As filed with the Securities and Exchange Commission on April 25, 2000
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. 9
X
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
X
Amendment No. 11
X
BT Insurance Funds Trust
(Exact Name of Registrant as Specified in Charter)
101 Federal Street
Boston, Massachusetts 02110
(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.
PFPC 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
X on April 30, 2000 pursuant to paragraph (b)
60 days after filing pursuant to paragraph (a)(1), or _ 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>
BT INSURANCE FUNDS TRUST
The purpose of this Post-Effective Amendment No. 9 is to bring the
financial statements and other information up to date under Section 10(a)(3) of
the Securities Act of 1933, as amended, for the Small Cap Fund, International
Equity Fund, Small Cap Index Fund, EAFE(R) Equity Index Fund, Equity 500 Index
Fund and U.S. Bond Index Fund.
The Prospectus and Statement of Additional Information of the Managed
Assets Fund is hereby incorporated by reference in its entirety to Amendment No.
1 filed with the Securities and Exchange Commission via EDGAR on September 18,
1996.
Deutsche Asset Management
Mutual Fund
Prospectus
April 30, 2000
Deutsche VIT Funds
EAFE/(R)/ Equity Index
Formerly a BT Insurance Fund
[Like shares of all mutual funds, these securities have not been approved or
disapproved by the Securities and Exchange Commission nor has the Securities and
Exchange Commission passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.]
A Member of the
Deutsche Bank Group [/]
<PAGE>
Overview
- - --------------------------------------------------------------------------------
of EAFE(R) Equity Index
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.
Core Strategy: The Fund attempts to invest in stocks and other securities that
are representative of the EAFE(R) Index as a whole.
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 comprise the EAFE(R) Index, in approximately the same weightings
as the Index. The Fund may also use stock index futures contracts, options and
forward currency exchange contracts.
- - --------------------------------------------------------------------------------
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.
EAFE(R) Equity Index
Overview of EAFE(R) Equity Index
<TABLE>
<S> <C>
Goal........................................................................ 3
Core Strategy............................................................... 3
Investment Policies and Strategies.......................................... 3
Principal Risks of Investing in the Fund.................................... 4
Who Should Consider Investing in the Fund................................... 4
Total Returns, After Fees and Expenses...................................... 5
A Detailed Look at EAFE(R) Equity Index
Objective................................................................... 6
Index Investing Versus Active Management.................................... 6
Strategy.................................................................... 6
Principal Investments....................................................... 6
Investment Process.......................................................... 6
Risks....................................................................... 7
Information Regarding the Index............................................. 8
Management of the Fund...................................................... 8
Calculating the Fund's Share Price.......................................... 9
Dividends and Distributions................................................. 9
Tax Considerations.......................................................... 9
Buying and Selling Shares................................................... 9
Financial Highlights........................................................ 11
</TABLE>
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3
<PAGE>
Overview of EAFE(R) Equity Index
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 us.
. The Fund could suffer losses if its futures and options positions are not
well correlated with the securities for which they are acting as a substitute
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 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 Fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
- - --------------------------------------------------------------------------------
4
<PAGE>
Overview of EAFE(R) Equity Index
[CHART APPEARS HERE]
YEAR-BY-YEAR RETURNS
(each full calendar year since inception)
1998 21.60%
1999 27.60%
Since inception, the Fund's highest return in any calendar quarter was 19.68%
(fourth quarter 1998) and its lowest quarterly return was -13.10% (third
quarter 1998). Past perfromance offers no indication of how the Fund will
perform in the future.
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 each
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.
- - --------------------------------------------------------------------------------
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.
PERFORMANCE FOR PERIOD ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Average Annual Returns
Since Inception
1 Year (August 22, 1997)/1/
<S> <C> <C>
Fund 27.60% 17.05%
--------------------------------------------
EAFE(R) Index 26.96% 16.71%
--------------------------------------------
</TABLE>
/1/ The performance of the EAFE(R) Index is
calculated from August 31, 1997.
- - --------------------------------------------------------------------------------
5
<PAGE>
A detailed look
- - --------------------------------------------------------------------------------
at EAFE(R) Equity Index
OBJECTIVE
The Fund seeks to match, as closely as possible, before the deduction of
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.
INDEX INVESTING 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 realize low capital gains.
STRATEGY
To attempt 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, the Fund intends to invest at least 80% of its
assets in stocks of companies included in the EAFE(R) Index and in derivative
instruments, such as futures contracts, options and forward currency exchange
contracts, that provide exposure to the stocks of companies in the EAFE(R)
Index. The Fund's securities are weighted to attempt to make the Fund's total
investment characteristics similar to those of the EAFE(R) Index as a whole.
The investment adviser may remove or exclude any EAFE(R) stock from the Fund if
the investment adviser believes that the stock is illiquid or that the merit of
the investment has been impaired by financial conditions or other extraordinary
events. 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 may also hold assets in short-term debt securities and money market
instruments.
INVESTMENT PROCESS
The Fund normally does not 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 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.
- - --------------------------------------------------------------------------------
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.
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.
- - --------------------------------------------------------------------------------
6
<PAGE>
A Detailed Look at EAFE(R) Equity Index
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.
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:
. 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.
. 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; and
. the risk that the Fund cannot sell the derivative because of an illiquid
secondary market;
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; 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.
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
- - -------------------------------------------------------------------------------
7
<PAGE>
A Detailed Look at EAFE(R) Equity Index
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.
INFORMATION REGARDING THE INDEX
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.
MANAGEMENT OF THE FUND
Deutsche Asset Management is the marketing name for the asset management
activities of Deutsche Bank A.G., Deutsche Funds Management, Bankers Trust
Company, DB Alex. Brown LLC, Deutsche Asset Management, Inc., and Deutsche
Asset Management Investment Services Limited.
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. Bankers Trust is an indirect wholly-
owned subsidiary of Deutsche Bank A.G. As investment adviser, Bankers Trust
makes the Fund's investment decisions. 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, 1999, Bankers Trust had total assets under management of
approximately $270 billion. Bankers Trust is dedicated to servicing the needs
of corporations, governments, financial institutions and private clients and
has invested retirement assets on behalf of the nation's largest corporations
and institutions for more than 50 years. 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.
At a special meeting of shareholders of the Fund held in 1999, shareholders
approved a new investment management agreement with Deutsche Asset Management,
Inc. (formerly Morgan Grenfell Inc.). The new investment management agreement
may be implemented within two years of the date of the special meeting upon
approval of a majority of the members of the Board of Trustees who are not
"interested persons," generally referred to as independent trustees.
Shareholders of the Fund also approved a new investment sub-management
agreement among the Trust, Deutsche Asset Management, Inc. and Bankers Trust
under which Bankers Trust may perform certain of Deutsche Asset Management,
Inc.'s responsibilities, at Deutsche Asset Management, Inc.'s expense, upon
approval of the independent trustees, within two years of the date of the
special meeting. Under the new investment management
- - --------------------------------------------------------------------------------
8
<PAGE>
A Detailed Look at EAFE(R) Equity Index
agreement and new investment sub-management agreement, the compensation paid
and the services provided would be the same as those under the existing
management agreement with the investment adviser.
Deutsche Asset Management, Inc. is located at 885 Third Avenue, 32nd Floor,
New York, New York 10022. The firm provides a full range of investment
advisory services to institutional clients. It serves as investment adviser to
11 other investment companies and as sub-adviser to five other investment
companies.
On March 11, 1999, Bankers Trust announced that it had reached an agreement
with the United States Attorney's Office in the Southern District of New York
to resolve an investigation concerning inappropriate transfers of unclaimed
funds and related record-keeping problems that occurred between 1994 and early
1996. Bankers Trust pleaded guilty to misstating entries in the bank's books
and records and agreed to pay a $63.5 million fine to state and federal
authorities. On July 26, 1999, the federal criminal proceedings were concluded
with Bankers Trust's formal sentencing. The events leading up to the guilty
pleas did not arise out of the investment advisory or mutual fund management
activities of Bankers Trust or its affiliates.
As a result of the plea, absent an order from the SEC, Bankers Trust would not
be able to continue to provide investment advisory services to the Fund. The
SEC has granted a temporary order to permit Bankers Trust and its affiliates
to continue to provide investment advisory services to registered investment
companies. There is no assurance that the SEC will grant a permanent order.
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 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), Independence Day (July
4th), Labor Day (the first Monday in September), Thanksgiving Day (the fourth
Thursday in November) and Christmas Day.
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.
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 a Company elects to have distributions made 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 advisor 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
- - -------------------------------------------------------------------------------
9
<PAGE>
A Detailed Look at EAFE(R) Equity Index
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.
- - -------------------------------------------------------------------------------
10
<PAGE>
A Detailed Look at EAFE(R) Equity Index
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.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
For the Period
For the For the August 22, 1997/1/
Year Ended Year Ended through
December 31, 1999 December 31, 1998 December 31, 1997
<S> <C> <C> <C>
For a Share Outstanding
Throughout Each Period
Net Asset Value,
Beginning of Period $11.18 $9.34 $10.00
---------------------------------------------------------------------------------
Income (Loss) From
Investment Operations:
Net Investment Income/2/ 0.125 0.12 0.02
---------------------------------------------------------------------------------
Net Realized and
Unrealized Gain (Loss)
on Investments, Futures
Contracts and Foreign
Currency Transactions 2.92 1.89 (0.68)
---------------------------------------------------------------------------------
Net Increase (Decrease)
in Net Asset Value From
Operations 3.07 2.01 (0.66)
---------------------------------------------------------------------------------
Less Distributions:
Distributions From Net
Investment Income (0.23) (0.16) 0.00
---------------------------------------------------------------------------------
Distributions From Net
Realized Gain on
Investments (0.42) (0.01) 0.00
---------------------------------------------------------------------------------
Total Distributions (0.65) (0.17) 0.00
---------------------------------------------------------------------------------
Net Asset Value, End of
Period $13.60 $11.18 $9.34
---------------------------------------------------------------------------------
Total Return/4/ 27.60% 21.60% (6.60)%
---------------------------------------------------------------------------------
Ratios/Supplemental Data
Net Assets, End of
Period (in 000s) $54,499 $35,956 $14,409
---------------------------------------------------------------------------------
Ratios to Average Net
Assets:
Net Investment Income
Including
Reimbursement/Waiver 1.37% 1.20% 0.72%/3/
---------------------------------------------------------------------------------
Operating Expenses
Including
Reimbursement/Waiver 0.65% 0.65% 0.65%/3/
---------------------------------------------------------------------------------
Operating Expenses
Excluding
Reimbursement/Waiver 1.15% 1.66% 2.75%/3/
---------------------------------------------------------------------------------
Portfolio Turnover Rate 29% 7% 0%/5/
---------------------------------------------------------------------------------
</TABLE>
/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 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. If fees for the adviser and
administrator were not waived the total return would have been lower.
/5/Less than 1%.
- - -------------------------------------------------------------------------------
11
<PAGE>
Additional information about the Fund's investments 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, 2000, 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 EDGAR Database
on the SEC's website (http://www.sec.gov), or you can get copies of this
information, after payment of a duplicating fee, by electronic request at
[email protected] or by writing to the Public Reference Section of the SEC,
Washington, D.C. 20549-0102. 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 1-202-942-8090.
EAFE(R) Equity Index
Deutsche Asset Management VIT Funds
CUSIP #05576E508
INS5PRO (4/00)
811-07507
Deutsche Asset Management
Mutual Fund
Prospectus
April 30, 2000
Deutsche VIT Funds
Equity 500 Index
Formerly a BT Insurance Fund
[Like shares of all mutual funds, these securities have not been approved or
disapproved by the Securities and Exchange Commission nor has the Securities and
Exchange Commission passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.]
A Member of the
Deutsche Bank Group [/]
<PAGE>
Overview
- - --------------------------------------------------------------------------------
of Equity 500 Index
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 Fund invests in a statistically selected sample of the
securities found in the S&P 500 Index.
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.
- - --------------------------------------------------------------------------------
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).
