
time, without penalty, by either party hereto, by written notice from the
terminating party to the non-terminating party. Such termination shall become
effective 90 days after receipt by the non-terminating party of such notice.
This Agreement shall also terminate upon the effectiveness of termination of the
employment of the Delegate as custodian of Assets.
9. Notices
All communications and notices between the parties hereto in connection
herewith (a) shall be in writing, hand delivered or sent by telex, telegram,
cable, facsimile or other means of electronic communication agreed upon by the
parties hereto addressed, if to a Fund, to:
BT Insurance Funds Trust
c/o First Data Investment Services Group.
Exchange Place
Boston, MA 02109-2873
Attn: Elizabeth Russell (617) 573-1531
Fax: (617) 722-9269
If to the Delegate, to:
Bankers Trust Company
One Bankers Trust Plaza-20
130 Liberty Street
New York, NY 10006
Attn: Richard J. Fogarty (212) 250-7686
Fax: (212) 669-0898
or in either case to such other address as shall have been furnished to the
receiving party pursuant to the provisions hereof and (b) shall be deemed
effective when received, or, in the case of a telex, when sent to the proper
number and acknowledged by a proper answerback.
10. Governing Law and Successors and Assigns
This Agreement shall be construed in accordance with the laws of the
State of New York and shall not be assignable by either party but shall bind the
successors in interest of the Board and the Delegate. Any suit, action or
proceeding arising out of this Agreement may be instituted in any State or
Federal court sitting in the City of New York, State of New York, United States
of America, and the Fund irrevocably submits to the exclusive jurisdiction of
any such court in any such suit, action or proceeding and waives, to the fullest
extent permitted by law, any objection which it may now or hereafter have to the
laying of venue of any such suit, action or proceeding brought in such a court
and any claim that such suit, action or proceeding was brought in an
inconvenient forum. Each party hereto irrevocably consents to the service of
process out of any of the aforementioned courts in any such action or proceeding
by the mailing of copies thereof by certified air mail, postage prepaid, to the
other party at its address set forth in Section 10 above or in any other manner
permitted by law.
<PAGE>
11. Counterparts
This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original.
If the foregoing correctly sets forth our understanding, please execute
in the space provided below and return to the undersigned the enclosed copy of
this Agreement.
Very truly yours,
BANKERS TRUST COMPANY
By: /s/Richard Quintal
AGREED AS SET FORTH ABOVE
BT INSURANCE FUNDS TRUST
MUTUAL FUNDS LISTED ON APPENDIX A
By: /s/William E. Small
<PAGE>
APPENDIX A
MANAGED ASSETS FUND
SMALL CAP FUND
INTERNATIONAL EQUITY FUND
SMALL CAP INDEX FUND
EAFE EQUITY INDEX FUND
EQUITY 500 INDEX FUND
U.S. BOND INDEX FUND
<PAGE>
APPENDIX B-- The following are the jurisdictions covered by the
Delegate's subcustodial network, as referenced in Paragraph 2:
Argentina Poland
Australia Portugal
Austria Russia
Bangladesh Singapore
Belgium Slovak Republic
Botswana South Africa
Brazil South Korea
Canada Spain
Chile Sri Lanka
People's Republic of China-Shanghai Sweden
People's Republic of China-Shenzhen Switzerland
Colombia Taiwan
Czech Republic Thailand
Denmark Turkey
Ecuador United Kingdom
Egypt Venezuela
Finland Zambia
France Zimbabwe
Germany
Ghana
Greece
Hong Kong
Hungary
India
Indonesia
Ireland
Israel
Italy
Japan
Jordan
Kenya
Luxembourg
Malaysia
Mauritius
Mexico
Morocco
Netherlands
New Zealand
Norway
Pakistan
Peru
<PAGE>
42
contract\ta\openend\bt98\trans2.doc
Exhibit h(1)
TRANSFER AGENCY AND SERVICES AGREEMENT
THIS AGREEMENT, dated as of this 10th day of December, 1998 between BT
INSURANCE FUNDS TRUST (the "Fund"), a Massachusetts business trust having its
principal place of business at 53 State Street Boston Massachusetts 02109 and
FIRST DATA INVESTOR SERVICES GROUP, INC. ("Investor Services Group"), a
Massachusetts corporation with principal offices at 4400 Computer Drive
Westboro, Massachusetts 01581.
WITNESSETH
WHEREAS, the Fund is authorized to issue Shares in separate series,
with each such series representing interests in a separate portfolio of
securities and other assets;
WHEREAS, the Fund initially intends to offer shares in those Portfolios
identified in the attached Exhibit 1, each such Portfolio, together with all
other Portfolios subsequently established by the Fund shall be subject to this
Agreement in accordance with Article 14;
WHEREAS, the Fund on behalf of the Portfolios, desires to appoint
Investor Services Group as its transfer agent, dividend disbursing agent and
agent in connection with certain other activities and Investor Services Group
desires to accept such appointment;
WHEREAS, Investor Services Group desires to accept such appointment;
NOW, THEREFORE, in consideration of the mutual covenants and promises
hereinafter set forth, the Fund and Investor Services Group agree as follows:
Article 1 Definitions.
1.1 Whenever used in this Agreement, the following words and phrases,
unless the context otherwise requires, shall have the following meanings:
(a) "Articles of Incorporation" shall mean the Articles of
Incorporation, Declaration of Trust, or other similar organizational
document as the case may be, of the Fund as the same may be amended
from time to time.
(b) "Authorized Person" shall be deemed to include (i) any
authorized officer of the Fund; or (ii) any person, whether or not such
person is an officer or employee of the Fund, duly authorized to give
Oral Instructions or Written Instructions on behalf of the Fund as
indicated in writing to Investor Services Group from time to time.
(c) "Board of Directors" shall mean the Board of Directors or
Board of Trustees of the Fund, as the case may be.
(d) "Commission" shall mean the Securities and Exchange
Commission.
(e) "Custodian" refers to any custodian or subcustodian of
securities and other property which the Fund may from time to time
deposit, or cause to be deposited or held under the name or account of
such a custodian pursuant to a Custodian Agreement.
(f) "1934 Act" shall mean the Securities Exchange Act of 1934
and the rules and regulations promulgated thereunder, all as amended
from time to time.
(g) "1940 Act" shall mean the Investment Company Act of 1940
and the rules and regulations promulgated thereunder, all as amended
from time to time.
(h) "Oral Instructions" shall mean instructions, other than
Written Instructions, actually received by Investor Services Group from
a person reasonably believed by Investor Services Group to be an
Authorized Person;
(i) "Portfolio" shall mean each separate series of shares
offered by the Fund representing interest in a separate portfolio of
securities and other assets;
(j) "Prospectus" shall mean the most recently dated Fund
Prospectus and Statement of Additional Information, including any
supplements thereto if any, which has become effective under the
Securities Act of 1933 and the 1940 Act.
(k) "Shares" refers collectively to such shares of capital
stock or beneficial interest, as the case may be, or class thereof, of
each respective Portfolio of the Fund as may be issued from time to
time.
(l) "Shareholder" shall mean a record owner of Shares of each
respective Portfolio of the Fund.
(m) "Written Instructions" shall mean a written communication
signed by a person reasonably believed by Investor Services Group to be
an Authorized Person and actually received by Investor Services Group.
Written Instructions shall include manually executed originals and
authorized electronic transmissions, including telefacsimile of a
manually executed original or other process.
Article 2 Appointment of Investor Services Group.
The Fund, on behalf of the Portfolios, hereby appoints and constitutes
Investor Services Group as transfer agent and dividend disbursing agent for
Shares of each respective Portfolio of the Fund and as shareholder servicing
agent for the Fund and Investor Services Group hereby accepts such appointments
and agrees to perform the duties hereinafter set forth.
Article 3 Duties of Investor Services Group.
3.1 Investor Services Group shall be responsible for:
(a) Administering and/or performing the customary services of
a transfer agent; acting as service agent in connection with dividend
and distribution functions; and for performing shareholder account and
administrative agent functions in connection with the issuance,
transfer and redemption or repurchase (including coordination with the
Custodian) of Shares of each Portfolio, as more fully described in the
written schedule of Duties of Investor Services Group annexed hereto as
Schedule A and incorporated herein, and in accordance with the terms of
the Prospectus of the Fund on behalf of the applicable Portfolio,
applicable law and the procedures established from time to time between
Investor Services Group and the Fund.
(b) Recording the issuance of Shares and maintaining pursuant
to Rule 17Ad-10(e) of the 1934 Act a record of the total number of
Shares of each Portfolio which are authorized, based upon data provided
to it by the Fund, and issued and outstanding. Investor Services Group
shall provide the Fund on a regular basis with the total number of
Shares of each Portfolio which are authorized and issued and
outstanding and shall have no obligation, when recording the issuance
of Shares, to monitor the issuance of such Shares or to take cognizance
of any laws relating to the issue or sale of such Shares, which
functions shall be the sole responsibility of the Fund.
(c) Notwithstanding any of the foregoing provisions of this
Agreement, Investor Services Group shall be under no duty or obligation
to inquire into, and shall not be liable for: (i) the legality of the
issuance or sale of any Shares; (ii) the legality of the redemption of
any Shares, or the propriety of the amount to be paid therefor; (iii)
the legality of the declaration of any dividend by the Board of
Directors, or the legality of the issuance of any Shares in payment of
any dividend; or (iv) the legality of any recapitalization or
readjustment of the Shares.
3.2 In addition to the duties set forth herein, Investor Services Group
shall perform such other duties and functions, and shall be paid such amounts
therefor, as may from time to time be agreed upon in writing between the Fund
and Investor Services Group.
3.3 Investor Services Group agrees to provide the services described
herein in accordance with the Performance Standards annexed hereto as Exhibit 1
to Schedule A and incorporated herein (the "Performance Standards"). Such
Performance Standards may be amended from time to time upon written agreement by
the parties.
<PAGE>
Article 4 Recordkeeping and Other Information.
4.1 Investor Services Group shall create and maintain all records
required of it pursuant to its duties hereunder and as set forth in Schedule A
in accordance with all applicable laws, rules and regulations, including records
required by Section 31(a) of the 1940 Act. Where applicable, such records shall
be maintained by Investor Services Group for the periods and in the places
required by Rule 31a-2 under the 1940 Act.
4.2 To the extent required by Section 31 of the 1940 Act, Investor
Services Group agrees that all such records prepared or maintained by Investor
Services Group relating to the services to be performed by Investor Services
Group hereunder are the property of the Fund and will be preserved, maintained
and made available in accordance with such section, and will be surrendered
promptly to the Fund on and in accordance with the Fund's request.
4.3 In case of any requests or demands for the inspection of
Shareholder records of the Fund, Investor Services Group will endeavor to notify
the Fund of such request and secure Written Instructions as to the handling of
such request. Investor Services Group reserves the right, however, to exhibit
the Shareholder records to any person whenever it is advised by its counsel that
it may be held liable for the failure to comply with such request.
Article 5 Fund Instructions.
5.1 Investor Services Group will have no liability when acting upon
Written or Oral Instructions believed to have been executed or orally
communicated by an Authorized Person and will not be held to have any notice of
any change of authority of any person until receipt of a Written Instruction
thereof from the Fund. Investor Services Group will also have no liability when
processing Share certificates with the proper countersignature of Investor
Services Group which it reasonably believes to bear the proper manual or
facsimile signatures of the officers of the Fund.
5.2 At any time, Investor Services Group may request Written
Instructions from the Fund and may seek advice from legal counsel for the Fund
(with the Fund's consent), or its own legal counsel, with respect to any matter
arising in connection with this Agreement, and subject to Section 11.1, it shall
not be liable for any action taken or not taken or suffered by it in good faith
in accordance with such Written Instructions or in accordance with the opinion
of counsel for the Fund. Written Instructions requested by Investor Services
Group will be provided by the Fund within a reasonable period of time.
5.3 Investor Services Group, its officers, agents or employees, shall
accept Oral Instructions or Written Instructions given to them by any person
representing or acting on behalf of the Fund only if said representative is an
Authorized Person. The Fund agrees that all Oral Instructions shall be followed
within one business day by confirming Written Instructions, and that the Fund's
failure to so confirm shall not impair in any respect Investor Services Group's
right to rely on Oral Instructions.
Article 6 Compensation.
6.1 The Fund on behalf of each of the Portfolios will compensate
Investor Services Group for the performance of its obligations hereunder in
accordance with the fees set forth in the written Fee Schedule annexed hereto as
Schedule B and incorporated herein.
6.2 In addition to those fees set forth in Section 6.1 above, the Fund
on behalf of each of the Portfolios agrees to pay, and will be billed separately
for, out-of-pocket expenses incurred by Investor Services Group in the
performance of its duties hereunder. Out-of-pocket expenses shall include, but
shall not be limited to, the items specified in the written schedule of
out-of-pocket charges annexed hereto as Schedule C and incorporated herein.
Schedule C may be modified by written agreement between the parties. Unspecified
out-of-pocket expenses shall be limited to those out-of-pocket expenses
reasonably incurred by Investor Services Group in the performance of its
obligations hereunder.
6.3 The Fund on behalf of each of the Portfolios agrees to pay all fees
and out-of-pocket expenses within fifteen (15) days following the receipt of the
respective invoice.
6.4 The Fund acknowledges that the fees that Investor Services Group
charges the Fund under this Agreement reflect the allocation of risk between the
parties, including the disclaimer of warranties in Section 9.3 and the
limitations on liability and exclusion of remedies in Section 11.2 and Article
12. Modifying the allocation of risk from what is stated here would affect the
fees that Investor Services Group charges, and in consideration of those fees,
the Fund agrees to the stated allocation of risk.
Article 7 Documents.
In connection with the appointment of Investor Services Group, the Fund
shall, on or before the date this Agreement goes into effect, but in any case
within a reasonable period of time for Investor Services Group to prepare to
perform its duties hereunder, deliver or caused to be delivered to Investor
Services Group the documents set forth in the written schedule of Fund Documents
annexed hereto as Schedule D.
Article 8 Transfer Agent System.
8.1 Investor Services Group shall retain title to and ownership of any
and all data bases, computer programs, screen formats, report formats,
interactive design techniques, derivative works, inventions, discoveries,
patentable or copyrightable matters, concepts, expertise, patents, copyrights,
trade secrets, and other related legal rights utilized by Investor Services
Group in connection with the services provided by Investor Services Group to the
Fund herein (the "Investor Services Group System").
8.2 Investor Services Group hereby grants to the Fund a limited license
to the Investor Services Group System for the sole and limited purpose of having
Investor Services Group provide the services contemplated hereunder and nothing
contained in this Agreement shall be construed or interpreted otherwise and such
license shall immediately terminate upon the termination of this Agreement.
Article 9 Representations and Warranties.
9.1 Investor Services Group represents and warrants to the Fund that:
(a) it is a corporation duly organized, existing and in good standing under
the laws of the Commonwealth of Massachusetts;
(b) it is empowered under applicable laws and by its Articles
of Incorporation and By-Laws to enter into and perform this Agreement;
(c) all requisite corporate proceedings have been taken to
authorize it to enter into this Agreement;
(d) it is duly registered with its appropriate regulatory
agency as a transfer agent and such registration will remain in effect
for the duration of this Agreement; and
(e) it has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and
obligations under this Agreement.
9.2 The Fund represents and warrants to Investor Services Group that:
(a) it is duly organized, existing and in good standing under the laws of
the jurisdiction in which it is organized;
(b) it is empowered under applicable laws and by its Article
of Incorporation and By-Laws to enter into this Agreement;
(c) all corporate proceedings required by said Articles of
Incorporation, By-Laws and applicable laws have been taken to authorize
it to enter into this Agreement;
(d) a registration statement under the Securities Act of 1933,
as amended, and the 1940 Act on behalf of each of the Portfolios is
currently effective and will remain effective, and all appropriate
state securities law filings have been made and will continue to be
made, with respect to all Shares of the Fund being offered for sale;
and
(e) all outstanding Shares are validly issued, fully paid and
non-assessable and when Shares are hereafter issued in accordance with
the terms of the Fund's Articles of Incorporation and its Prospectus
with respect to each Portfolio, such Shares shall be validly issued,
fully paid and non-assessable.
9.3 THIS IS A SERVICE AGREEMENT. EXCEPT AS EXPRESSLY PROVIDED IN THIS
AGREEMENT, INVESTOR SERVICES GROUP DISCLAIMS ALL OTHER REPRESENTATIONS OR
WARRANTIES, EXPRESS OR IMPLIED, MADE TO THE FUND OR ANY OTHER PERSON, INCLUDING,
WITHOUT LIMITATION, ANY WARRANTIES REGARDING QUALITY, SUITABILITY,
MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR OTHERWISE (IRRESPECTIVE OF
ANY COURSE OF DEALING, CUSTOM OR USAGE OF TRADE) OF ANY SERVICES OR ANY GOODS
PROVIDED INCIDENTAL TO SERVICES PROVIDED UNDER THIS AGREEMENT. INVESTOR SERVICES
GROUP DISCLAIMS ANY WARRANTY OF TITLE OR NON-INFRINGEMENT EXCEPT AS OTHERWISE
SET FORTH IN THIS AGREEMENT.
Article 10 Indemnification.
10.1 Investor Services Group shall not be responsible for and the Fund
on behalf of each Portfolio shall indemnify and hold Investor Services Group
harmless from and against any and all claims, costs, expenses (including
reasonable attorneys' fees), losses, damages, charges, payments and liabilities
of any sort or kind which may be asserted against Investor Services Group or for
which Investor Services Group may be held to be liable (a "Claim") arising out
of or attributable to any of the following:
(a) any actions of Investor Services Group required to be
taken pursuant to this Agreement unless such Claim resulted from (1) a
negligent act or omission to act, willful misconduct or bad faith by
Investor Services Group in the performance of its duties hereunder
and/or (2) breach of any representation or warranty of Investor
Services Group in this Agreement;
(b) Investor Services Group's reasonable reliance on, or
reasonable use of information, data, records and documents (including
but not limited to magnetic tapes, computer printouts, hard copies and
microfilm copies) received by Investor Services Group from the Fund, or
any third party authorized in writing to act on behalf of the Fund in
the performance of Investor Services Group's duties and obligations
hereunder;
(c) the reliance on, or the implementation of, any Written or
Oral Instructions or any other instructions or requests of the Fund on
behalf of the applicable Portfolio;
(d) the Fund's refusal or failure to materially comply with
the terms of this Agreement, or any Claim which arises out of the
Fund's negligence or willful misconduct or the material breach of any
representation or warranty of the Fund made herein.
Except where Investor Services Group is entitled to indemnification
under Section 10.1 hereof, Investor Services Group shall indemnify and hold the
Fund (and the relevant Portfolio harmless from and against any and all claims,
costs, expenses (including reasonable attorneys' fees) losses, damages, charges,
payments and liabilities of any sort or kind arising out of or attributable to
Investor Services Group's failure to comply with the terms of this Agreement or
arising out of or attributable to Investor Services Group's negligence, willful
misconduct or bad faith or breach of any representations or warranties of
Investor Services Group in this Agreement.
10.2 In any case in which either party (the "Indemnifying Party") may
be asked to indemnify or hold the other party (the "Indemnified Party")
harmless, the Indemnified Party will notify the Indemnifying Party in writing
promptly after identifying any situation which it believes presents or appears
likely to present a claim for indemnification against the Indemnifying Party
although the failure to do so shall not prevent recovery by the Indemnified
Party and shall keep the Indemnifying Party advised with respect to all
developments concerning such situation. The Indemnifying Party shall have the
option to defend the Indemnified Party against any Claim which may be the
subject of this indemnification, and, in the event that the Indemnifying Party
so elects, such defense shall be conducted by counsel chosen by the Indemnifying
Party and satisfactory to the Indemnified Party, and thereupon the Indemnifying
Party shall take over complete defense of the Claim and the Indemnified Party
shall sustain no further legal or other expenses in respect of such Claim. the
Indemnified Party will not confess any Claim or make any compromise in any case
in which the Indemnifying Party will be asked to provide indemnification, except
with the Indemnifying Party's prior written consent. The obligations of the
parties hereto under this Article 10 shall survive the termination of this
Agreement.