Equity 500 Index
Overview of Equity 500 Index
<TABLE>
<S> <C>
Goal........................................................................ 3
Core Strategy............................................................... 3
Investment Policies and Strategies.......................................... 3
Principal Risks of Investing in the Fund.................................... 4
Who Should Consider Investing in the Fund................................... 4
Total Returns, After Fees and Expenses...................................... 5
</TABLE>
A Detailed Look at the Equity 500 Index Fund
<TABLE>
<S> <C>
Objective................................................................... 6
Index Investing Versus Active Management.................................... 6
Strategy.................................................................... 6
Principal Investments....................................................... 6
Investment Process.......................................................... 6
Risks....................................................................... 7
Information Regarding the Index............................................. 7
Management of the Fund...................................................... 7
Calculating the Fund's Share Price.......................................... 8
Dividends and Distributions................................................. 8
Tax Considerations.......................................................... 9
Buying and Selling Fund Shares.............................................. 9
Financial Highlights........................................................ 10
</TABLE>
- - --------------------------------------------------------------------------------
3
<PAGE>
Overview of Equity 500 Index
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' stocks, in which the Fund invests, 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 us.
. The Fund could suffer losses if its futures and options positions are not
well correlated with the securities for which they are acting as a substitute
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. It can,
however, afford exposure to investment opportunities not available to an
investor in small- and medium-sized company stocks. 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 bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
- - --------------------------------------------------------------------------------
4
<PAGE>
Overview of Equity 500 Index
[CHART APPEARS HERE]
YEAR-BY-YEAR RETURNS
(each full calendar year since inception)
1998 28.71%
1999 20.39%
Since inception, the Fund's highest return in any calendar quarter was 21.22%
(fourth quarter 1998) and its lowest quarterly return was -10.06% (third
quarter 1998). Past perfromance offers no indication of how the Fund will
perform in the future.
TOTAL RETURNS, AFTER FEES & 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 each
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.
- - --------------------------------------------------------------------------------
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.
PERFORMANCE FOR PERIOD ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Average Annual Returns
Since Inception
1 Year (October 1, 1997)/1/
<S> <C> <C>
Fund 20.39% 22.53%
-----------------------------------------------
S&P 500 Index 21.04% 22.74%
-----------------------------------------------
</TABLE>
/1/ The performance of the S&P 500 Index is
calculated from September 30, 1997.
- - --------------------------------------------------------------------------------
5
<PAGE>
A detailed look
- - --------------------------------------------------------------------------------
at Equity 500 Index
OBJECTIVE
The Fund seeks to match, as closely as possible, before the deduction of
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 inter-
est income is incidental to the pursuit of its objective. While we give prior-
ity 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 INVESTING 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 realize low capital gains.
STRATEGY
To attempt 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
Under normal circumstances, the Fund will invest at least 80% of its assets in
stocks of companies included in the S&P 500 Index and in derivative
instruments, such as futures contracts and options, that provide exposure to
the stocks of companies in the S&P 500 Index. The Fund's securities are
weighted to attempt 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
remove any S&P stock from the Fund, if the investment adviser believes that the
stock is illiquid or that the merit of the investment has been impaired by
financial conditions or other extraordinary events. 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 may also hold assets
in short-term debt securities and money market instruments.
INVESTMENT PROCESS
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 and selected based on liquidity. 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. This
approach attempts to maximize the Fund's liquidity and returns while minimizing
its costs.
- - --------------------------------------------------------------------------------
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.
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.
- - --------------------------------------------------------------------------------
6
<PAGE>
A Detailed Look at Equity 500 Index
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,
including stocks held by the Fund.
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 stocks.
. 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.
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.
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.
INFORMATION REGARDING THE INDEX
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's only
relationship to this Fund is the licensing of certain trademarks and trade
names of S&P and of the S&P 500 Index, which is determined, composed and
calculated without regard to the Fund. 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.
MANAGEMENT OF THE FUND
Deutsche Asset Management is the marketing name for the asset management
activities of Deutsche Bank A.G., Deutsche Funds Management, Bankers Trust
Company, DB Alex. Brown LLC, Deutsche Asset Management, Inc., and Deutsche
Asset Management Investment Services Limited.
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.
- - -------------------------------------------------------------------------------
7
<PAGE>
A Detailed Look at Equity 500 Index
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. Bankers Trust is an indirect wholly-
owned subsidiary of Deutsche Bank A.G. As investment adviser, Bankers Trust
makes the Fund's investment decisions. 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, 1999, Bankers Trust had total assets under management of
approximately $270 billion. Bankers Trust is dedicated to servicing the needs
of corporations, governments, financial institutions and private clients and
has invested retirement assets on behalf of the nation's largest corporations
and institutions for more than 50 years. 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.
At a special meeting of shareholders of the Fund held in 1999, shareholders
approved a new investment management agreement with Deutsche Asset Management,
Inc. (formerly Morgan Grenfell Inc.). The new investment management agreement
may be implemented within two years of the date of the special meeting upon
approval of a majority of the members of the Board of Trustees who are not
"interested persons," generally referred to as independent trustees.
Shareholders of the Fund also approved a new investment sub-management
agreement among the Trust, Deutsche Asset Management, Inc. and Bankers Trust
under which Bankers Trust may perform certain of Deutsche Asset Management,
Inc.'s responsibilities, at Deutsche Asset Management, Inc.'s expense, upon
approval of the independent trustees, within two years of the date of the
special meeting. Under the new investment management agreement and new
investment sub-management agreement, the compensation paid and the services
provided would be the same as those under the existing management agreement
with the investment adviser.
Deutsche Asset Management, Inc. is located at 885 Third Avenue, 32nd Floor, New
York, New York 10022. The firm provides a full range of investment advisory
services to institutional clients. It serves as investment adviser to 11 other
investment companies and as sub-adviser to five other investment companies.
On March 11, 1999, Bankers Trust announced that it had reached an agreement
with the United States Attorney's Office in the Southern District of New York
to resolve an investigation concerning inappropriate transfers of unclaimed
funds and related record-keeping problems that occurred between 1994 and early
1996. Bankers Trust pleaded guilty to misstating entries in the bank's books
and records and agreed to pay a $63.5 million fine to state and federal
authorities. On July 26, 1999, the federal criminal proceedings were concluded
with Bankers Trust's formal sentencing. The events leading up to the guilty
pleas did not arise out of the investment advisory or mutual fund management
activities of Bankers Trust or its affiliates.
As a result of the plea, absent an order from the SEC, Bankers Trust would not
be able to continue to provide investment advisory services to the Fund. The
SEC has granted a temporary order to permit Bankers Trust and its affiliates to
continue to provide investment advisory services to registered investment
companies. There is no assurance that the SEC will grant a permanent order.
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.
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 a Company elects to have distributions made 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
- - --------------------------------------------------------------------------------
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), Independence Day (July
4th), Labor Day (the first Monday in September), Thanksgiving Day (the fourth
Thursday in November) and Christmas Day.
- - --------------------------------------------------------------------------------
8
<PAGE>
A Detailed Look at Equity 500 Index
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 advisor 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.
- - -------------------------------------------------------------------------------
9
<PAGE>
A Detailed Look at Equity 500 Index
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.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
For the Period
For the For the October 1, 1997/1/
Year Ended Year Ended through
December 31, 1999 December 31, 1998 December 31, 1997
<S> <C> <C> <C>
For a Share Outstanding
Throughout Each Period
Net Asset Value,
Beginning of Period $12.73 $10.19 $10.00
--------------------------------------------------------------------------------
Income From Investment
Operations:
Net Investment Income 0.05 0.07 0.03/2/
--------------------------------------------------------------------------------
Net Realized and
Unrealized Gain on
Investments and Futures
Contracts 2.55 2.84 0.16
--------------------------------------------------------------------------------
Net Increase in Net
Asset Value From
Operations 2.60 2.91 0.19
--------------------------------------------------------------------------------
Less Distributions:
Distributions From Net
Investment Income (0.10) (0.05) 0.00
--------------------------------------------------------------------------------
Distributions From Net
Realized Gain on
Investments (0.05) (0.32) 0.00
--------------------------------------------------------------------------------
Total Distributions (0.15) (0.37) 0.00
--------------------------------------------------------------------------------
Net Asset Value, End of
Period $15.18 $12.73 $10.19
--------------------------------------------------------------------------------
Total Return/4/ 20.39% 28.71% 1.90%
--------------------------------------------------------------------------------
Ratios/Supplemental Data
Net Assets, End of
Period (in 000s) $288,531 $49,691 $11,760
--------------------------------------------------------------------------------
Ratios to Average Net
Assets:
Net Investment Income
Including
Reimbursement/Waiver 1.16% 1.37% 1.51%/3/
--------------------------------------------------------------------------------
Operating Expenses
Including
Reimbursement/Waiver 0.30% 0.30% 0.30%/3/
--------------------------------------------------------------------------------
Operating Expenses
Excluding
Reimbursement/Waiver 0.43% 1.19% 2.78%/3/
--------------------------------------------------------------------------------
Portfolio Turnover Rate 2% 36% 7%
--------------------------------------------------------------------------------
</TABLE>
/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. If fees for the adviser and
administrator were not waived the total return would have been lower.
- - --------------------------------------------------------------------------------
10
<PAGE>
This page intentionally left blank
<PAGE>
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, 2000, 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 EDGAR
Database on the SEC's website (http://www.sec.gov), or you can get copies
of this information, after payment of a duplicating fee, by electronic
request at [email protected] or by writing to the Public Reference Section
of the SEC, Washington, D.C. 20549-0102. 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 1-202-942-8090.
Equity 500 Index
Deutsche Asset Management VIT Funds
CUSIP #05576E607
INS6PRO (4/00)
811-07507
Deutsche Asset Management
Mutual Fund
Prospectus
April 30, 2000
Deutsche VIT Funds
Small Cap Index
Formerly a BT Insurance Fund
[Like shares of all mutual funds, these securities have not been approved or
disapproved by the Securities and Exchange Commission nor has the Securities and
Exchange Commission passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.]
A Member of the
Deutsche Bank Group [/]
<PAGE>
Overview
- - --------------------------------------------------------------------------------
of Small Cap Index
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 Fund invests in a statistically selected sample of the
securities found in the Russell 2000 Index.
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 comprise the Russell 2000 Index. The Fund may also use stock
index futures contracts and options.
- - --------------------------------------------------------------------------------
The Russell 2000 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, which measures the performance of the 3,000 largest U.S.
companies based on total market capitalization. The Russell 2000 tracks the
2000 smallest companies in the Russell 3000 Index. As of May 31, 1999, the
Russell 2000 Index represents approximately 8% of the total market
capitalization of the Russell 3000 Index. As of June 30, 1999, the average
market capitalization was approximately $526.4 million and the median market
capitalization was approximately $428.0 million. The largest company in the
index had an approximate market capitalization of $1,349.8 million.
Small Cap Index
Overview of Small Cap Index
<TABLE>
<S> <C>
Goal........................................................................ 3
Core Strategy............................................................... 3
Investment Policies and Strategies.......................................... 3
Principal Risks of Investing in the Fund.................................... 4
Who Should Consider Investing in the Fund................................... 4
Total Returns, After Fees and Expenses...................................... 5
A Detailed Look at Small Cap Index
Objective................................................................... 6
Index Investing Versus Active Management.................................... 6
Strategy.................................................................... 6
Principal Investments....................................................... 6
Investment Process.......................................................... 6
Risks....................................................................... 7
Management of the Fund...................................................... 7
Calculating the Fund's Share Price.......................................... 8
Dividends and Distributions................................................. 8
Tax Considerations.......................................................... 9
Buying and Selling Shares................................................... 9
Financial Highlights........................................................ 10
</TABLE>
- - --------------------------------------------------------------------------------
3
<PAGE>
Overview of Small Cap Index
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, in which the Fund invests, 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, 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 us.