10.3 Any claim for indemnification under this Agreement must be made
prior to the earlier of:
(a) one year after the Fund becomes aware of the event for which
indemnification is claimed; or
(b) one year after the earlier of the termination of this
Agreement or the expiration of the term of this Agreement.
10.4 Except for remedies that cannot be waived as a matter of law (and
injunctive or provisional relief), the provisions of this Article 10 shall be
Investor Services Group's sole and exclusive remedy for claims or other actions
or proceedings to which the Fund's indemnification obligations pursuant to this
Article 10 may apply.
Article 11 Standard of Care.
11.1 Investor Services Group shall at all times act in good faith and
agrees to use its best efforts within commercially reasonable limits to ensure
the accuracy of all services performed under this Agreement, but assumes no
responsibility for loss or damage to the Fund unless said errors are caused by
Investor Services Group's own negligence, bad faith or willful misconduct or
that of its employees.
11.2 Notwithstanding any provision in this Agreement to the contrary,
Investor Services Group's cumulative liability (to the Fund) for all Claims
arising out of or related to this Agreement and regardless of the form of action
or legal theory shall not exceed five million ($5,000,000) dollars.
11.3 Each party shall have the duty to mitigate damages for which the
other party may become responsible.
Article 12 Consequential Damages.
NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO THE CONTRARY, IN NO EVENT
SHALL EITHER PARTY, ITS AFFILIATES OR ANY OF ITS OR THEIR DIRECTORS, OFFICERS,
EMPLOYEES, AGENTS OR SUBCONTRACTORS BE LIABLE UNDER ANY THEORY OF TORT,
CONTRACT, STRICT LIABILITY OR OTHER LEGAL OR EQUITABLE THEORY FOR LOST PROFITS,
EXEMPLARY, PUNITIVE, SPECIAL, INCIDENTAL, INDIRECT OR CONSEQUENTIAL DAMAGES,
EACH OF WHICH IS HEREBY EXCLUDED BY AGREEMENT OF THE PARTIES REGARDLESS OF
WHETHER SUCH DAMAGES WERE FORESEEABLE OR WHETHER EITHER PARTY OR ANY ENTITY HAS
BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
Article 13 Term and Termination.
13.1 This Agreement shall be effective on the date first written above
and shall continue for a period of five (5) years (the "Initial Term").
13.2 Upon expiration of the Initial Term, this Agreement shall
automatically renew for successive terms of one (1) year ("Renewal Terms") each,
unless the Fund or Investor Services Group provides written notice to the other
of its intent not to renew. Such notice must be received not less than ninety
(90) days and not more than one hundred eighty (180) days prior to the
expiration of the Initial Term or the current renewal term. In the event the
Fund shall provide Investor Services Group with notice to terminate this
Agreement, it shall be deemed that the Fund has given similar notice to
terminate the Administration Agreement between the Fund and Investor Services
Group and the Distribution Agreement between the Fund and First Data
Distributors, Inc., and such other agreements shall terminate on the same date
as this Agreement; provided, however, that Investor Services Group, in its sole
discretion, shall have the right to waive this cross termination provision with
respect to either or both agreements.
13.3 In the event a termination notice is given by the Fund, all
expenses associated with movement of records and materials and conversion
thereof to a successor transfer agent will be borne by the Fund.
13.4 If a party hereto is guilty of a material failure to perform its
duties and obligations hereunder (a "Defaulting Party") the other party (the
"Non-Defaulting Party") may give written notice thereof to the Defaulting Party,
and if such material breach shall not have been remedied within thirty (30) days
after such written notice is given, then the Non-Defaulting Party may
immediately terminate this Agreement by giving written notice of such
termination to the Defaulting Party. If Investor Services Group is the
Non-Defaulting Party, its termination of this Agreement shall not constitute a
waiver of any other rights or remedies of Investor Services Group with respect
to services performed prior to such termination of rights of Investor Services
Group to be reimbursed for out-of-pocket expenses. In all cases, termination by
the Non-Defaulting Party shall not constitute a waiver by the Non-Defaulting
Party of any other rights or remedies it might have under this Agreement or
otherwise against the Defaulting Party.
13.5 In the event that Investor Services Group has failed to meet a
specific Performance Standard, as set forth in Exhibit 1 to Schedule A, in any
two consecutive calendar quarters, the Fund may terminate this Agreement upon
ninety (90) days written notice to Investor Services Group. The Fund must
provide such notice within thirty (30) days following the end of second calendar
quarter if it intends to exercise its option under this Section 13.5.
Notwithstanding the foregoing, the Fund's right under this Section 13.5 shall
not become effective until ninety (90) days following the effective date of this
Agreement.
Article 14 Additional Portfolios.
In the event that the Fund establishes one or more Portfolios in
addition to those identified in Exhibit 1, with respect to which the Fund
desires to have Investor Services Group render services as transfer agent under
the terms hereof, the Fund shall so notify Investor Services Group in writing,
and if Investor Services Group agrees in writing to provide such services,
Exhibit 1 shall be amended to include such additional Portfolios.
Article 15 Confidentiality.
15.1 The parties agree that the Proprietary Information (defined below)
and the contents of this Agreement (collectively "Confidential Information") are
confidential information of the parties and their respective licensors. The Fund
and Investor Services Group shall exercise at least the same degree of care, but
not less than reasonable care, to safeguard the confidentiality of the
Confidential Information of the other as it would exercise to protect its own
confidential information of a similar nature. The Fund and Investor Services
Group may use the Confidential Information only to exercise its rights under
this Agreement. Except as required by law, the Fund and Investor Services Group
shall not duplicate, sell or disclose to others the Confidential Information of
the other, in whole or in part, without the prior written permission of the
other party. The Fund and Investor Services Group may, however, disclose
Confidential Information to its employees, auditors, counsel, regulatory
authorities and others agreed to by Investor Services Group and the Fund who
have a need to know the Confidential Information to perform work for the other,
provided that each shall use reasonable efforts to ensure that the Confidential
Information is not duplicated or disclosed by its employees in breach of this
Agreement. The Fund and Investor Services Group may also disclose the
Confidential Information to independent contractors, provided they first agree
in writing to be bound by the confidentiality obligations substantially similar
to this Section 15.1. Notwithstanding the previous sentence, in no event shall
either the Fund or Investor Services Group disclose the Confidential Information
to any competitor of the other without specific, prior written consent.
15.2 Proprietary Information means:
(a) any data or information that is competitively sensitive
material, and not generally known to the public, including, but not
limited to, information about product plans, marketing strategies,
finance, operations, customer relationships, customer profiles, sales
estimates, business plans, and internal performance results relating to
the past, present or future business activities of the Fund or Investor
Services Group, their respective subsidiaries and affiliated companies
and the customers, clients and suppliers of any of them;
(b) any scientific or technical information, design, process,
procedure, formula, or improvement that is commercially valuable and
secret in the sense that its confidentiality affords the Fund or
Investor Services Group a competitive advantage over its competitors;
and
(c) all confidential or proprietary concepts, documentation,
reports, data, specifications, computer software, source code, object
code, flow charts, databases, inventions, know-how, show-how and trade
secrets, whether or not patentable or copyrightable.
15.3 Confidential Information includes, without limitation, all
documents, inventions, substances, engineering and laboratory notebooks,
drawings, diagrams, specifications, bills of material, equipment, prototypes and
models, and any other tangible manifestation of the foregoing of either party
which now exist or come into the control or possession of the other.
Article 16 Force Majeure.
16.1 No party shall be liable for any default or delay in the
performance of its obligations under this Agreement if and to the extent such
default or delay is caused, directly or indirectly, by (i) fire, flood, elements
of nature or other acts of God; (ii) any outbreak or escalation of hostilities,
war, riots or civil disorders in any country, (iii) any act or omission of the
other party or any governmental authority; or (iv) nonperformance by a third
party or any similar cause beyond the reasonable control of such party,
including without limitation, failures or fluctuations in telecommunications or
other equipment. In any such event, the non-performing party shall be excused
from any further performance and observance of the obligations so affected only
for as long as such circumstances prevail and such party continues to use
commercially reasonable efforts to recommence performance or observance as soon
as practicable.
16.2 Notwithstanding the foregoing Section 16.1, Investor Services
Group agrees to maintain a Business Contingency Plan for the purpose of
mitigating the disruption of the services provided to the Fund hereunder which
may result from an uncontrollable event as described in Section 16.1.
Article 17 Assignment and Subcontracting.
This Agreement, its benefits and obligations shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
permitted assigns. This Agreement may not be assigned or otherwise transferred
by either party hereto, without the prior written consent of the other party,
which consent shall not be unreasonably withheld; provided, however, that
Investor Services Group may, in its sole discretion, assign all its right, title
and interest in this Agreement to an affiliate, parent or subsidiary. Investor
Services Group may engage subcontractors to perform any of the obligations
contained in this Agreement to be performed by Investor Services Group with the
prior written consent of the Fund, which consent shall not be unreasonably
withheld, provided however, that Investor Services Group shall be as fully
responsible to the Fund for the acts and omissions of any subcontractor as it is
for its own acts and omissions.
Article 18 Notice.
Any notice or other instrument authorized or required by this Agreement
to be given in writing to the Fund or Investor Services Group, shall be
sufficiently given if addressed to that party and received by it at its office
set forth below or at such other place as it may from time to time designate in
writing.
To the Fund:
c/o BT Alex Brown
One South Street
Baltimore, Maryland 21202
Attention: Brian Wixted
To Investor Services Group:
First Data Investor Services Group, Inc.