. The Fund could suffer losses if its futures and options positions are not
well correlated with the securities for which they are acting as a substitute
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 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 Small Cap Index 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 Fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
- - --------------------------------------------------------------------------------
4
<PAGE>
Overview of Small Cap Index
[HEAD, CHART and FOOTNOTE APPEARS HERE]
YEAR-BY-YEAR RETURNS
(each full calendar year since inception)
1998 -2.18%
1999 20.16%
Since inception, the Fund's highest return in any calendar quarter was 18.28%
(fourth quarter 1999) and its lowest quarterly return was -19.43% (third
quarter 1998). Past perfromance offers no indication of how the Fund will
perform in the future.
TOTAL RETURNS, AFTER FEES & 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 each
full 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.
- - --------------------------------------------------------------------------------
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.
PERFORMANCE FOR PERIOD ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Average Annual Returns
Since Inception
1 year (August 25, 1997)/1/
<S> <C> <C>
Fund 20.16% 9.38%
--------------------------------------------------
Russell 2000
Index 21.26% 9.70%
--------------------------------------------------
</TABLE>
/1/ The performance of the Russell 2000 Index
is calculated from August 31, 1997.
- - --------------------------------------------------------------------------------
5
<PAGE>
A detailed look
- - --------------------------------------------------------------------------------
at Small Cap Index
OBJECTIVE
The Fund seeks to match, as closely as possible (before the deduction of
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 INVESTING 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 realize low capital gains.
STRATEGY
To attempt 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
Under normal circumstances, the Fund will invest at least 80% of its assets in
stocks of companies included in the Russell 2000 Index and in derivative
instruments, such as futures contracts and options, that provide exposure to
the stocks of companies 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. 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 may also hold assets
in short-term debt securities and money market instruments.
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.
- - --------------------------------------------------------------------------------
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.
Portfolio Turnover. The annual portfolio turnover rate measures the frequency
that the Portfolio sells and replaces its securities within a given period.
Historically, this Fund has had a low portfolio turnover rate.
- - --------------------------------------------------------------------------------
6
<PAGE>
A Detailed Look at Small Cap Index
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. Industrywide
reversals have had a greater impact on small companies, since they lack a large
company's financial resources to deal with setbacks. 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; and
. the risk that the Fund cannot sell the derivative because of an illiquid
secondary market.
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.
MANAGEMENT OF THE FUND
Deutsche Asset Management is the marketing name for the asset management
activities of Deutsche Bank A.G., Deutsche Funds Management, Bankers Trust
Company, DB Alex. Brown LLC, Deutsche Asset Management, Inc., and Deutsche
Asset Management Investment Services Limited.
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. Bankers Trust is an indirect wholly-
owned subsidiary of Deutsche Bank A.G. As investment adviser, Bankers Trust
makes the Fund's investment decisions. 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.
- - --------------------------------------------------------------------------------
7
<PAGE>
A Detailed Look at Small Cap Index
As of December 31, 1999, Bankers Trust had total assets under management of
approximately $270 billion. Bankers Trust is dedicated to servicing the needs
of corporations, governments, financial institutions and private clients and
has invested retirement assets on behalf of the nation's largest corporations
and institutions for more than 50 years. 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.
At a special meeting of shareholders of the Fund held in 1999, shareholders
approved a new investment management agreement with Deutsche Asset Management,
Inc. (formerly Morgan Grenfell Inc.). The new investment management agreement
may be implemented within two years of the date of the special meeting upon
approval of a majority of the members of the Board of Trustees who are not
"interested persons," generally referred to as independent trustees.
Shareholders of the Fund also approved a new investment sub-management
agreement among the Trust, Deutsche Asset Management, Inc. and Bankers Trust
under which Bankers Trust may perform certain of Deutsche Asset Management,
Inc.'s responsibilities, at Deutsche Asset Management, Inc.'s expense, upon
approval of the independent trustees, within two years of the date of the
special meeting. Under the new investment management agreement and new
investment sub-management agreement, the compensation paid and the services
provided would be the same as those under the existing management agreement
with the investment adviser.
Deutsche Asset Management, Inc. is located at 885 Third Avenue, 32nd Floor, New
York, New York 10022. The firm provides a full range of investment advisory
services to institutional clients. It serves as investment adviser to 11 other
investment companies and as sub-adviser to five other investment companies.
On March 11, 1999, Bankers Trust announced that it had reached an agreement
with the United States Attorney's Office in the Southern District of New York
to resolve an investigation concerning inappropriate transfers of unclaimed
funds and related record-keeping problems that occurred between 1994 and early
1996. Bankers Trust pleaded guilty to misstating entries in the bank's books
and records and agreed to pay a $63.5 million fine to state and federal
authorities. On July 26, 1999, the federal criminal proceedings were concluded
with Bankers Trust's formal sentencing. The events leading up to the guilty
pleas did not arise out of the investment advisory or mutual fund management
activities of Bankers Trust or its affiliates.
As a result of the plea, absent an order from the SEC, Bankers Trust would not
be able to continue to provide investment advisory services to the Fund. The
SEC has granted a temporary order to permit Bankers Trust and its affiliates to
continue to provide investment advisory services to registered investment
companies. There is no assurance that the SEC will grant a permanent order.
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.
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 a Company elects to have distributions made 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.
- - --------------------------------------------------------------------------------
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), Independence Day (July
4th), Labor Day (the first Monday in September), Thanksgiving Day (the fourth
Thursday in November) and Christmas Day.
- - --------------------------------------------------------------------------------
8
<PAGE>
A Detailed Look at Small Cap Index
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 advisor 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.
- - -------------------------------------------------------------------------------
9
<PAGE>
A Detailed Look at Small Cap Index
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.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
For the Period
For the For the August 25,
Year Ended Year Ended 1997/1/ through
December 31, 1999 December 31, 1998 December 31, 1997
<S> <C> <C> <C>
For a Share Outstanding
Throughout Each Period
Net Asset Value,
Beginning of Period $ 10.06 $ 10.51 $ 10.00
--------------------------------------------------------------------------------
Income (Loss) From
Investment Operations:
Net Investment Income 0.09 0.06 0.03/2/
--------------------------------------------------------------------------------
Net Realized and
Unrealized Gain (Loss)
on Investments and
Futures Contracts 1.92 (0.30) 0.48
--------------------------------------------------------------------------------
Net Increase (Decrease)
in Net Asset Value From
Operations 2.01 (0.24) 0.51
--------------------------------------------------------------------------------
Less Distributions:
Distributions From Net
Investment Income (0.12) (0.05) 0.00
--------------------------------------------------------------------------------
Distributions From Net
Realized Gain on
Investments (0.34) (0.16) 0.00
--------------------------------------------------------------------------------
Total Distributions (0.46) (0.21) 0.00
--------------------------------------------------------------------------------
Net Asset Value, End of
Period $ 11.61 $ 10.06 $ 10.51
--------------------------------------------------------------------------------
Total Return/4/ 20.16% (2.18)% 5.10%
--------------------------------------------------------------------------------
Ratios/Supplemental Data
Net Assets, End of
Period (in 000s) $55,559 $36,744 $12,617
--------------------------------------------------------------------------------
Ratios to Average Net
Assets:
--------------------------------------------------------------------------------
Net Investment Income
Including
Reimbursement/Waiver 1.14% 1.18% 1.08%/3/
--------------------------------------------------------------------------------
Operating Expenses
Including
Reimbursement/Waiver 0.45% 0.45% 0.45%/3/
--------------------------------------------------------------------------------
Operating Expenses
Excluding
Reimbursement/Waiver 1.18% 1.58% 3.27%/3/
--------------------------------------------------------------------------------
Portfolio Turnover Rate 68% 30% 8%
--------------------------------------------------------------------------------
</TABLE>
/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. If fees for the adviser and
administrator were not waived the total return would have been lower.
- - --------------------------------------------------------------------------------
10
<PAGE>
This page intentionally left blank
<PAGE>
Additional information about the Fund's investments 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, 2000, 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 EDGAR
Database on the SEC's website (http://www.sec.gov), or you can get copies
of this information, after payment of a duplicating fee, by electronic
request at [email protected] or by writing to the Public Reference Section
of the SEC, Washington, D.C. 20549-0102. 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 1-202-942-8090.
Small Cap Index
Deutsche Asset Management VIT Funds
CUSIP# 05576E409
INS4PRO (4/00)
811-07507
Deutsche Asset
Management
Mutual Fund
Prospectus
April 30,
2000
Deutsche VIT
Funds
International Equity
Formerly a BT Insurance Fund
[Like shares of all mutual funds, these securities have not been approved or
disapproved by the Securities and Exchange Commission nor has the Securities
and Exchange Commission passed upon the accuracy or adequacy of this
prospectus.
Any representation to the contrary is a criminal offense.]
[LOGO OF DEUTSCHE BANK
GROUP]
<PAGE>
Overview
- - -----------------------------------------------------------------------------
- - ---
of International Equity
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 goal 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.
- - -----------------------------------------------------------------------------
- - ---
International Equity
Overview of International Equity
<TABLE>
<S>
<C>
Goal........................................................................
3
Core Strategy...............................................................
3
Investment Policies and Strategies..........................................
3
Principal Risks of Investing in the Fund....................................
4
Who Should Consider Investing in the Fund...................................
4
A Note on Fees..............................................................
4
A Detailed Look at International Equity
Objective...................................................................
5
Strategy....................................................................
5
Principal Investments.......................................................
5
Investment Process..........................................................
5
Risks.......................................................................
5
Management of the Fund......................................................
7
Calculating the Fund's Share Price..........................................
8
Dividends and Distributions.................................................
9
Tax Considerations..........................................................
9
Buying and Selling Fund Shares..............................................
9
Financial Highlights........................................................
9
</TABLE>
- - -----------------------------------------------------------------------------
- - ---
3
<PAGE>
Overview of International Equity
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 we have 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.
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 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 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 Fund is not a bank deposit 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.
- - -----------------------------------------------------------------------------
- - ---
4
<PAGE>
A detailed look
- - -----------------------------------------------------------------------------
- - ---
at International Equity
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 goal. While we give
priority to capital appreciation, we cannot offer any assurance of achieving
this goal. The Fund's goal 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 of the companies in which the Fund invests are based in the
developed foreign countries that make up the Morgan Stanley Capital
International (MSCI) EAFE(R) Index ("EAFE(R) Index"), plus Canada. 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.
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.
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 may invest 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.
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.
- - -----------------------------------------------------------------------------
- - ---
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.
- - -----------------------------------------------------------------------------
- - ---
5
<PAGE>
A Detailed Look at International Equity
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.
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:
. 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, we devote much of our research
effort to understanding and assessing the impact of these differences upon
a
company's financial conditions and prospects.
. 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
as in the United States.
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. We seek 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, 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--
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. Industrywide reversals have had a greater impact on
small
companies, since they lack a large company's financial resources. 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
- - -----------------------------------------------------------------------------
- - ---
Currency management is used to offset investment risk ("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.
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6
<PAGE>
A Detailed Look at International
Equity
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. 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.
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 other financial condition of European
issuers that the Fund holds in its portfolio; 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.
MANAGEMENT OF THE FUND
Deutsche Asset Management is the marketing name for the asset management
activities of Deutsche Bank A.G., Deutsche Fund Management, Bankers Trust
Company, DB Alex. Brown LLC, Deutsche Asset Management, Inc., and Deutsche
Asset Management Investment Services Limited.
- - -----------------------------------------------------------------------------
Futures contracts, options 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.
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. Bankers Trust is an indirect wholly-
owned subsidiary of Deutsche Bank A.G. As investment adviser, Bankers Trust
makes the Fund's investment decisions. 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, 1999, Bankers Trust had total assets under management of
approximately $270 billion. Bankers Trust is dedicated to servicing the needs
of corporations, governments, financial institutions and private clients and
has invested retirement assets on behalf of the nation's largest corporations
and institutions for more than 50 years. 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 Board of Trustees voted at meeting held on February 25, 1999 to approve a
new investment management agreement (the "Management Agreement") with Bankers
Trust and for such Management Agreement to be submitted to the shareholders
of
the Fund for their approval. Approval of the Management Agreement was sought
because Deutsche Bank became Bankers Trust's parent company and, therefore,
controls its operations as investment adviser.
The Board of Trustees also voted at a meeting held on July 27, 1999 to
approve
a new investment management agreement with Deutsche Asset Management, Inc.
(formerly Morgan Grenfell Inc.) and for such investment management agreement
to
be submitted to the shareholders of the Fund for their approval. The new
investment management agreement may be implemented upon approval of a
majority
of the members of the Board of Trustees who are not "interested persons,"
generally referred to as independent trustees. The Board of Trustees also
approved a new investment sub-management agreement among the Trust, Deutsche
Asset Management, Inc. and Bankers Trust, to be submitted to the shareholders
of the Fund for their approval, under which Bankers Trust may perform certain
of Deutsche Asset Management, Inc.'s responsibilities, at
- - -----------------------------------------------------------------------------
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7
<PAGE>
A Detailed Look at International Equity
Deutsche Asset Management, Inc.'s expense, upon approval of the independent
trustees. Under the new investment management agreement and new investment
sub-
management agreement, the compensation paid and the services provided would
be
the same as those under the existing management agreement with the investment
adviser.
Deutsche Asset Management, Inc. is located at 885 Third Avenue, 32nd Floor,
New
York, New York 10022. The firm provides a full range of investment advisory
services to institutional clients. It serves as investment adviser to 11
other
investment companies and as sub-adviser to five other investment companies.
On March 11, 1999, Bankers Trust announced that it had reached an agreement
with the United States Attorney's Office in the Southern District of New York
to resolve an investigation concerning inappropriate transfers of unclaimed
funds and related record-keeping problems that occurred between 1994 and
early
1996. Bankers Trust pleaded guilty to misstating entries in the bank's books
and records and agreed to pay a $63.5 million fine to state and federal
authorities. On July 26, 1999, the federal criminal proceedings were
concluded
with Bankers Trust's formal sentencing. The events leading up to the guilty
pleas did not arise out of the investment advisory or mutual fund management
activities of Bankers Trust or its affiliates.
As a result of the plea, absent an order from the SEC, Bankers Trust would
not
be able to continue to provide investment advisory services to the Fund. The
SEC has granted a temporary order to permit Bankers Trust and its affiliates
to
continue to provide investment advisory services to registered investment
companies. There is no assurance that the SEC will grant a permanent order.
Portfolio Managers
The following portfolio managers are responsible for the day-to-day
management
of the Fund's investments:
Michael Levy
. Co-Lead Portfolio Manager of the Fund.
. International equity strategist, overseeing the design and implementation
of
the firm's proprietary stock selection process.
. 28 years of business experience, 18 of them as an investment professional.
. Degrees in mathematics and geophysics from the University of Michigan.
Robert Reiner
. Co-Lead Portfolio Manager of the Fund.
. Specializes in Japanese and European stock and market analysis.
. Served as a Senior Financial Analyst at Scudder, Stevens & Clark from 1993
to
1994.
. 18 years of investment industry experience.
. Degrees from the University of Southern California and Harvard University.
Julie Wang
. Co-Portfolio Manager of the Fund.
. 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.
. 11 years of investment management experience.
. BS in economics from Yale University, MBA from The Wharton School,
University
of Pennsylvania.
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.
- - -----------------------------------------------------------------------------
- - ---
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), Independence Day (July
4th), Labor Day (the first Monday in September), Thanksgiving Day (the fourth
Thursday in November) and Christmas Day.
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8
<PAGE>
A Detailed Look at International
Equity
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 a Company elects to have distributions made 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 advisor 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
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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9
<PAGE>
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<PAGE>
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<PAGE>
After the Fund commences operations, additional information about the
Fund's investments will be 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, 2000, 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 EDGAR
Database on the SEC's website (http://www.sec.gov), or you can get copies
of this information, after payment of a duplicating fee, by electronic
request at [email protected] or by writing to the Public Reference Section
of the SEC, Washington, D.C. 20549-0102. 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 1-202-942-8090.
International Equity
Deutsche Asset Management VIT Funds
CUSIP
#05576E201
INSIEFPRO
(04/00)
811-07507
Deutsche Asset
Management
Mutual Fund
Prospectus
April 30,
2000
Deutsche VIT
Funds
Small Cap
Formerly a BT Insurance Fund
[Like shares of all mutual funds, these securities have not been approved or
disapproved by the Securities and Exchange Commission nor has the Securities
and Exchange Commission passed upon the accuracy or adequacy of this
prospectus.
Any representation to the contrary is a criminal offense.]
[LOGO OF DEUTSCHE BANK
GROUP]
<PAGE>
Overview
- - -----------------------------------------------------------------------------
- - ---
of Small Cap
Goal: The Fund invests for long-term capital growth.
Core Strategy: The Fund invests primarily in stocks and other equity
securities
of smaller U.S. companies.
INVESTMENT POLICIES AND STRATEGIES
The Fund seeks to achieve its goal by investing in stocks and other equity
securities of 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.
- - -----------------------------------------------------------------------------
- - ---
Small Cap
Overview of Small Cap
<TABLE>
<S>
<C>
Goal........................................................................
2
Core Strategy...............................................................
2
Investment Policies and Strategies..........................................
2
Principal Risks of Investing in the Fund....................................
3
Who Should Consider Investing in the Fund...................................
3
A Note on Fees..............................................................
3
</TABLE>
A Detailed Look at Small Cap
<TABLE>
<S>
<C>
Objective...................................................................
4
Strategy....................................................................
4
Principal Investments.......................................................
4
Investment Process..........................................................
4
Risks.......................................................................
5
Management of the Fund......................................................
5
Calculating the Fund's Share Price..........................................
7
Dividends and Distributions.................................................
7
Tax Considerations..........................................................
7
Buying and Selling Shares...................................................
7
Financial Highlights........................................................
7
</TABLE>
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2
<PAGE>
Overview of Small
Cap
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 we have 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.
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 Small Cap 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.
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 bank deposit 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.
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3
<PAGE>
A detailed look
- - -----------------------------------------------------------------------------
- - ---
at Small Cap
OBJECTIVE
Small Cap seeks long-term capital growth. Under normal circumstances, the
Fund
invests at least 65% of its total assets in the stock and other securities
with
equity characteristics of 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 goal. While we give priority to
capital growth, we cannot offer any assurance of achieving this goal. The
Fund's goal 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.
- - -----------------------------------------------------------------------------
- - ---
"Market Capitalization," or "Market Cap," provides an estimate of a company's
value. It is calculated by multiplying the total number of a company's
outstanding shares by the share's current price.
The Russell 2000 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, which measures the performance of the 3,000 largest U.S.
companies based on total market capitalization. The Russell 2000 tracks the
2000 smallest companies in the Russell 3000 Index. As of May 31, 1999, the
Russell 2000 Index represents approximately 8% of the total market
capitalization of the Russell 3000 Index. As of June 30, 1999, the average
market capitalization was approximately $526.4 million; the median market
capitalization was approximately $428.0 million. The largest company in the
index had an approximate market capitalization of $1,349.8 million.
PRINCIPAL INVESTMENTS
The Fund normally owns stock in approximately 90 to 110 small companies at
any
one time. The Fund focuses principally on companies with market caps, at the
time we purchase the stock, 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 capitalization companies.
Under
normal conditions, these two tactics would not comprise major elements of its
strategy.
INVESTMENT PROCESS
The Fund's process begins with a methodical search for industries poised to
do
well. 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 Fund's 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 we have long applied and are
continuously enhancing. The work demands intensive research: visits to a
company's plants and frequent contact with its management, suppliers,
customers
and competitors.
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 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 adopt such a position and over the
course of its duration, the Fund may not meet its goal of long-term capital
growth.
- - -----------------------------------------------------------------------------
- - ---
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 high portfolio turnover rate. High
turnover can increase the Fund's transaction costs, thereby lowering its
returns. It may also increase your tax liability.
- - -----------------------------------------------------------------------------
- - ---
4
<PAGE>
A Detailed Look at Small
Cap
RISKS
Below we set forth some of the prominent risks associated with investing in
small companies, as well as investing in general. 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 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.
Industrywide reversals have had a greater impact on small companies, since
they
lack a large company's financial resources. 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.
Financial reporting standards for companies based in foreign markets differ
from those in the U.S. Since the "numbers" themselves sometimes mean
different
things, we devote much of our research effort to understanding and assessing
the impact of these differences upon a company's financial condition.
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 Risk
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.
MANAGEMENT OF THE FUND
Deutsche Asset Management is the marketing name for the asset management
activities of Deutsche Bank A.G., Deutsche Fund Management, Bankers Trust
Company, DB Alex. Brown LLC, Deutsche Asset Management, Inc., and Deutsche
Asset Management Investment Services Limited.
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. Bankers Trust is an indirect wholly-
owned subsidiary of Deutsche Bank A.G. As investment adviser, Bankers Trust
makes the Fund's investment decisions. It buys and sells securities for the
Fund and conducts the research that leads to the purchase and sale decisions.
The investment adviser is entitled to receive a fee of 0.80% of the Fund's
average daily net assets for its services.
As of December 31, 1999, Bankers Trust had total assets under management of
approximately $270 billion. Bankers Trust is dedicated to servicing the needs
of corporations, governments, financial institutions and private clients and
has invested retirement assets on behalf of the nation's largest corporations
and institutions for more than 50 years. 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.
- - -----------------------------------------------------------------------------
- - ---
5
<PAGE>
A Detailed Look at Small Cap
The Board of Trustees voted at a meeting held on February 25, 1999 to approve
a
new investment management agreement (the "Management Agreement") with Bankers
Trust and for such Management Agreement to be submitted to the shareholders
of
the Fund for their approval. Approval of the Management Agreement was sought
because Deutsche Bank became Bankers Trust's parent company and, therefore,
controls its operations as investment adviser.
The Board of Trustees also voted at a meeting held on July 27, 1999 to
approve
a new investment management agreement with Deutsche Asset Management, Inc.
(formerly Morgan Grenfell Inc.) and for such investment management agreement
to
be submitted to the shareholders of the Fund for their approval. The new
investment management agreement may be implemented upon approval of a
majority
of the members of the Board of Trustees who are not "interested persons,"
generally referred to as independent trustees. The Board of Trustees also
approved a new investment sub-management agreement among the Trust, Deutsche
Asset Management, Inc. and Bankers Trust, to be submitted to the shareholders
of the Fund for their approval, under which Bankers Trust may perform certain
of Deutsche Asset Management, Inc.'s responsibilities, at Deutsche Asset
Management, Inc.'s expense, upon approval of the independent trustees. Under
the new investment management agreement and new investment sub-management
agreement, the compensation paid and the services provided would be the same
as
those under the existing management agreement with the investment adviser.
Deutsche Asset Management, Inc. is located at 885 Third Avenue, 32nd Floor,
New
York, New York 10022. The firm provides a full range of investment advisory
services to institutional clients. It serves as investment adviser to 11
other
investment companies and as sub-adviser to five other investment companies.
On March 11, 1999, Bankers Trust announced that it had reached an agreement
with the United States Attorney's Office in the Southern District of New York
to resolve an investigation concerning inappropriate transfers of unclaimed
funds and related record-keeping problems that occurred between 1994 and
early
1996. Bankers Trust pleaded guilty to misstating entries in the bank's books
and records and agreed to pay a $63.5 million fine to state and federal
authorities. On July 26, 1999, the federal criminal proceedings were
concluded
with Bankers Trust's formal sentencing. The events leading up to the guilty
pleas did not arise out of the investment advisory or mutual fund management
activities of Bankers Trust or its affiliates.
As a result of the plea, absent an order from the SEC, Bankers Trust would
not
be able to continue to provide investment advisory services to the Fund. The
SEC has granted a temporary order to permit Bankers Trust and its affiliates
to
continue to provide investment advisory services to registered investment
companies. There is no assurance that the SEC will grant a permanent order.