4400 Computer Drive
Westboro, Massachusetts 01581
Attention: President
with a copy to Investor Services Group's General Counsel
Article 19 Governing Law/Venue.
The laws of the State of New York, excluding the laws on conflicts of
laws, shall govern the interpretation, validity, and enforcement of this
Agreement.
Article 20 Counterparts.
This Agreement may be executed in any number of counterparts, each of
which shall be deemed to be an original; but such counterparts shall, together,
constitute only one instrument.
Article 21 Captions.
The captions of this Agreement are included for convenience of
reference only and in no way define or limit any of the provisions hereof or
otherwise affect their construction or effect.
Article 22 Publicity.
Neither Investor Services Group nor the Fund shall release or publish
news releases, public announcements, advertising or other publicity relating to
this Agreement or to the transactions contemplated by it without the prior
review and written approval of the other party; provided, however, that either
party may make such disclosures as are required by legal, accounting or
regulatory requirements after making reasonable efforts in the circumstances to
consult in advance with the other party.
Article 23 Relationship of Parties/Non-Solicitation.
23.1 The parties agree that they are independent contractors and not
partners or co-venturers and nothing contained herein shall be interpreted or
construed otherwise.
23.2 During the term of this Agreement and for one (1) year afterward,
neither party shall recruit, solicit, employ or engage, for itself or others,
the employees of the other party.
Article 24 Limitation of Trustee/Shareholder Liability.
A copy of the Declaration of Trust of the Fund is on file with the
Secretary of the Commonwealth of Massachusetts, and notice is hereby given that
this instrument is executed on behalf of the Trustees of the Fund as Trustees
and not individually and that the obligations of this
<PAGE>
instrument are not binding upon any of the Trustees or Shareholders individually
but are binding only upon the assets and property of the Fund.
Article 25 Entire Agreement; Severability.
25.1 This Agreement, including Schedules, Addenda, and Exhibits hereto,
constitutes the entire Agreement between the parties with respect to the subject
matter hereof and supersedes all prior and contemporaneous proposals,
agreements, contracts, representations, and understandings, whether written or
oral, between the parties with respect to the subject matter hereof. No change,
termination, modification, or waiver of any term or condition of the Agreement
shall be valid unless in writing signed by each party. No such writing shall be
effective as against Investor Services Group unless said writing is executed by
a Senior Vice President, Executive Vice President, or President of Investor
Services Group. A party's waiver of a breach of any term or condition in the
Agreement shall not be deemed a waiver of any subsequent breach of the same or
another term or condition.
25.2 The parties intend every provision of this Agreement to be
severable. If a court of competent jurisdiction determines that any term or
provision is illegal or invalid for any reason, the illegality or invalidity
shall not affect the validity of the remainder of this Agreement. In such case,
the parties shall in good faith modify or substitute such provision consistent
with the original intent of the parties. Without limiting the generality of this
paragraph, if a court determines that any remedy stated in this Agreement has
failed of its essential purpose, then all other provisions of this Agreement,
including the limitations on liability and exclusion of damages, shall remain
fully effective.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers, as of the day and year first above
written.
BT INSURANCE FUNDS TRUST
By: /s/William E.
Small
Title: President
FIRST DATA INVESTOR SERVICES GROUP, INC.
By: /s/Barbara L.
Worthen
Title: Executive Vice President
General
Counsel
<PAGE>
Exhibit 1
LIST OF PORTFOLIOS
Small Cap Fund
International Equity Fund
Managed Assets Fund
Small Cap Index Fund
EAFE Equity Index Fund
Equity 500 Index Fund
US Bond Index Fund
<PAGE>
Schedule A
DUTIES OF INVESTOR SERVICES GROUP
1. Shareholder Information. Investor Services Group shall maintain a
record of the number of Shares held by each Shareholder of record which shall
include name, address, taxpayer identification and which shall indicate whether
such Shares are held in certificates or uncertificated form.
2. Shareholder Services. Investor Services Group shall respond as
appropriate to all inquiries and communications from Shareholders relating to
Shareholder accounts with respect to its duties hereunder and as may be from
time to time mutually agreed upon between Investor Services Group and the Fund.
3. Mailing Communications to Shareholders; Proxy Materials. Investor
Services Group will address and mail to Shareholders of the Fund, all reports to
Shareholders, dividend and distribution notices and proxy material for the
Fund's meetings of Shareholders. In connection with meetings of Shareholders,
Investor Services Group will prepare Shareholder lists, mail and certify as to
the mailing of proxy materials, process and tabulate returned proxy cards,
report on proxies voted prior to meetings, act as inspector of election at
meetings and certify Shares voted at meetings.
4. Sales of Shares
(a) Investor Services Group shall not be required to issue any
Shares of the Fund where it has received a Written Instruction from the Fund or
official notice from any appropriate authority that the sale of the Shares of
the Fund has been suspended or discontinued. The existence of such Written
Instructions or such official notice shall be conclusive evidence of the right
of Investor Services Group to rely on such Written Instructions or official
notice.
(b) In the event that any check or other order for the payment
of money is returned unpaid for any reason, Investor Services Group will
endeavor to: (i) give prompt notice of such return to the Fund or its designee;
(ii) place a stop transfer order against all Shares issued as a result of such
check or order; and (iii) take such actions as Investor Services Group may from
time to time deem appropriate.
5. Transfer and Repurchase
(a) Investor Services Group shall process all requests to
transfer or redeem Shares in accordance with the transfer or repurchase
procedures set forth in the Fund's Prospectus.
(b) Investor Services Group will transfer or repurchase Shares
upon receipt of Oral or Written Instructions or otherwise pursuant to the
Prospectus and Share certificates, if any, properly endorsed for transfer or
redemption, accompanied by such documents as Investor Services Group reasonably
may deem necessary.
(c) Investor Services Group reserves the right to refuse to
transfer or repurchase Shares until it is satisfied that the endorsement on the
instructions is valid and genuine. Investor Services Group also reserves the
right to refuse to transfer or repurchase Shares until it is satisfied that the
requested transfer or repurchase is legally authorized, and it shall incur no
liability for the refusal, in good faith, to make transfers or repurchases which
Investor Services Group, in its good judgment, deems improper or unauthorized,
or until it is reasonably satisfied that there is no basis to any claims adverse
to such transfer or repurchase.
(d) When Shares are redeemed, Investor Services Group shall,
upon receipt of the instructions and documents in proper form, deliver to the
Custodian and the Fund or its designee a notification setting forth the number
of Shares to be repurchased. Such repurchased shares shall be reflected on
appropriate accounts maintained by Investor Services Group reflecting
outstanding Shares of the Fund and Shares attributed to individual accounts.
(e) Investor Services Group shall, upon receipt of the monies
provided to it by the Custodian for the repurchase of Shares, pay such monies as
are received from the Custodian, all in accordance with the procedures described
in the written instruction received by Investor Services Group from the Fund.
(f) Investor Services Group shall not process or effect any
repurchase with respect to Shares of the Fund after receipt by Investor Services
Group or its agent of notification of the suspension of the determination of the
net asset value of the Fund.
6. Dividends
(a) Upon the declaration of each dividend and each capital
gains distribution by the Board of Directors of the Fund with respect to Shares
of the Fund, the Fund shall furnish or cause to be furnished to Investor
Services Group Written Instructions setting forth the date of the declaration of
such dividend or distribution, the ex-dividend date, the date of payment
thereof, the record date as of which Shareholders entitled to payment shall be
determined, the amount payable per Share to the Shareholders of record as of
that date, the total amount payable on the payment date and whether such
dividend or distribution is to be paid in Shares at net asset value.
(b) On or before the payment date specified in such resolution
of the Board of Directors, the Fund will provide Investor Services Group with
sufficient cash to make payment to the Shareholders of record as of such payment
date.
(c) If Investor Services Group does not receive sufficient
cash from the Fund to make total dividend and/or distribution payments to all
Shareholders of the Fund as of the record date, Investor Services Group will,
upon notifying the Fund, withhold payment to all Shareholders of record as of
the record date until sufficient cash is provided to Investor Services Group.
7. In addition to and neither in lieu nor in contravention of the
services set forth above, Investor Services Group shall: (i) perform all the
customary services of a transfer agent, registrar, dividend disbursing agent and
agent of the dividend reinvestment and cash purchase plan as described herein
consistent with those requirements in effect as at the date of this Agreement.
The detailed definition, frequency, limitations and associated costs (if any)
set out in the attached fee schedule, include but are not limited to:
maintaining all Shareholder accounts, preparing Shareholder meeting lists,
mailing proxies, tabulating proxies, mailing Shareholder reports to current
Shareholders, withholding taxes on U.S. resident and non-resident alien accounts
where applicable, preparing and filing U.S. Treasury Department Forms 1099 and
other appropriate forms required with respect to dividends and distributions by
federal authorities for all Shareholders.
<PAGE>
Exhibit 1 to
SCHEDULE A
PERFORMANCE STANDARDS
Process all Fund transactions - 98.5% or better accuracy rate
on an annualized basis in accordance with the following
formula:
Errors in the Quarter
----------------------------------------------
Average Annual Transaction
Volume, Based on the Prior Quarter's
Actual Total Transactions Processed
<PAGE>
Schedule B
Fee Schedule
1. FEES
A. Annual Fees: $7,200 per year per Portfolio for first 5
Portfolios to commence operations
$6,000 per year per Portfolio for next 2
Portfolios to commence operations
B. Additional Classes $6,000 per year per Portfolio for each additional
share class, not including the initial share class
C. Conversion Costs: $10,000 one time start-up fee
The foregoing fees assume that Investor Services Group will provide services to
no more than fifteen (15) shareholder accounts per Portfolio. If the foregoing
assumption proves to be incorrect, the parties agree to renegotiate the
foregoing fees.