Portfolio Managers
The following portfolio managers are responsible for the day-to-day
management
of the Fund's investments:
John P. Callaghan
. Co-Portfolio Manager of the Fund.
. Portfolio Manager at Deutsche Asset Management, Inc. from 1997 to present,
Odyssey Partners from 1996 to 1997 and Weiss Peck & Greer from 1993 to
1996.
. AB in Economics from Harvard College and MBA from Harvard Business School.
Mary P. Dugan, CFA
. Co-Portfolio Manager of the Fund.
. Portfolio Manager in the investment adviser's small cap group from 1994 to
1999.
. Securities Analyst at Fred Alger Management from 1992 to 1994 and at Dean
Witter Reynolds from 1989 to 1992.
. BA from the University of Rochester and MBA from New York University's
Stern
School of Business.
Audrey M. T. Jones, CFA
. Co-Portfolio Manager of the Fund.
. Portfolio Manager at Deutsche Asset Management, Inc. from 1986 to present.
. BBA in Finance/Accounting from Pace University Lubin School of Business.
- - -----------------------------------------------------------------------------
- - ---
6
<PAGE>
A Detailed Look at Small
Cap
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.
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 a Company elects to have distributions made 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.
- - -----------------------------------------------------------------------------
- - --
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), Independence Day (July
4th), Labor Day (the first Monday in September), Thanksgiving Day (the fourth
Thursday in November) and Christmas Day.
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 advisor 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.
- - -----------------------------------------------------------------------------
- - --
7
<PAGE>
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, 2000, 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 EDGAR
Database on the SEC's website (http://www.sec.gov), or you can get copies
of this information, after payment of a duplicating fee, by electronic
request at [email protected] or by writing to the Public Reference Section
of the SEC, Washington, D.C. 20549-0102. 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 1-202-942-8090.
Small Cap
Deutsche Asset Management VIT Funds
CUSIP #05576E102
INS2PRO
(04/00)
811-07507
Deutsche Asset
Management
Mutual Fund
Prospectus
April 30,
2000
Deutsche VIT
Funds
U.S. Bond Index
Formerly a BT Insurance Fund
[Like shares of all mutual funds, these securities have not been approved or
disapproved by the Securities and Exchange Commission nor has the Securities
and Exchange Commission passed upon the accuracy or adequacy of this
prospectus.
Any representation to the contrary is a criminal offense.]
[LOGO OF DEUTSCHE BANK
GROUP]
<PAGE>
Overview
- - -----------------------------------------------------------------------------
- - ---
of U.S. Bond Index
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 Fund invests in a statistically selected sample of the
securities found in the Lehman Bond Index.
INVESTMENT POLICIES AND STRATEGIES
The Fund seeks to match, before expenses, the risk and return characteristics
of the Lehman Brothers Aggregate 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 use
securities index futures and options.
- - -----------------------------------------------------------------------------
- - ---
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. All of the bonds on the Index have
maturities of one year or more at the time of their issue.
U.S. Bond Index
Overview of U.S. Bond Index
<TABLE>
<S>
<C>
Goal........................................................................
2
Core Strategy...............................................................
2
Investment Policies and Strategies..........................................
2
Principal Risks of Investing in the Fund....................................
3
Who Should Consider Investing in the Fund...................................
3
A Note on Fees..............................................................
3
</TABLE>
A Detailed Look at U.S. Bond Index
<TABLE>
<S>
<C>
Objective...................................................................
4
Index Investing Versus Active Management....................................
4
Strategy....................................................................
4
Principal Investments.......................................................
4
Investment Process..........................................................
5
Risks.......................................................................
5
Management of the Fund......................................................
6
Calculating the Fund's Share Price..........................................
7
Dividends and Distributions.................................................
7
Tax Considerations..........................................................
7
Buying and Selling Shares...................................................
7
Financial Highlights........................................................
7
</TABLE>
- - -----------------------------------------------------------------------------
- - ---
2
<PAGE>
Overview of U.S. Bond
Index
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 bond market could decline in value as a result of a rise in interest
rates.
. The creditworthiness of a bond issuer could decline, which could cause the
value of the bond to decline.
. The Fund may not be able to mirror the Lehman Bond Index closely enough to
track its performance for a number of reasons, including the Fund's cost to
buy and sell securities, the flow of money into and out of the Fund and the
underperformance of securities selected by us.
. The Fund could suffer losses if its futures and options positions are not
well correlated with the securities for which they are acting as a
substitute 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 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 U.S. Bond Index if you are pursuing a
short-term financial goal, are investing to achieve capital appreciation or
are seeking to outperform the Lehman Bond Index.
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 Fund is not a bank deposit 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.
- - -----------------------------------------------------------------------------
- - --
3
<PAGE>
A detailed look
- - -----------------------------------------------------------------------------
- - ---
at U.S. Bond Index
OBJECTIVE
The Fund seeks to match, as closely as possible (before the deduction of
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
do
not require their approval to do so.
INDEX INVESTING 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
usually
have relatively low trading activity and therefore brokerage commissions
tend
to be lower; and
. index funds generally realize low capital gains.
STRATEGY
To attempt to match the investment performance of the Lehman Bond Index over
time, the Fund invests in a statistically selected sample of the securities
in
the Lehman Bond Index. Over the long term, we seek 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.
PRINCIPAL INVESTMENTS
Under normal circumstances, the Fund intends to invest at least 80% of its
assets in securities included in the Lehman Bond Index and derivative
instruments, such as futures contracts and options, that provide exposure to
the securities in the Lehman Bond Index. The Fund's securities are weighted
to
attempt to make the Fund's total investment characteristics similar to those
of
the Lehman Bond Index as a whole. We may exclude or remove any Lehman
security
from the Fund, if we believe that the stock is illiquid or that the merit of
the investment has been impaired by financial conditions or other
extraordinary
events. 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 may also hold short-term debt securities and money market
instruments.
- - -----------------------------------------------------------------------------
- - ---
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.
- - -----------------------------------------------------------------------------
- - ---
4
<PAGE>
A Detailed Look at U.S. Bond
Index
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 Index, which tracks four major classes of investment grade
fixed-income securities. The chart below shows the proportion as of December
31, 1999 that each class has recently constituted of the market value of the
Index. The Fund also attempts to match the Index's duration, an intermediate
term.
CLASS OF SECURITIES
<TABLE>
<CAPTION>
Percent of Market
Value of Index
<S> <C>
U.S. Treasury and agency securities 70%
-------------------------------------------------------
Mortgage-backed
securities 2%
-------------------------------------------------------
Corporate Bonds 25%
-------------------------------------------------------
Bonds issued outside the
U.S. but payable in U.S.
Dollars 3%
-------------------------------------------------------
Other debt securities N/A
-------------------------------------------------------
</TABLE>
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
Tracking Error. There are several reasons that the Fund's performance may not
match the Index exactly:
. Unlike the Index, the Fund incurs administrative expenses and transaction
costs in trading bonds.
. The composition of the 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" Index.
- - -----------------------------------------------------------------------------
- - ---
Duration measures the sensitivity of bond prices to changes in interest
rates.
The longer the duration of a bond, the longer it will take to repay the
principal and interest obligations and the more sensitive it is to changes in
interest rates. Investors in longer-duration bonds face more risk as interest
rates rise--but also are more likely to receive more income from their
investment to compensate for the risk.
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.
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 in the
Fund have experienced a moderate level of short-term price fluctuation.
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:
. that the derivative is not well correlated with the securities for which it
is acting as a substitute;
. that derivatives used for risk management may not have the intended effects
and may result in losses or missed opportunities; and
. that the Fund cannot sell the derivative because of an illiquid secondary
market.
- - -----------------------------------------------------------------------------
- - ---
Portfolio Turnover. The 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.
- - -----------------------------------------------------------------------------
- - ---
5
<PAGE>
A Detailed Look at U.S. Bond Index
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.
MANAGEMENT OF THE FUND
Deutsche Asset Management is the marketing name for the asset management
activities of Deutsche Bank A.G., Deutsche Fund Management, Bankers Trust
Company, DB Alex. Brown LLC, Deutsche Asset Management, Inc., and Deutsche
Asset Management Investment Services Limited.
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. Bankers Trust is an indirect wholly-
owned subsidiary of Deutsche Bank A.G. As investment adviser, Bankers Trust
makes the Fund's investment decisions. 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, 1999, Bankers Trust had total assets under management of
approximately $270 billion. Bankers Trust is dedicated to servicing the needs
of corporations, governments, financial institutions and private clients and
has invested retirement assets on behalf of the nation's largest corporations
and institutions for more than 50 years. 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 Board of Trustees voted at meeting held on February 25, 1999 to approve a
new investment management agreement (the "Management Agreement") with Bankers
Trust and for such
Management Agreement to be submitted to the shareholders of the Fund for
their
approval. Approval of the Management Agreement was sought because Deutsche
Bank became Bankers Trust's parent company and, therefore, controls its
operations as investment adviser.
The Board of Trustees also voted at a meeting held on July 27, 1999 to
approve
a new investment management agreement with Deutsche Asset Management, Inc.
(formerly Morgan Grenfell Inc.) and for such investment management agreement
to be submitted to the shareholders of the Fund for their approval. The new
investment management agreement may be implemented upon approval of a
majority
of the members of the Board of Trustees who are not "interested persons,"
generally referred to as independent trustees. The Board of Trustees also
approved a new investment sub-management agreement among the Trust, Deutsche
Asset Management, Inc. and Bankers Trust, to be submitted to the shareholders
of the Fund for their approval, under which Bankers Trust may perform certain
of Deutsche Asset Management, Inc.'s responsibilities, at Deutsche Asset
Management, Inc.'s expense, upon approval of the independent trustees. Under
the new investment management agreement and new investment sub-management
agreement, the compensation paid and the services provided would be the same
as those under the existing management agreement with the investment adviser.
Deutsche Asset Management, Inc. is located at 885 Third Avenue, 32nd Floor,
New York, New York 10022. The firm provides a full range of investment
advisory services to institutional clients. It serves as investment adviser
to
11 other investment companies and as sub-adviser to five other investment
companies.
On March 11, 1999, Bankers Trust announced that it had reached an agreement
with the United States Attorney's Office in the Southern District of New York
to resolve an investigation concerning inappropriate transfers of unclaimed
funds and related record-keeping problems that occurred between 1994 and
early
1996. Bankers Trust pleaded guilty to misstating entries in the bank's books
and records and agreed to pay a $63.5 million fine to state and federal
authorities. On July 26, 1999, the federal criminal proceedings were
concluded
with Bankers Trust's formal sentencing. The events leading up to the guilty
pleas did not arise out of the investment advisory or mutual fund management
activities of Bankers Trust or its affiliates.
As a result of the plea, absent an order from the SEC, Bankers Trust would
not
be able to continue to provide investment advisory services to the Fund. The
SEC has granted a
- - -----------------------------------------------------------------------------
- - --
6
<PAGE>
A Detailed Look at U.S. Bond
Index
temporary order to permit Bankers Trust and its affiliates to continue to
provide investment advisory services to registered investment companies.
There
is no assurance that the SEC will grant a permanent order.
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.
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 gains on an annual basis.
These distributions are automatically made in the form of additional shares
of
the Fund and not cash, unless a Company elects to have distributions made 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.
- - -----------------------------------------------------------------------------
- - --
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), Independence Day (July
4th), Labor Day (the first Monday in September), Thanksgiving Day (the fourth
Thursday in November) and Christmas Day.
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 advisor 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.
- - -----------------------------------------------------------------------------
- - --
7
<PAGE>
After the Fund commences operations, additional information about the
Fund's investments will be 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, 2000, 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 EDGAR
Database on the SEC's website (http://www.sec.gov), or you can get copies
of this information, after payment of a duplicating fee, by electronic
request at [email protected] or by writing to the Public Reference Section
of the SEC, Washington, D.C. 20549-0102. 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 1-202-942-8090.
U.S. Bond Index
Deutsche Asset Management VIT Funds
CUSIP
#05576E706
INS1PRO
(04/00)
811-07507
STATEMENT OF ADDITIONAL INFORMATION
April 30, 2000
DEUTSCHE ASSET MANAGEMENT VIT FUNDS
Equity 500 Index Fund
U.S. Bond Index Fund
Small Cap Index Fund
EAFE(r) Equity Index Fund
Deutsche Asset Management VIT Funds (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 Provident
Distributors, Inc. (the "Distributor").
The Prospectus for each Fund, dated April 30, 2000, 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 (other than U.S. Bond Index Fund which
has not commenced operations as of the date of this SAI) for the fiscal year
ended December 31, 1999, are incorporated herein by reference to the Annual
Report to shareholders for each Fund dated December 31, 1999. 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.
BANKERS TRUST COMPANY
Investment Adviser of each Fund
PROVIDENT DISTRIBUTORS, INC.
Distributor
Four Falls Corporate Center
West Conshohocken, Pennsylvania 19428
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 Stocks 05
Convertible Securities 06
U.S. Government Obligations 06
Short-Term Instruments 06
Certificates of Deposit and Bankers' Acceptances 06
Commercial Paper 07
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 09
Swap Agreements 09
Ginnie Mae Certificates 10
Fannie Mae Certificates 10
Freddie Mac Certificates 10
Adjustable Rate Mortgages - Interest Rate Indices 11
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 14
Currency Exchange Transactions 14
Forward Currency Exchange Contracts 14
Options on Foreign Currencies 15
Futures Contracts and Options on Futures Contracts 16
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 24
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
Code of Ethics 34
Investment Adviser 34
Administrator 35
Distributor 36
Custodian and Transfer Agent 36
Expenses 36
Banking Regulatory Matters 37
Counsel and Independent Auditors 37
ORGANIZATION OF THE TRUST 37
TAXATION 38
Taxation of the Funds 38
Distributions 39
Other Taxation 39
Foreign Withholding Taxes 39
FINANCIAL STATEMENTS 39
appendix 40
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(s).
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"), which emphasizes government and corporate
investment grade debt securities.
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"), which emphasizes stocks of companies in major markets in Europe,
Australia and the Far East.
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 invests 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 invests
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 Certificate.. 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.
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.
If a 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.
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"). 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?
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? 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 net 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), 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.
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 net 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 years ended December 31, 1999, 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
$76,582, $17,740 and $1,075, respectively. During the fiscal year ended
December 31, 1999, none of these brokerage commissions were paid to an
affiliate.
For the fiscal years ended December 31, 1999, 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
$41,714, $23,046 and $11,148, respectively. During the fiscal year ended
December 31, 1999, none of these brokerage commissions were paid to an
affiliate.
For the fiscal years ended December 31, 1999, 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
$32,983, $2,749 and $24,396, respectively. During the fiscal year ended
December 31, 1999, none of these brokerage commissions were paid to an
affiliate.
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.
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? 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.
Trustees and Officers
Name, Address and Age
Position Held with the
Trust
Principal Occupations
During
Past 5 Years
+Robert R. Coby, 48
118 North Drive
North Massapequa, NY
11758
Trustee
Independent Consultant
since April 1999;
President of Lynch &
Mayer, Inc., (1996-1999);
President of Leadership
Capital Inc. (1995-1996);
Chief Operating Officer of
CS First Boston Investment
Management, Inc. (1994-
1995); President of
Blackhawk L.P. (1993-
1994).
+Desmond G. FitzGerald,
56
2015 West Main Street
Stamford, CT 06902
Trustee
Chairman of North American
Properties Group since
January 1987; Advisory
Director, Bank of New
York; Director, Hilliard
Farber & Co.
+James S. Pasman, Jr.,
69
29 The Trillium
Pittsburgh, PA 15238
Trustee
Retired; Director, Tyco
International Ltd.
Conglomerate(2); Director,
Education Management
Corporation(2); Director,
CSAM Income Fund Inc.(3);
Director, CSAM Global
Strategic Inc.(3);
Director and Trustee,
Warburg Pincus Funds(3).
+(1)(4)Edward C.
Schmults, 68
1037 Bailey Road
Cuttingsville, VT 05738
Trustee
Director, Green Point
Financial Corp and its
subsidiary, Green Point
Bank(2); Director, Destia
Communications, Inc.(2);
Chairman of the Board of
Trustees, The Edna
McConnell Clark
Foundation; Senior Vice
President- External
Affairs and General
Counsel, GTE Corporation
(1984-1994); Director, The
Germany Fund, Inc.(3);
Director, The Central
European Equity Fund,
Inc.(3); Director,
Deutsche Funds, Inc.(3);
Director, Deutsche
Portfolios Trust (3).
+*William E. Small, 58
26 Stowell Road
Winchester, MA 01890
Trustee
Independent Consultant
since 1996; Executive Vice
President of First Data
Investor Services Group
Inc. ("Investor Services
Group") (1993-1996).**
+(1)(4)Werner Walbroel,
61
40 West 57th Street
New York, NY 10019
Trustee
President and Chief
Executive Officer, German
American Chamber of
Commerce, Inc.; President
and Chief Executive
Officer, European American
Chamber of Commerce, Inc.;
Member, United States
German Youth Exchange
Council; Director, TUV
Rheinland of North
America, Inc.; President
and Director, German
American Partnership
Program; Director, AXA
Nordstern Art Insurance
Corporation; Director, DB
New World Fund, Limited
and LDC; Director, The
Germany Fund, Inc.(3);
Director, The Central
European Equity Fund,
Inc.(3); Director,
Deutsche Portfolios
Trust(3).
Gerald J. Holland, 49
President
Vice President of PFPC
Inc. ("PFPC") (formerly
known as Investor Services
Group) since 1994.
Brian J. O'Neill, 32
Treasurer
Manager of PFPC's
Financial Reporting
Department since 1994.
Elizabeth A. Russell, 38
Secretary
Vice President of PFPC
since 1999; Counsel of
PFPC (1994-1999).
+ Member of the Audit Committee.
* While currently deemed non-interested, Mr. Small was deemed an
"interested person" within Section 2(a)(19) of the 1940 Act until December
31, 1998 as a result of his employment until December 1996 by Investor
Services Group.
** Administrator of the Trust.
Holds two other directorships in the Fund Complex, which consists of the
Trust, Deutsche Funds, Inc. and Deutsche Portfolio Trust.
A publicly held company with securities registered pursuant to Section 12 of
the Exchange Act.
An investment company registered under the 1940 Act.
Trustee since September 30, 1999.
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 Provident
Distributors, Inc. 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, 1999, was as follows:
(1)
Name of
Board Member
(2)
Aggregate
Compensatio
n
from Fund*
(3)
Pension or
Retirement
Benefits
Accrued as Part
of
Fund's Expenses
(4)
Estimated
Annual Benefits
Upon Retirement
(5)
Total
Compensation
from
Registrant
and Fund
Complex
Robert R. Coby
$17,5
00
N/A
N/A
$17,500
Desmond G.
FitzGerald
$17,5
00
N/A
N/A
$17,500
James S. Pasman,
Jr.
$17,5
00
N/A
N/A
$17,500
William E. Small
$17,5
00
N/A
N/A
$17,500
Edward C. Schmults
$3,75
0
N/A
N/A
$3,750
Werner Walbrol
$3,75
0
N/A
N/A
$3,750
* Amount does not include reimbursed expenses for attending Board meetings,
which amounted to $7,280 for all Trustees as a group.
As of April 11, 2000 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 April 11, 2000, the following shareholders of record owned 5% or more
of the outstanding shares of the Equity 500 Index Fund:
Name and Address Percentage Owned
Lincoln National Life Insurance Company 25.05%
Variable Annuity Account
1300 South Clinton Street
Fort Wayne, IN 46801
Lincoln National Life Insurance Company 15.98%
Lincoln Life Separate Account
1300 South Clinton Street
Fort Wayne, IN 46801
Lincoln National Life Insurance Company 15.23%
Lincoln Life Variable Annuity Account
1300 South Clinton Street
Fort Wayne, IN 46801
Integrity Life Insurance Company 10.91%
515 West Market Street
8th Floor
Louisville, KY 40202
USAA Life Insurance Company 8.59%
9800 Fredericksburg
San Antonio, TX 78288
National Integrity Life Insurance Company 5.18%
515 West Market Street
8th Floor
Louisville, KY 40202
As of April 11, 2000, the following shareholders of record owned 5% or more
of the outstanding Shares of the Small Cap Index Fund:
Name and Address Percentage Owned
Connecticut General Life Insurance Company 22.65%
900 Cottage Grove Road
Hartford, CT 06152
Lincoln National Life Insurance Company 14.90%
Variable Annuity Account
1300 South Clinton Street
Fort Wayne, IN 46801
Travelers Insurance Company 11.46%
One Tower Square
Hartford, CT 06183
National Integrity Life Insurance Company 8.41%
515 West Market Street
8th Floor
Louisville, KY 40202
Lincoln National Life Insurance Company 7.94%
Separate Account
1300 South Clinton Street
Fort Wayne, IN 46801
Integrity Life Insurance Company 7.73%
515 West Market Street
8th Floor
Louisville, KY 40202
CM Life Insurance Company 6.21%
1295 State Street
Springfield, MA 01111
Great West Life & Annuity Insurance Company 5.95%
8515 East Orchard Road
Englewood, CO 80111
USAA Life Insurance Company 5.77 %
9800 Fredericksburg
San Antonio, TX 78288
As of April 11, 2000, the following shareholders of record owned 5% or more
of the outstanding Shares of the EAFE(r) Equity Index Fund:
Name and Address Percentage Owned
Connecticut General Life Insurance Company 47.80%
Separate Account
900 Cottage Grove Road
Hartford, CT 06152
Connecticut General Life Insurance Company 20.05%
Separate Account
280 Trumbull Street
Hartford, CT 06103
Integrity Life Insurance Company 5.69 %
515 West Market Street
8th Floor
Louisville, KY 40202
Code of Ethics
The Board of Trustees of the Funds has adopted a Code of Ethics pursuant to
Rule 17j-1 under the 1940 Act. The Funds' Code of Ethics permits Fund
personnel to invest in securities for their own accounts, but requires
compliance with the Code's pre-clearance requirements (with certain
exceptions). In addition, the Funds' Code of Ethics provides for trading
"blackout periods" that prohibit trading by personnel within periods of
trading by the Funds in the same security. The Funds' Code of Ethics also
prohibits short term trading profits and personal investment in initial
public offerings. The Code requires prior approval with respect to purchases
of securities in private placements.
The Funds' adviser, Bankers Trust, has also adopted a Code of Ethics. The
Code of Ethics allows personnel to invest in securities for their own
accounts, but requires compliance with the Code's pre-clearance requirements
and other restrictions including "blackout periods" and minimum holding
periods, subject to limited exceptions. The Code prohibits purchases of
securities in initial public offerings (the prohibition is limited to U.S.
public offerings) and requires prior approval for purchases of securities in
private placements.
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 Funds'
Investment Adviser. Bankers Trust is an indirect wholly-owned subsidiary of
Deutsche Bank A.G. ("Deutsche Bank"). Deutsche Bank is a banking company
with limited liability organized under the laws of the Federal Republic of
Germany. Deutsche Bank is the parent company of a group consisting of banks,
capital market companies, fund management companies, mortgage banks, a
property finance company, installments financing and leasing companies,
insurance companies, research and consultancy companies and other domestic
and foreign companies.
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.
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 years ended December 31, 1999, December 31, 1998, and for
the period from October 1, 1997 (commencement of operations) to December 31,
1997, Bankers Trust earned $279,775 $47,571 and $5,294, respectively, as
compensation for investment advisory services provided to the Equity 500
Index Fund. During the same periods, Bankers Trust reimbursed $154,772
$182,787 and $65,771, respectively, to the Fund to cover expenses.
For the fiscal years ended December 31, 1999, December 31, 1998 and for the
period from August 25, 1997 (commencement of operations) to December 31,
1997, Bankers Trust earned $131,616, $80,592 and $13,629, respectively, for
investment advisory services provided to the Small Cap Index Fund. During
the same periods, Bankers Trust reimbursed $245,455, $214,720 and $110,002,
respectively, to the Fund to cover expenses.