2. GENERAL
A. Investor Services Group may charge a service fee equal to the lesser of (i)
one and one-half percent (1 1/2%) per month or (ii) the highest interest rate
legally permitted on any unpaid amounts, unless such amounts are ultimately
determined not due in accordance with the Payment Dispute Procedure. The Fund
shall also reimburse Investor Services Group for all reasonable expenses to
collect delinquent amounts, including reasonable attorney's fees and court
costs.
B. Investor Services Group may adjust any annual or monthly fees once per
calendar year, upon thirty (30) days prior written notice in an amount not to
exceed the cumulative percentage increase in the Consumer Price Index for All
Urban Consumers (CPI-U) U.S. City Average. All items (unadjusted) -
(1982-84=100), published by the U.S Department of Labor since the last such
adjustment in the Fund's monthly fees (or the effective date absent a prior such
adjustment).
C. It is specifically understood by the parties that fees for additional
Portfolios which are not included in Exhibit 1 under "LIST OF PORTFOLIOS" will
be negotiated and charged separately by Investor Services Group and are not
included in the fees referenced above. Investor Services Group reserves the
right to renegotiate the fees set forth on this Schedule B and in Section 6 of
the Agreement should the actual services required vary materially from the
assumptions provided. It is specifically understood by the parties that fees for
those services provided by Investor Services Group which are not described in
Article 3 of the Agreement or which are not included on Schedule A under "Duties
of Investor Services Group" will be charged separately by Investor Services
Group and are not included in the fees referenced above.
<PAGE>
Schedule C
OUT-OF-POCKET EXPENSES
The Fund shall reimburse Investor Services Group monthly for applicable
out-of-pocket expenses, including, but not limited to the following items:
- Microfiche/microfilm production
- Magnetic media tapes and freight
- Printing costs, including certificates, envelopes,
checks and stationery
- Postage (bulk, pre-sort, ZIP+4, barcoding, first class)
direct pass through to the Fund
- Due diligence mailings
- Telephone and telecommunication costs, including all lease,
maintenance and line costs
- Ad hoc reports
- Proxy solicitations, mailings and tabulations
- Daily & Distribution advice mailings
- Shipping, Certified and Overnight mail and insurance
- Year-end form production and mailings
- Terminals, communication lines, printers and other
equipment and any expenses incurred in
connection with such terminals and lines
- Duplicating services
- Courier services
- Incoming and outgoing wire charges
- Federal Reserve charges for check clearance
- Overtime, as approved by the Fund
- Temporary staff, as approved by the Fund
- Travel and entertainment, as approved by the Fund
- Record retention, retrieval and destruction costs,
including, but not limited to exit fees
charged by third party record keeping vendors
- Third party audit reviews
- Ad hoc SQL time
- All Systems enhancements after the conversion at the rate of
$100.00 per hour
- Insurance
- Such other miscellaneous expenses reasonably incurred by
Investor Services Group in performing
its duties and responsibilities under this Agreement.
The Fund agrees that postage and mailing expenses will be paid on the
day of or prior to mailing as agreed with Investor Services Group. In addition,
the Fund will promptly reimburse Investor Services Group for any other
unscheduled expenses incurred by Investor Services Group whenever the Fund and
Investor Services Group mutually agree that such expenses are not otherwise
properly borne by Investor Services Group as part of its duties and obligations
under the Agreement.
<PAGE>
Schedule D
Fund Documents
- Certified copy of the Articles of Incorporation of the Fund,
as amended
- Certified copy of the By-laws of the Fund, as amended,
- Copy of the resolution of the Board of Directors authorizing
the execution and delivery of this
Agreement
- Specimens of the certificates for Shares of the Fund, if
applicable, in the form approved by the Board of Directors of
the Fund, with a certificate of the Secretary of the Fund as
to such approval
- All account application forms and other documents relating
to Shareholder accounts or to any
plan, program or service offered by the Fund
- Certified list of Shareholders of the Fund with the name,
address and taxpayer identification number of each
Shareholder, and the number of Shares of the Fund held by
each, certificate numbers and denominations (if any
certificates have been issued), lists of any accounts against
which stop transfer orders have been placed, together with the
reasons therefore, and the number of Shares redeemed by the
Fund
- All notices issued by the Fund with respect to the Shares in
accordance with and pursuant to the Articles of Incorporation
or By-laws of the Fund or as required by law and shall perform
such other specific duties as are set forth in the Articles of
Incorporation including the giving of notice of any special or
annual meetings of shareholders and any other notices required
thereby.
<PAGE>
6
shared\tlegal\contract\isg\admin\bt98\admin3.doc
Exhibit h(2)
ADMINISTRATION AGREEMENT
THIS ADMINISTRATION AGREEMENT is made as of December 10th, 1998 (the
"Effective Date"), by and between FIRST DATA INVESTOR SERVICES GROUP, INC., a
Massachusetts corporation ("Investor Services Group"), and BT INSURANCE FUNDS
TRUST, a Massachusetts business trust (the "Trust").
WITNESSETH:
WHEREAS, the Trust desires to retain Investor Services Group to render
certain administrative services to each portfolio of the Trust listed on
Schedule A annexed hereto and incorporated herein, as the same may be amended
from time to time (collectively, the "Funds"); and
WHEREAS, Investor Services Group is willing to render such services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment. The Trust hereby appoints Investor Services Group to act as
Administrator on the terms set forth in this Agreement. Investor Services Group
accepts such appointment and agrees to render the services herein set forth for
the compensation herein provided. In the event that the Trust decides to retain
Investor Services Group to act as Administrator hereunder with respect to one or
more portfolios other than the Funds, the Trust shall notify Investor Services
Group in writing. If Investor Services Group is willing to render such services,
it shall notify the Trust in writing whereupon such portfolio shall become a
Fund hereunder.
2. Delivery of Documents. The Trust has furnished Investor Services Group
with copies properly certified or authenticated of each of the following:
(a) The Trust's Declaration of Trust (the "Declaration of Trust")
filed with the Commonwealth of Massachusetts and all amendments thereto;
(b) The Trust's Registration Statement on Form N-1A (the
"Registration Statement") under the Securities Act of 1933 and under the 1940
Act, as filed with the Securities and Exchange Commission ("SEC") on January 26,
1996, relating to shares of beneficial interest of the Trust, $.001 par value
per share, and all amendments thereto; and
(c) Each Fund's most recent prospectus and statement of additional
information, and all amendments and supplements thereto (collectively, the
"Prospectuses").
The Trust will furnish Investor Services Group from time to time with
copies, properly certified or authenticated, of all amendments of or supplements
to the foregoing. Furthermore, the Trust will provide Investor Services Group
with any other documents that Investor Services Group may reasonably request and
will notify Investor Services Group as soon as possible of any matter materially
affecting the performance by Investor Services Group of its services under this
Agreement.
3. Duties as Administrator. Subject to the supervision and direction of the
Trust, Investor Services Group, as Administrator, will assist in supervising
various aspects of the Trust's administrative operations and undertakes to
perform the following specific services:
(a) Maintaining office facilities (which may be in the offices of Investor
Services Group or a corporate affiliate);
(b) Furnishing statistical and research data, data processing
services, clerical services, and internal legal, executive and administrative
services and stationery and office supplies in connection with the foregoing;
(c) Furnishing corporate secretarial services including
preparation and distribution of materials for Board of Trustees meetings (Board
meetings in excess of five in any calendar year and shareholder meetings shall
involve an additional reasonable charge as may be agreed upon by the parties
hereto);
(d) Accounting and bookkeeping services (including maintenance of
such accounts, books and records of the Trust as may be required by Section
31(a) of the 1940 Act and the rules thereunder);
(e) Internal auditing;
(f) Valuing the assets of each Fund and calculating the net asset
value of the shares of each Fund at the close of trading on the New York Stock
Exchange (the "NYSE") on each day on which the NYSE is open for trading, or such
other business day as described in the Prospectus, and at such other times as
the Board of Trustees may reasonably request;
(g) Calculating the net income and realized capital gains or losses of each
Fund;
(h) Accumulating information for and, subject to approval by the
Trust's Treasurer, preparing reports to the Trust's shareholders of record and
the SEC including, but not necessarily limited to, Annual Reports and
Semi-Annual Reports on Form N-SAR;
(i) Preparing and filing various reports or other documents
required by federal, state and other applicable laws and regulations, other than
those filed or required to be filed by the Trust's investment adviser (the
"Adviser") or transfer agent;
(j) Preparing and filing the Trust's tax returns;
(k) Assisting the Adviser in monitoring and developing compliance
procedures for the Trust which will include, among other matters, procedures to
assist the Adviser in monitoring compliance with each Fund's investment
objective, policies, restrictions, tax matters and applicable laws and
regulations; and
(l) Preparing and furnishing the Trust (at the Trust's request)
with performance information (including yield and total return information)
calculated in accordance with applicable U.S. securities laws and reporting to
external databases such information as may reasonably be requested; and
(m) Performing the "Routine Projects" and "Special Projects" on
Schedule B annexed hereto and incorporated herein.
In performing all services under this Agreement, Investor Services Group:
(a) shall act in conformity with the Declaration of Trust, the Prospectuses, the
Registration Statements and the instructions and directions of the Trust or the
Adviser, and will conform to and comply with the requirements of the Investment
Company Act of 1940 ("1940 Act") and all other applicable federal or state laws
and regulations; and (b) will consult with legal counsel to the Trust, as
necessary or appropriate. Furthermore, Investor Services Group shall not have or
be required to have any authority to supervise the investment or reinvestment of
the securities or other properties which comprise the assets of the Trust or any
of the Funds and shall not provide any investment advisory services to the Trust
or any of the Funds.
Investor Services Group agrees to provide the services described herein in
accordance with the Performance Standards annexed hereto as Exhibit 1 to
Schedule B and incorporated herein (the "Performance Standards"). Such
Performance Standards may be amended from time to time upon written agreement by
the parties.
4. Compensation and Allocation of Expenses. Investor Services Group shall
bear all expenses in connection with the performance of its services under this
Agreement, except as indicated below.