For the fiscal years ended December 31, 1999, December 31, 1998 and for the
period from August 22, 1997 (commencement of operations) to December 31,
1997, Bankers Trust earned $189,499, $105,141 and $23,060, respectively, for
investment advisory services provided to the EAFE(r) Equity Index Fund. During
the same periods, Bankers Trust reimbursed $179,979, $216,275 and $107,853,
respectively, to the Fund to cover expenses.
Administrator
Effective December 1, 1999, First Data Investor Services Group, Inc.
("Investor Services Group"), the Funds' Administrator and Transfer Agent,
became a majority-owned subsidiary of PNC Bank Corp. As a result of this
transaction, Investor Services Group is now known as PFPC Inc. ("PFPC"). As
Administrator, PFPC, 101 Federal Street, Boston, Massachusetts 02110, 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. PFPC will generally assist in all aspects of the
Fund's operations; supply and maintain office facilities (which may be in
PFPC'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 PFPC's services under the Administration Agreement, PFPC
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 years ended December 31, 1999, December 31, 1998, and for the
period from October 1, 1997 (commencement of operations) to December 31,
1997, Equity 500 Index Fund paid PFPC/Investor Services Group $98,126,
$74,756 and $17,758, respectively, for administrative and other services
provided to the Equity 500 Index Fund.
For the fiscal years ended December 31, 1999, December 31, 1998, and for the
period from August 25, 1997 (commencement of operations) to December 31,
1997, Small Cap Index Fund paid PFPC/Investor Services Group $77,712, $74,620
and $25,263, respectively as compensation for administrative and other
services provided to Small Cap Index Fund.
For the fiscal years ended December 31, 1999, December 31, 1998, and for the
period from August 22, 1997 (commencement of operations to December 31, 1997,
EAFE(r) Equity Index Fund paid PFPC/Investor Services Group $78,615, $74,667
and $25,701, respectively, as compensation for administrative and other
services provided to EAFE? Equity Index Fund.
Distributor
Effective December 1, 1999, Provident Distributors, Inc. (the "Distributor")
replaced First Data Distributors, Inc. as the distributor of the Funds'
shares to separate accounts of the Companies, for which it receives no
separate fee from the Funds. The principal address of the Distributor is
Four Falls Corporate Center, West Conshohocken, Pennsylvania 19428.
Custodian and Transfer Agent
Bankers Trust, 130 Liberty Street (One Bankers Trust Plaza), New York, New
York 10006, serves as custodian for the Funds. As custodian, it holds the
Funds' assets. Bankers Trust will comply with the self-custodian provisions
of Rule 17f-2 under the 1940 Act.
PFPC serves as transfer agent of the Trust. Under its transfer agency
agreement with the Trust, PFPC maintains the shareholder account records for
the Funds, handles certain communications between shareholders and the Funds
and causes to be distributed any dividends and distributions payable by the
Funds.
Bankers Trust and PFPC may be reimbursed by the Funds 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.
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 Auditors
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 Auditors 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. Effective April 30, 2000, the Trust's name
changed from BT Insurance Funds Trust to Deutsche Asset Management VIT Funds.
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.
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 April 11, 2000, 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: Lincoln National Life Insurance Company, Fort Wayne, Indiana.
As of April 11, 2000, 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: Lincoln
National Life Insurance Company, Fort Wayne, Indiana.
As of April 11, 2000, 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:
Connecticut General Life Insurance Company, Hartford, Connecticut.
TAXATION
Taxation of the Funds
Each Fund intends to qualify or 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 from 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,
1999 (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, 1999. 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.
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.
Investment Adviser of each Fund
BANKERS TRUST COMPANY
Administrator
PFPC INC.
Distributor
PROVIDENT DISTRIBUTORS, INC.
Custodian
BANKERS TRUST COMPANY
Transfer Agent
PFPC INC.
Independent Auditors
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.
____________________
STATEMENT OF ADDITIONAL INFORMATION
April 30, 2000
DEUTSCHE ASSET MANAGEMENT VIT FUNDS
Small Cap Fund
Deutsche Asset Management VIT Funds (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 Provident
Distributors, Inc. (the "Distributor").
The Prospectus for the Fund is dated April 30, 2000. 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.
BANKERS TRUST COMPANY
Investment Adviser of the Fund
PROVIDENT DISTRIBUTORS, INC.
Distributor
Four Falls Corporate Center
West Conshohocken, Pennsylvania 19428
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
Code of Ethics 22
Investment Adviser 22 Administrator 23
Distributor 23
Custodian and Transfer Agent 23
Expenses 23
Banking Regulatory Matters. 24
Counsel and Independent Auditors 24
ORGANIZATION OF THE TRUST 24
TAXATION 25
Taxation of the Fund 25
Distributions 26
Other Taxation 26
Foreign Withholding Taxes 26
APPENDIX 27
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.
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.
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.
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.
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.
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. If a 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.
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"). 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.
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.
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 net 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.
(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
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) 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.
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.
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 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.
Trustees and Officers
Name, Address and Age
Position Held with the
Trust
Principal Occupations
During
Past 5 Years
+Robert R. Coby, 48
118 North Drive
North Massapequa, NY
11758
Trustee
Independent Consultant
since April 1999;
President of Lynch &
Mayer, Inc., (1996-1999);
President of Leadership
Capital Inc. (1995-1996);
Chief Operating Officer of
CS First Boston Investment
Management, Inc. (1994-
1995); President of
Blackhawk L.P. (1993-
1994).
+Desmond G. FitzGerald,
56
2015 West Main Street
Stamford, CT 06902
Trustee
Chairman of North American
Properties Group since
January 1987; Advisory
Director, Bank of New
York; Director, Hilliard
Farber & Co.
+James S. Pasman, Jr.,
69
29 The Trillium
Pittsburgh, PA 15238
Trustee
Retired; Director, Tyco
International Ltd.
Conglomerate(2); Director,
Education Management
Corporation(2); Director,
CSAM Income Fund Inc.(3);
Director, CSAM Global
Strategic Inc.(3);
Director and Trustee,
Warburg Pincus Funds(3).
+(1)(4)Edward C.
Schmults, 68
1037 Bailey Road
Cuttingsville, VT 05738
Trustee
Director, Green Point
Financial Corp and its
subsidiary, Green Point
Bank(2); Director, Destia
Communications, Inc.(2);
Chairman of the Board of
Trustees, The Edna
McConnell Clark
Foundation; Senior Vice
President- External
Affairs and General
Counsel, GTE Corporation
(1984-1994); Director, The
Germany Fund, Inc.(3);
Director, The Central
European Equity Fund,
Inc.(3); Director,
Deutsche Funds, Inc.(3);
Director, Deutsche
Portfolios Trust (3).
+*William E. Small, 58
26 Stowell Road
Winchester, MA 01890
Trustee
Independent Consultant
since 1996; Executive Vice
President of First Data
Investor Services Group
Inc. ("Investor Services
Group") (1993-1996).**
+(1)(4)Werner Walbroel,
61
40 West 57th Street
New York, NY 10019
Trustee
President and Chief
Executive Officer, German
American Chamber of
Commerce, Inc.; President
and Chief Executive
Officer, European American
Chamber of Commerce, Inc.;
Member, United States
German Youth Exchange
Council; Director, TUV
Rheinland of North
America, Inc.; President
and Director, German
American Partnership
Program; Director, AXA
Nordstern Art Insurance
Corporation; Director, DB
New World Fund, Limited
and LDC; Director, The
Germany Fund, Inc.(3);
Director, The Central
European Equity Fund,
Inc.(3); Director,
Deutsche Portfolios
Trust(3).
Gerald J. Holland, 49
President
Vice President of PFPC
Inc. ("PFPC") (formerly
known as Investor Services
Group) since 1994.
Brian J. O'Neill, 32
Treasurer
Manager of PFPC's
Financial Reporting
Department since 1994.
Elizabeth A. Russell, 38
Secretary
Vice President of PFPC
since 1999; Counsel of
PFPC (1994-1999).
+ Member of the Audit Committee.
* While currently deemed non-interested, Mr. Small was deemed an
"interested person" within Section 2(a)(19) of the 1940 Act until December
31, 1998 as a result of his employment until December 1996 by Investor
Services Group.
** Administrator of the Trust.
Holds two other directorships in the Fund Complex, which consists of the
Trust, Deutsche Funds, Inc. and Deutsche Portfolio Trust.
A publicly held company with securities registered pursuant to Section 12 of
the Exchange Act.
An investment company registered under the 1940 Act.
Trustee since September 30, 1999.
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 Provident
Distributors, Inc. 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, 1999, was as follows:
(1)
Name of
Board Member
(2)
Aggregate
Compensatio
n
from Fund*
(3)
Pension or
Retirement
Benefits
Accrued as Part
of
Fund's Expenses
(4)
Estimated
Annual Benefits
Upon Retirement
(5)
Total
Compensation
from
Registrant
and Fund
Complex
Robert R. Coby
$17,5
00
N/A
N/A
$17,500
Desmond G.
FitzGerald
$17,5
00
N/A
N/A
$17,500
James S. Pasman,
Jr.
$17,5
00
N/A
N/A
$17,500
William E. Small
$17,5
00
N/A
N/A
$17,500
Edward C. Schmults
$3,75
0
N/A
N/A
$3,750
Werner Walbrl
$3,75
0
N/A
N/A
$3,750
* Amount does not include reimbursed expenses for attending Board
meetings, which amounted to $7,280 for all Trustees as a group.
As of April 11, 2000, 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).
Code of Ethics
The Board of Trustees of the Fund has adopted a Code of Ethics pursuant to
Rule 17j-1 under the 1940 Act. The Fund's Code of Ethics permits Fund
personnel to invest in securities for their own accounts, but requires
compliance with the Code's pre-clearance requirements (with certain
exceptions). In addition, the Fund's Code of Ethics provides for trading
"blackout periods" that prohibit trading by personnel within periods of
trading by the Fund in the same security. The Fund's Code of Ethics also
prohibits short term trading profits and personal investment in initial
public offerings. The Code requires prior approval with respect to purchases
of securities in private placements.
The Fund's adviser, Bankers Trust, has also adopted a Code of Ethics. The
Code of Ethics allows personnel to invest in securities for their own
accounts, but requires compliance with the Code's pre-clearance requirements
and other restrictions including "blackout periods" and minimum holding
periods, subject to limited exceptions. The Code prohibits purchases of
securities in initial public offerings (the prohibition is limited to U.S.
public offerings) and requires prior approval for purchases of securities in
private placements.
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. Bankers Trust is an indirect wholly-owned subsidiary of
Deutsche Bank A.G. ("Deutsche Bank"). Deutsche Bank is a banking company
with limited liability organized under the laws of the Federal Republic of
Germany. Deutsche Bank is the parent company of a group consisting of banks,
capital market companies, fund management companies, mortgage banks, a
property finance company, installments financing and leasing companies,
insurance companies, research and consultancy companies and other domestic
and foreign companies.
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.
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.
Administrator
Effective December 1, 1999, First Data Investor Services Group, Inc.
("Investor Services Group"), the Fund's Administrator and Transfer Agent,
became a majority-owned subsidiary of PNC Bank Corp. As a result of this
transaction, Investor Services Group is now known as PFPC Inc. ("PFPC"). As
Administrator, PFPC, 101 Federal Street, Boston, Massachusetts 02110, 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. PFPC will generally assist in all aspects of the
Fund's operations; supply and maintain office facilities (which may be in
PFPC'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 PFPC's services under the Administration Agreement, PFPC
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
Effective December 1, 1999, Provident Distributors, Inc. (the "Distributor")
replaced First Data Distributors, Inc. as the distributor of the Fund's
shares to separate accounts of the Companies, for which it receives no
separate fee from the Fund. The principal address of the Distributor is Four
Falls Corporate Center, West Conshohocken, Pennsylvania 19428.