(a) Investor Services Group may from time to time employ such
person or persons as Investor Services Group may believe to be particularly
suited to assist it in performing services under this Agreement. Such person or
persons may be officers or employees of Investor Services Group. The
compensation of such person or persons shall be paid by Investor Services Group
and no obligation shall be incurred on behalf of the Trust in such respect.
(b) Investor Services Group shall not be required to pay any of
the following expenses which may be incurred by the Trust: membership dues in
the Investment Company Institute or any similar organization; investment
advisory expenses; costs of printing and mailing stock certificates,
prospectuses, reports and notices; interest on borrowed money; brokerage
commissions; stock exchange listing fees; taxes and fees payable to Federal,
state and other governmental agencies; fees of Trustees of the Trust who are not
affiliated with Investor Services Group; outside auditing expenses; outside
legal expenses; or other expenses not specified in this Section 4 which may be
properly payable by the Trust.
(c) For the services to be rendered, the facilities to be
furnished and the payments to be made by Investor Services Group, as provided
for in this Agreement, the Funds will pay Investor Services Group within 30 days
after the end of each month a fee for the previous month as set forth on
Schedule C annexed hereto and incorporated herein. The fee for the period from
the date the Registration Statement is declared effective by the SEC to the end
of the month during which the Registration Statement is declared effective shall
be prorated according to the proportion that such period bears to the full
monthly period. Upon any termination of this Agreement before the end of any
month, the fee for such part of a month shall be prorated according to the
proportion which such period bears to the full monthly period and shall be
payable upon the date of termination of this Agreement. For the purpose of
determining fees payable to Investor Services Group, the value of each Fund's
net assets shall be computed at the times and in the manner specified in the
Registration Statement.
(d) The Trust shall compensate Investor Services Group for its
services rendered pursuant to this Agreement in accordance with the fees set
forth above. Such fees do not include out-of-pocket disbursements of Investor
Services Group for which Investor Services Group shall be entitled to bill
separately. Out-of-pocket disbursements shall include, but shall not be limited
to, the items specified in Schedule D annexed hereto and incorporated herein.
Schedule D may be modified by Investor Services Group upon not less than thirty
(30) days' prior written notice to the Trust with the Trust's consent.
(e) Investor Services Group will bill the Trust for out-of-pocket
expenses as soon as practicable after the end of each calendar month, and such
billings will be detailed in accordance with the out-of-pocket schedule. The
Trust will pay to Investor Services Group the amount of such billing within
thirty (30) days of receipt.
(f) The Trust acknowledges that the fees that Investor Services
Group charges the Trust under this Agreement reflect the allocation of risk
between the parties hereto, including the disclaimer of warranties in Section 7
and the limitations on liability in Section 5. Modifying the allocation of risk
from what is stated here would affect the fees that Investor Services Group
charges, and in consideration of those fees, the Trust agrees to the stated
allocation of risk.
5. Limitation of Liability.
(a) Investor Services Group, its directors, officers, employees,
shareholders and agents shall not be liable for any error of judgment or mistake
of law or for any loss suffered by the Trust in connection with the performance
of its obligations and duties under this Agreement, except a loss resulting from
Investor Services Group's willful misfeasance, bad faith or negligence in the
performance of such obligations and duties, or by reason of its reckless
disregard thereof.
(b) Notwithstanding any provision in this Agreement to the
contrary, Investor Services Group's cumulative liability to the Trust for all
losses, claims, suits, controversies, breaches, or damages ("Liability Claims")
for any cause whatsoever arising out of or related to this Agreement and
regardless of the form of action or legal theory, shall not exceed Five Million
Dollars ($5,000,000).
(c) Each party shall have the duty to mitigate damages for which
the other party may become responsible.
(d) NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO THE CONTRARY, IN
NO EVENT SHALL EITHER PARTY HERETO, ITS AFFILIATES OR ANY OF ITS OR THEIR
DIRECTORS, OFFICERS, EMPLOYEES, AGENTS OR SUBCONTRACTORS BE LIABLE UNDER ANY
THEORY OF TORT, CONTRACT, STRICT LIABILITY OR OTHER LEGAL OR EQUITABLE THEORY
FOR LOST PROFITS, EXEMPLARY, PUNITIVE, SPECIAL, INCIDENTAL, INDIRECT OR
CONSEQUENTIAL DAMAGES, EACH OF WHICH IS HEREBY EXCLUDED BY AGREEMENT OF THE
PARTIES REGARDLESS OF WHETHER SUCH DAMAGES WERE FORESEEABLE OR WHETHER EITHER
PARTY OR ANY ENTITY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
6. Indemnification.
(a) The Trust shall indemnify and hold Investor Services Group
harmless from and against any and all claims, costs, expenses (including
reasonable attorneys' fees), losses, damages, charges, payments and liabilities
of any sort or kind which may be asserted against Investor Services Group or for
which Investor Services Group may be held to be liable in connection with this
Agreement or Investor Services Group's performance hereunder (a "Claim"), unless
such Claim resulted from a negligent act or omission to act, willful misconduct
or bad faith by Investor Services Group in the performance of its duties
hereunder. Investor Services Group shall indemnify and hold the Trust harmless
from and against any and all claims, costs, expenses (including reasonable
attorneys' fees), losses, damages, charges, payments and liabilities of any sort
or kind which may be asserted against the Trust or for which the Trust may be
held to be liable in connection with this Agreement or the Trust's performance
hereunder (a "Claim"), unless such Claim resulted from a negligent act or
omission to act, willful misconduct or bad faith by the Trust in the performance
of its duties hereunder
(b) In any case in which the either party (the "Indemnifying
Party") may be asked to indemnify or hold the other party (the "Indemnified
Party") harmless, the Indemnified Party will notify the Indemnifying Party in
writing promptly after identifying any situation which it believes presents or
appears likely to present a claim for indemnification against the Indemnifying
Party although the failure to do so shall not prevent recovery by the
Indemnified Party unless the Indemnifying Party is prejudiced by such failure to
notify and shall keep the Indemnifying Party advised with respect to all
developments concerning such situation. The Indemnifying Party shall have the
option to defend the Indemnified Party against any Claim which may be the
subject of this indemnification, and, in the event that the Indemnifying Party
so elects, such defense shall be conducted by counsel chosen by the Indemnifying
Party and satisfactory to the Indemnified Party, and thereupon the Indemnifying
Party shall take over complete defense of the Claim and the Indemnified Party
shall sustain no further legal or other expenses in respect of such Claim. the
Indemnified Party will not confess any Claim or make any compromise in any case
in which the Indemnifying Party will be asked to provide indemnification, except
with the Indemnifying Party's prior written consent. The obligations of the
parties hereto under this Section 6 shall survive the termination of this
Agreement.
7. EXCLUSION OF WARRANTIES. THIS IS A SERVICE AGREEMENT. EXCEPT AS
EXPRESSLY PROVIDED IN THIS AGREEMENT, INVESTOR SERVICES GROUP DISCLAIMS ALL
OTHER REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, MADE TO THE TRUST OR
ANY OTHER PERSON, INCLUDING, WITHOUT LIMITATION, ANY WARRANTIES REGARDING
QUALITY, SUITABILITY, MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR
OTHERWISE (IRRESPECTIVE OF ANY COURSE OF DEALING, CUSTOM OR USAGE OF TRADE) OF
ANY SERVICES OR ANY GOODS PROVIDED INCIDENTAL TO SERVICES PROVIDED UNDER THIS
AGREEMENT. Investor Services Group DISCLAIMS ANY WARRANTY OF TITLE OR
NON-INFRINGEMENT EXCEPT AS OTHERWISE SET FORTH IN THIS AGREEMENT.
8. Term and Termination of Agreement.
(a) This Agreement shall be effective on the date first written above
and shall continue for a period of five (5) years (the "Initial Term").
(b) Upon expiration of the Initial Term, this Agreement shall
automatically renew for successive terms of one (1) year ("Renewal Terms") each,
unless the Trust or Investor Services Group provides written notice to the other
of its intent not to renew. Such notice must be received not less than ninety
(90) days and not more than one hundred eighty (180) days prior to the
expiration of the Initial Term or the current renewal term. In the event the
Trust shall provide Investor Services Group with notice to terminate this
Agreement, it shall be deemed that the Trust has given similar notice to
terminate the Transfer Agency and Services Agreement between the Trust and
Investor Services Group and the Distribution Agreement between the Trust and
First Data Distributors, Inc., and such other agreements shall terminate on the
same date as this Agreement; provided, however, that Investor Services Group, in
its sole discretion, shall have the right to waive this cross termination
provision with respect to either or both agreements.
(c) In the event a termination notice is given by the Trust, all
expenses associated with the movement of records and materials and conversion
thereof will be borne by the Trust.
(d) If a party hereto is guilty of a material failure to perform
its duties and obligations hereunder (a "Defaulting Party") resulting in a
material loss to the other party, such other party (the "Non-Defaulting Party")
may give written notice thereof to the Defaulting Party, and if such material
breach shall not have been remedied within thirty (30) days after such written
notice is given, then the Non-Defaulting Party may immediately terminate this
Agreement by giving written notice of such termination to the Defaulting Party.
If Investor Services Group is the Non-Defaulting Party, its termination of this
Agreement shall not constitute a waiver of any other rights or remedies of
Investor Services Group with respect to services performed prior to such
termination or rights of Investor Services Group to be reimbursed for
out-of-pocket expenses. In all cases, termination by the Non-Defaulting Party
shall not constitute a waiver by the Non-Defaulting Party of any other rights it
might have under this Agreement or otherwise against the Defaulting Party.
(e) In the event that Investor Services Group has failed to meet a
specific Performance Standard, as set forth in Exhibit 1 to Schedule B, in any
two consecutive calendar quarters, the Trust may terminate this Agreement upon
ninety (90) days written notice to Investor Services Group. The Trust must
provide such notice within thirty (30) days following the end of second calendar
quarter if it intends to exercise its option under this Section 8(e).
Notwithstanding the foregoing, the Trust's right under this Section 8(e) shall
not become effective until ninety (90) days following the effective date of this
Agreement.
9. Modifications and Waivers. No change, termination, modification, or
waiver of any term or condition of the Agreement shall be valid unless in
writing signed by each party. No such writing shall be effective as against
Investor Services Group unless said writing is executed by an Executive Vice
President or the President of Investor Services Group. A party's waiver of a
breach of any term or condition in the Agreement shall not be deemed a waiver of
any subsequent breach of the same or another term or condition.
10. No Presumption Against Drafter. Investor Services Group and the Trust
have jointly participated in the negotiation and drafting of this Agreement. The
Agreement shall be construed as if drafted jointly by the Trust and Investor
Services Group, and no presumptions arise favoring any party by virtue of the
authorship of any provision of this Agreement.
11. Publicity. Neither Investor Services Group nor the Trust shall release
or publish news releases, public announcements, advertising or other publicity
relating to this Agreement or to the transactions contemplated by it without
prior review and written approval of the other party; provided, however, that
either party may make such disclosures as are required by legal, accounting or
regulatory requirements after making reasonable efforts in the circumstances to
consult in advance with the other party.
12. Severability. The parties intend every provision of this Agreement to
be severable. If a court of competent jurisdiction determines that any term or
provision is illegal or invalid for any reason, the illegality or invalidity
shall not affect the validity of the remainder of this Agreement. In such case,
the parties shall in good faith modify or substitute such provision consistent
with the original intent of the parties. Without limiting the generality of this
paragraph, if a court determines that any remedy stated in this Agreement has
failed of its essential purpose, then all other provisions of this Agreement,
including the limitations on liability and exclusion of damages, shall remain
fully effective.
13. Miscellaneous.
(a) Any notice or other instrument authorized or required by this
Agreement to be given in writing to the Trust or Investor Services Group shall
be sufficiently given if addressed to the party and received by it at its office
set forth below or at such other place as it may from time to time designate in
writing.
To the Trust:
c/o BT Alex Brown
One South Street
Baltimore, Maryland 21202
Attention: Brian Wixted
With a copy to:
Burton Leibert, Esq.
Willkie Farr & Gallagher
153 East 53rd Street
New York, New York 10022
To Investor Services Group:
First Data Investor Services Group, Inc.
4400 Computer Drive
Westboro, Massachusetts 01581
Attention: President
with a copy to Investor Services Group's General Counsel
(b) This Agreement shall be binding upon and inure to the benefit
of the parties hereto and their respective successors and permitted assigns and
is not intended to confer upon any other person any rights or remedies
hereunder. This Agreement may not be assigned or otherwise transferred by either
party hereto, without the prior written consent of the other party, which
consent shall not be unreasonably withheld; provided, however, that Investor
Services Group may, in its sole discretion, assign all its right, title and
interest in this Agreement to an affiliate, parent or subsidiary. Investor
Services Group may engage subcontractors to perform any of the obligations
contained in this Agreement to be performed by Investor Services Group with the
prior written consent of the Trust, which consent shall not be unreasonably
withheld, provided however, that Investor Services Group shall be as fully
responsible to the Trust for the acts and omissions of any subcontractor as it
is for its own acts and omissions.
(c) The laws of the State of New York, excluding the laws on
conflicts of laws, shall govern the interpretation, validity, and enforcement of
this Agreement.
(d) This Agreement may be executed in any number of counterparts
each of which shall be deemed to be an original and which collectively shall be
deemed to constitute only one instrument.
(e) The captions of this Agreement are included for convenience of
reference only and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect.
14. Confidentiality.
(a) The parties agree that the Proprietary Information (defined
below) and the contents of this Agreement (collectively "Confidential
Information") are confidential information of the parties and their respective
licensers. The Trust and Investor Services Group shall exercise reasonable care
to safeguard the confidentiality of the Confidential Information of the other.
The Trust and Investor Services Group may each use the Confidential Information
only to exercise its rights or perform its duties under this Agreement. Except
as required by law, the Trust and Investor Services Group shall not duplicate,
sell or disclose to others the Confidential Information of the other, in whole
or in part, without the prior written permission of the other party. The Trust
and Investor Services Group may, however, disclose Confidential Information to
its employees, auditors, counsel, regulatory authorities and others agreed to by
Investor Services Group and the Trust who have a need to know the Confidential
Information to perform work for the other, provided that each shall use
reasonable efforts to ensure that the Confidential Information is not duplicated
or disclosed by its employees in breach of this Agreement. The Trust and
Investor Services Group may also disclose the Confidential Information to
independent contractors, provided they first agree in writing to be bound by the
confidentiality obligations substantially similar to this Section 14.
Notwithstanding the previous sentence, in no event shall either the Trust or
Investor Services Group disclose the Confidential Information to any competitor
of the other without specific, prior written consent.
(b) Proprietary Information means:
(i) any data or information that is completely sensitive material, and not
generally known to the public, including, but not limited to, information
about product plans, marketing strategies, finance, operations, customer
relationships, customer profiles, sales estimates, business plans, and
internal performance results relating to the past, present or future
business activities of the Trust or Investor Services Group, their
respective subsidiaries and affiliated companies and the customers, clients
and suppliers of any of them;
(ii) any scientific or technical information, design, process, procedure,
formula, or
improvement that is commercially valuable and secret in the sense that its
confidentiality affords the Trust or Investor Services Group a competitive
advantage over its competitors; and
(iii) all confidential or proprietary concepts, documentation, reports,
data, specifications, computer software, source code, object code, flow
charts, databases, inventions, know-how, show-how and trade secrets,
whether or not patentable or copyrightable.
(c) Confidential Information includes, without limitation, all
documents, inventions, substances, engineering and laboratory notebooks,
drawings, diagrams, specifications, bills of material, equipment, prototypes and
models, and any other tangible manifestation of the foregoing of either party
hereto which now exist or come into the control or possession of the other party
hereto.
(d) The Trust acknowledges that breach of the restrictions on use,
dissemination or disclosure of any Confidential Information would result in
immediate and irreparable harm, and money damages would be inadequate to
compensate Investor Services Group for that harm. Investor Services Group shall
be entitled to equitable relief, in addition to all other available remedies, to
redress any such breach.
15. Force Majeure. No party shall be liable for any default or delay in the
performance of its obligations under this Agreement if and to the extent such
default or delay is caused, directly or indirectly, by (i) fire, flood, elements
of nature or other acts of God; (ii) any outbreak or escalation of hostilities,
war, riots or civil disorders in any country, (iii) any act or omission of the
other party or any governmental authority; or (iv) nonperformance by a third
party or any similar cause beyond the reasonable control of such party,
including without limitation, failures or fluctuations in telecommunications or
other equipment. In any such event, the non-performing party shall be excused
from any further performance and observance of the obligations so affected only
for so long as such circumstances prevail and such party continues to use
commercially reasonable efforts to recommence performance or observance as soon
as practicable.
16. Limitation of Trustee/Shareholder Liability. A copy of the Declaration
of Trust of the Trust dated January 19, 1996 is on file with the Secretary of
the Commonwealth of Massachusetts, and notice is hereby given that this
instrument is executed on behalf of the Trustees of the Trust as Trustees and
not individually and that the obligations of this instrument are not binding
upon any of the Trustees or the Trust's shareholders individually but are
binding only upon the assets and property of the Trust.
17. Entire Agreement. This Agreement, including all Schedules hereto,
constitutes the entire agreement between the parties with respect to the subject
matter hereof and supersedes all prior and contemporaneous proposals,
agreements, contracts, representations, and understandings, whether written or
oral, between the parties with respect to the subject matter hereof.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
duly executed and delivered by their duly authorized officers as of the date
first written above.
FIRST DATA INVESTOR SERVICES GROUP, INC.
By: /s/Barbara L. Worthen
Name: Barbara L. Worthen
Title: Executive Vice President
General Counsel
BT INSURANCE FUNDS TRUST
By: /s/William E. Small
Name: William E. Small
Title: President
<PAGE>
SCHEDULE A
Names of Funds
Managed Assets Fund
Small Cap Fund
International Equity Fund
Small Cap Index Fund
EAFE Equity Index Fund
Equity 500 Index Fund
US Bond Index Fund
<PAGE>
SCHEDULE B
Fund Accounting and Administrative Services
Routine Projects
o Daily, Weekly, and Monthly Reporting o Portfolio and General Ledger Accounting
o Daily Pricing of all Securities o Daily Valuation and NAV Calculation o
Comparison of NAV to market movement o Review of price tolerance/fluctuation
report
o Research items appearing on the price exception report
o Weekly cost monitoring along with market-to-market valuations in
accordance with Rule 2a7
o Preparation of monthly ex-dividend monitor
o Daily cash reconciliation with the custodian bank
o Daily updating of price and rate information to the Transfer Agent/Insurance
Agent
o Daily support and report delivery to Portfolio Management
o Daily calculation of fund advisor fees and waivers
o Daily calculation of distribution rates
o Daily maintenance of each fund's general ledger including expense accruals
o Daily price notification to other vendors as required
o Calculation of 30-day adjusted SEC yields
o Preparation of month-end reconciliation package
o Monthly reconciliation of fund expense records
o Preparation of monthly pay down gain/loss summaries
o Preparation of all annual and semi-annual audit work papers
o Preparation and Printing of Financial Statements
o Providing Shareholder Tax Information to Transfer Agent
o Producing Drafts of IRS and State Tax Returns
o Treasury Services including:
Provide Officer for the fund
Expense Accrual Monitoring
Determination of Dividends
Prepare materials for review by the board, e.g., 2a-7,10f-3, 17a-7,
17e-1
Tax and Financial Counsel
o Monthly Compliance Testing including section 817H o Provide 1940 Act attorney
to assist in organization
o Prepare agenda and background materials for legal approval at Board
Meetings; make presentations where appropriate; prepare minutes; follow up
on issues
o Review and filing of Form N-SAR
o Review and filing of Annual and Semi-Annual Financial Reports
o Assistance in Preparation of Fund Registration Statements
o Review of all Sales Material and Advertising
o Coordinate all aspects of the printing and mailing process with outside
printers for all
shareholder publications
<PAGE>
SCHEDULE B (CONTINUED)
o Support for all quarterly board meetings o Preparation of proxy materials for
one meeting per year o Annual update Post-Effective Amendment (PEA) o Prospectus
supplements as needed o Consultations regarding legal issues as needed o SEC
audit report o Arrange insurance coverage
o Support for one special board meeting per year and consent votes where needed
o One additional PEA (other than annual update) o One exemptive order
application o Assist with marketing strategy and product development o
Preparation of surveys
Special Projects*
o Proxy material preparation for additional meetings beyond one per year o N-14
preparation (merger document) o Additional PEAs beyond two per year o Prospectus
simplification o Additional exemptive order applications beyond one per year o
Extraordinary non-recurring projects - e.g., arranging CDSC financing programs o
Basic sales, mutual funds, and product training to branch and sales
representatives
*Charged on a project-by-project basis.
<PAGE>
Exhibit 1 to
SCHEDULE B
PERFORMANCE STANDARDS
Daily NAV calculations - 98.5% or better accuracy rate on an
annualized basis, provided that all information received from
external vendors or fund managers is correct and received
within appropriate time frame.
Daily communication of NAV's - 98.5% accuracy in delivering
the NAV to the Transfer Agent and participating insurance
companies on an annualized basis.
Correct any material weaknesses (as determined by the Trust's
auditors) in the Trust's system of internal accounting
control, related to the services provided under this
Agreement, within 30 days.
Complete the following regulatory filings within the
prescribed deadlines, including all applicable extensions,
provided that all requested information is received from fund
managers in accordance with an agreed upon schedule: federal
and state tax returns; annual and semi-annual reports; annual
update to the Registration Statement; and annual 24f-2
notices.
<PAGE>
SCHEDULE C
1. Fees (On an Annual Basis)
$70,000 per Fund per annum, plus
2.0 basis points on first $2 billion in aggregate
assets 1.0 basis point on next $3 billion in
aggregate assets 0.75 basis point on excess
$3,000 per Fund per annum for each additional share
class, not including
the initial share class
2. Start-Up Fees
$20,000 per Fund start-up fee with respect to the
Small Cap Fund and International Equity Fund (total
of $40,000), payable upon effectiveness of the
Registration Statement relating to such Portfolios
$10,000 per Fund start-up fee with respect to the
Managed Assets Fund, Small Cap Index Fund, EAFE
Equity Index Fund, Equity 500 Index Fund and the U.S.
Bond Index Fund (total of $50,000), payable upon
effectiveness of the Registration Statement relating
to such Portfolios
3. Fee Waivers
Investor Services Group agrees to waive its annual fees with respect to the
Small Cap Index Fund, EAFE Equity Index Fund, Equity 500 Index Fund (the "Waiver
Portfolios") as follows: Investor Services Group will waive $1 of its annual
fees with respect to the Waiver Portfolios for each $2 of investment advisory
fee waived by the Adviser with respect to the Waiver Portfolios; provided,
however, that such fee waivers by Investor Services Group shall not exceed
$30,000 per Waiver Portfolio for the period ending one (1) year after the
Effective Date; $25,000 per Waiver Portfolio for the period ending two (2) years
after the Effective Date; and $10,000 per Waiver Portfolio for the period ending
three (3) years after the Effective Date. In the event that at any time this
Agreement is effective an affiliate of the Fund would provide administration
services to any of the Waiver Portfolios, the Fund shall pay to Investor
Services Group the amount of any fees waived prior to the termination of
services.
4. General
Investor Services Group reserves the right to renegotiate the fees set
forth on this Schedule C and in Section 4 of the Agreement should the actual
services required vary materially from the assumptions provided. It is
specifically understood by the parties that fees for those services provided by
Investor Services Group which are not described in Section 3 of the Agreement or
which are not included on Schedule B under "Routine Projects" will be charged
separately by Investor Services Group and are not included in the fees
referenced above.
<PAGE>
SCHEDULE D
Out-of-Pocket Expenses
Out-of-pocket expenses include, but are not limited to, the following:
- Overnight delivery and courier service
- Telephone and telecommunications charges (including fax)
- Terminals, transmitting lines and any expenses incurred in
connection with such lines
- Travel expenses associated with Board of Trustees meetings
- Pro rata portion of the cost for SAS 70 Report
- Customized programming requests
- Any other unusual expenses in association with the services
rendered under this Agreement
- Pricing services
- Vendor set-up charges for Blue Sky services
Investor Services Group reserves the right to renegotiate the fees set forth on
this Schedule D and in Section 4 of the Agreement should the actual services
required vary materially from the assumptions provided.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 5
<NAME> EAFE EQUITY INDEX FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 33,221,551
<INVESTMENTS-AT-VALUE> 36,488,428
<RECEIVABLES> 123,772
<ASSETS-OTHER> 174,193
<OTHER-ITEMS-ASSETS> 15,208
<TOTAL-ASSETS> 36,801,601
<PAYABLE-FOR-SECURITIES> 679,157
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 166,844
<TOTAL-LIABILITIES> 846,001
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 32,668,112
<SHARES-COMMON-STOCK> 3,215,550
<SHARES-COMMON-PRIOR> 1,541,913
<ACCUMULATED-NII-CURRENT> 114,484
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
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<ACCUM-APPREC-OR-DEPREC> 3,369,512
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<INTEREST-INCOME> 70,290
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<EXPENSES-NET> 151,475
<NET-INVESTMENT-INCOME> 280,241
<REALIZED-GAINS-CURRENT> 100,196
<APPREC-INCREASE-CURRENT> 4,388,022
<NET-CHANGE-FROM-OPS> 4,768,459
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 492,028
<DISTRIBUTIONS-OF-GAINS> 30,752
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 18,290,292
<NUMBER-OF-SHARES-REDEEMED> 1,512,182
<SHARES-REINVESTED> 522,780
<NET-CHANGE-IN-ASSETS> 21,546,539
<ACCUMULATED-NII-PRIOR> 55,357
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<PER-SHARE-NAV-BEGIN> 9.34
<PER-SHARE-NII> .12
<PER-SHARE-GAIN-APPREC> 1.89
<PER-SHARE-DIVIDEND> .16
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<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.18
<EXPENSE-RATIO> .65
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 6
<NAME> EQUITY 500 INDEX FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 47,220,853
<INVESTMENTS-AT-VALUE> 52,980,666
<RECEIVABLES> 322,739
<ASSETS-OTHER> 208,116
<OTHER-ITEMS-ASSETS> 16,115
<TOTAL-ASSETS> 53,527,636
<PAYABLE-FOR-SECURITIES> 3,724,164
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 112,122
<TOTAL-LIABILITIES> 3,836,286
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 43,644,185
<SHARES-COMMON-STOCK> 3,906,617
<SHARES-COMMON-PRIOR> 1,154,183
<ACCUMULATED-NII-CURRENT> 197,747
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 79,129
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 5,770,289
<NET-ASSETS> 49,691,350
<DIVIDEND-INCOME> 63,914
<INTEREST-INCOME> 332,586
<OTHER-INCOME> 0
<EXPENSES-NET> 70,822
<NET-INVESTMENT-INCOME> 325,678
<REALIZED-GAINS-CURRENT> 1,143,389
<APPREC-INCREASE-CURRENT> 5,567,806
<NET-CHANGE-FROM-OPS> 7,036,873
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 167,871
<DISTRIBUTIONS-OF-GAINS> 1,074,374
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 44,489,580
<NUMBER-OF-SHARES-REDEEMED> 13,595,227
<SHARES-REINVESTED> 1,242,246
<NET-CHANGE-IN-ASSETS> 37,931,227
<ACCUMULATED-NII-PRIOR> 39,940
<ACCUMULATED-GAINS-PRIOR> 10,114
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 47,571
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 281,868
<AVERAGE-NET-ASSETS> 23,785,489
<PER-SHARE-NAV-BEGIN> 10.19
<PER-SHARE-NII> .07
<PER-SHARE-GAIN-APPREC> 2.84
<PER-SHARE-DIVIDEND> .05
<PER-SHARE-DISTRIBUTIONS> .32
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.73
<EXPENSE-RATIO> .30
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> SMALL CAP INDEX FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 39,407,744
<INVESTMENTS-AT-VALUE> 38,485,778
<RECEIVABLES> 227,955
<ASSETS-OTHER> 53,933
<OTHER-ITEMS-ASSETS> 15,596
<TOTAL-ASSETS> 38,783,262
<PAYABLE-FOR-SECURITIES> 1,904,272
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 135,231
<TOTAL-LIABILITIES> 2,039,503
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 37,289,971
<SHARES-COMMON-STOCK> 3,653,373
<SHARES-COMMON-PRIOR> 1,200,199
<ACCUMULATED-NII-CURRENT> 144,264
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 224,577
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (915,053)
<NET-ASSETS> 36,743,759
<DIVIDEND-INCOME> 327,677
<INTEREST-INCOME> 46,826
<OTHER-INCOME> 0
<EXPENSES-NET> 103,200
<NET-INVESTMENT-INCOME> 271,303
<REALIZED-GAINS-CURRENT> 670,599
<APPREC-INCREASE-CURRENT> (1,298,958)
<NET-CHANGE-FROM-OPS> (357,056)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 167,192
<DISTRIBUTIONS-OF-GAINS> 535,016
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 27,649,770
<NUMBER-OF-SHARES-REDEEMED> 3,165,975
<SHARES-REINVESTED> 702,208
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<OVERDIST-NET-GAINS-PRIOR> 0
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<AVERAGE-NET-ASSETS> 23,026,242
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<PER-SHARE-NII> .06
<PER-SHARE-GAIN-APPREC> (.30)
<PER-SHARE-DIVIDEND> .05
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<EXPENSE-RATIO> .45
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