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.
PFPC serves as transfer agent of the Trust. Under its transfer agency
agreement with the Trust, PFPC 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 PFPC 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.
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 Auditors
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 Auditors 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. Effective April 30, 2000, the Trust's name
changed from BT Insurance Funds Trust to Deutsche Asset Management VIT Funds.
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.
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 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 from
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.
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.
Investment Adviser
BANKERS TRUST COMPANY
Administrator
PFPC INC.
Distributor
PROVIDENT DISTRIBUTORS, INC.
Custodian
BANKERS TRUST COMPANY
Transfer Agent
PFPC INC.
Independent Auditors
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.
STATEMENT OF ADDITIONAL INFORMATION
April 30, 2000
DEUTSCHE ASSET MANAGEMENT VIT FUNDS
International Equity Fund
Deutsche Asset Management VIT Funds (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 Provident
Distributors, Inc. (the "Distributor").
The Prospectus for the Fund, dated April 30, 2000, 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.
BANKERS TRUST COMPANY
Investment Adviser of The Fund
PROVIDENT DISTRIBUTORS, INC.
Distributor
Four Falls Corporate Center
West Conshohocken, Pennsylvania 19428
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 20
MANAGEMENT OF THE TRUST 20
Trustees and Officers 20
Code of Ethics 22
Investment Adviser 22
Administrator. 23
Distributor. 23
Custodian and Transfer Agent 23
Expenses 24
Banking Regulatory Matters 24
Counsel and Independent Auditors. 24
ORGANIZATION OF THE TRUST 24
TAXATION. 25
Taxation of the Fund 25
Distributions 26
Other Taxation 26
Foreign Withholding Taxes 26
APPENDIX. 27
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'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.
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.
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.
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.
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.
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.
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. If a 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.
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"). 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.
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.
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.
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 net 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.
(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
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) 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.
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.
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.
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.
Trustees and Officers
Name, Address and Age
Position Held with the
Trust
Principal Occupations
During
Past 5 Years
+Robert R. Coby, 48
118 North Drive
North Massapequa, NY
11758
Trustee
Independent Consultant
since April 1999;
President of Lynch &
Mayer, Inc., (1996-1999);
President of Leadership
Capital Inc. (1995-1996);
Chief Operating Officer of
CS First Boston Investment
Management, Inc. (1994-
1995); President of
Blackhawk L.P. (1993-
1994).
+Desmond G. FitzGerald,
56
2015 West Main Street
Stamford, CT 06902
Trustee
Chairman of North American
Properties Group since
January 1987; Advisory
Director, Bank of New
York; Director, Hilliard
Farber & Co.
+James S. Pasman, Jr.,
69
29 The Trillium
Pittsburgh, PA 15238
Trustee
Retired; Director, Tyco
International Ltd.
Conglomerate(2); Director,
Education Management
Corporation(2); Director,
CSAM Income Fund Inc.(3);
Director, CSAM Global
Strategic Inc.(3);
Director and Trustee,
Warburg Pincus Funds(3).
+(1)(4)Edward C.
Schmults, 68
1037 Bailey Road
Cuttingsville, VT 05738
Trustee
Director, Green Point
Financial Corp and its
subsidiary, Green Point
Bank(2); Director, Destia
Communications, Inc.(2);
Chairman of the Board of
Trustees, The Edna
McConnell Clark
Foundation; Senior Vice
President- External
Affairs and General
Counsel, GTE Corporation
(1984-1994); Director, The
Germany Fund, Inc.(3);
Director, The Central
European Equity Fund,
Inc.(3); Director,
Deutsche Funds, Inc.(3);
Director, Deutsche
Portfolios Trust (3).
+*William E. Small, 58
26 Stowell Road
Winchester, MA 01890
Trustee
Independent Consultant
since 1996; Executive Vice
President of First Data
Investor Services Group
Inc. ("Investor Services
Group") (1993-1996).**
+(1)(4)Werner Walbroel,
61
40 West 57th Street
New York, NY 10019
Trustee
President and Chief
Executive Officer, German
American Chamber of
Commerce, Inc.; President
and Chief Executive
Officer, European American
Chamber of Commerce, Inc.;
Member, United States
German Youth Exchange
Council; Director, TUV
Rheinland of North
America, Inc.; President
and Director, German
American Partnership
Program; Director, AXA
Nordstern Art Insurance
Corporation; Director, DB
New World Fund, Limited
and LDC; Director, The
Germany Fund, Inc.(3);
Director, The Central
European Equity Fund,
Inc.(3); Director,
Deutsche Portfolios
Trust(3).
Gerald J. Holland, 49
President
Vice President of PFPC
Inc. ("PFPC") (formerly
known as Investor Services
Group) since 1994.
Brian J. O'Neill, 32
Treasurer
Manager of PFPC's
Financial Reporting
Department since 1994.
Elizabeth A. Russell, 38
Secretary
Vice President of PFPC
since 1999; Counsel of
PFPC (1994-1999).
+ Member of the Audit Committee.
* While currently deemed non-interested, Mr. Small was deemed an
"interested person" within Section 2(a)(19) of the 1940 Act until December
31, 1998 as a result of his employment until December 1996 by Investor
Services Group.
** Administrator of the Trust.
Holds two other directorships in the Fund Complex, which consists of the
Trust, Deutsche Funds, Inc. and Deutsche Portfolio Trust.
A publicly held company with securities registered pursuant to Section 12 of
the Exchange Act.
An investment company registered under the 1940 Act.
Trustee since September 30, 1999.
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 Provident
Distributors, Inc. 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, 1999, was as follows:
(1)
Name of
Board Member
(2)
Aggregate
Compensatio
n
from Fund*
(3)
Pension or
Retirement
Benefits
Accrued as Part
of
Fund's Expenses
(4)
Estimated
Annual Benefits
Upon Retirement
(5)
Total
Compensation
from
Registrant
and Fund
Complex
Robert R. Coby
$17,5
00
N/A
N/A
$17,500
Desmond G.
FitzGerald
$17,5
00
N/A
N/A
$17,500
James S. Pasman,
Jr.
$17,5
00
N/A
N/A
$17,500
William E. Small
$17,5
00
N/A
N/A
$17,500
Edward C. Schmults
$3,75
0
N/A
N/A
$3,750
Werner Walbrl
$3,75
0
N/A
N/A
$3,750
* Amount does not include reimbursed expenses for attending Board
meetings, which amounted to $7,280 for all Trustees as a group.
As of April 11, 2000 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).
Code of Ethics
The Board of Trustees of the Fund has adopted a Code of Ethics pursuant to
Rule 17j-1 under the 1940 Act. The Fund's Code of Ethics permits Fund
personnel to invest in securities for their own accounts, but requires
compliance with the Code's pre-clearance requirements (with certain
exceptions). In addition, the Fund's Code of Ethics provides for trading
"blackout periods" that prohibit trading by personnel within periods of
trading by the Fund in the same security. The Fund's Code of Ethics also
prohibits short term trading profits and personal investment in initial
public offerings. The Code requires prior approval with respect to purchases
of securities in private placements.
The Fund's adviser, Bankers Trust, has also adopted a Code of Ethics. The
Code of Ethics allows personnel to invest in securities for their own
accounts, but requires compliance with the Code's pre-clearance requirements
and other restrictions including "blackout periods" and minimum holding
periods, subject to limited exceptions. The Code prohibits purchases of
securities in initial public offerings (the prohibition is limited to U.S.
public offerings) and requires prior approval for purchases of securities in
private placements.
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. Bankers Trust is an indirect wholly-owned subsidiary of
Deutsche Bank A.G. ("Deutsche Bank"). Deutsche Bank is a banking company
with limited liability organized under the laws of the Federal Republic of
Germany. Deutsche Bank is the parent company of a group consisting of banks,
capital market companies, fund management companies, mortgage banks, a
property finance company, installments financing and leasing companies,
insurance companies, research and consultancy companies and other domestic
and foreign companies.
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.
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.
Administrator
Effective December 1, 1999, First Data Investor Services Group, Inc.
("Investor Services Group"), the Fund's Administrator and Transfer Agent,
became a majority-owned subsidiary of PNC Bank Corp. As a result of this
transaction, Investor Services Group is now known as PFPC Inc. ("PFPC"). As
Administrator, PFPC, 101 Federal Street, Boston, Massachusetts 02110, 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. PFPC will generally assist in all aspects of the
Fund's operations; supply and maintain office facilities (which may be in
PFPC'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 PFPC's services under the Administration Agreement, PFPC
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
Effective December 1, 1999, Provident Distributors, Inc. (the "Distributor")
replaced First Data Distributors, Inc. as the distributor of the Fund's
shares to separate accounts of the Companies, for which it receives no
separate fee from the Fund. The principal address of the Distributor is Four
Falls Corporate Center, West Conshohocken, Pennsylvania 19428.
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.
PFPC serves as transfer agent of the Trust. Under its transfer agency
agreement with the Trust, PFPC 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 PFPC 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.
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 Auditors
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 Auditors 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. Effective April 30, 2000, the Trust's name
changed from BT Insurance Funds Trust to Deutsche Asset Management VIT Funds.
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.
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 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 from
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.
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.
Investment Adviser
BANKERS TRUST COMPANY
Administrator
PFPC INC.
Distributor
PROVIDENT DISTRIBUTORS, INC.
Custodian
BANKERS TRUST COMPANY
Transfer Agent
PFPC INC.
Independent Auditors
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>
PART C. OTHER INFORMATION
Item 23. Exhibits
Description
a(1) Declaration of Trust is hereby incorporated
by reference to the initial Registration
Statement filed with the Securities and
Exchange Commission via EDGAR on January 26,
1996.
a(2) Amendment No. 1 to the Declaration of Trust dated July 16, 1996 is filed
herein as Exhibit a(2).
a(3) Amendment No. 2 to the Declaration of Trust dated September 9, 1996 is
filed herein as Exhibit a(3).
a(4) Amendment No. 3 to the Declaration of Trust dated June 12, 1997 is filed
herein as Exhibit a(4).
a(5) Certificate of Amendment to the Declaration of Trust dated September 9,
1999 is filed herein as Exhibit a(5).
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) Investment Management Agreement, dated June
4, 1999, between BT Insurance Funds Trust,
on behalf of Managed Assets Fund, and
Bankers Trust Company is filed herein as
Exhibit d(1).
d(2) Investment Management Agreement, dated June
4, 1999, between BT Insurance Funds Trust,
on behalf of Small Cap Index Fund and
International Equity Fund, and Bankers Trust
Company is filed herein as Exhibit d(2).
d(3) Investment Management Agreement, dated June
4, 1999, between BT Insurance Funds Trust,
on behalf of Small Cap Index Fund, Equity
500 Index Fund and EAFE(R) Equity Index
Fund, and Bankers Trust Company is filed
herein as Exhibit d(3).
d(4) Investment Management Agreement, dated June 4, 1999, between BT
Insurance Funds Trust, on behalf of U.S. Bond Index Fund, and Bankers Trust
Company is filed herein as Exhibit d(4).
e Distribution Agreement, dated September 9, 1999, between BT Insurance Funds
Trust and Provident Distributors, Inc. is filed herein as Exhibit e.
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 incorporated by reference to
Post-Effective Amendment No. 7 filed with
the Securities and Exchange Commission via
EDGAR on March 1, 1999.
h(1) The Transfer Agency and Services Agreement, dated December 10, 1998,
between Registrant and First Data Investor Services Group, Inc. (now known as
PFPC Inc.) is incorporated by reference to Post-Effective Amendment No. 7 filed
with the Securities and Exchange Commission via EDGAR on March 1, 1999.
h(2) The Administration Agreement, dated December 10, 1998, between Registrant
and First Data Investor Services Group, Inc. (now known as PFPC Inc.) is
incorporated by reference to Post-Effective Amendment No. 7 filed with the
Securities and Exchange Commission via EDGAR on March 1, 1999.
h(3) Amendment to the Administration Agreement, dated September 9, 1999, is
filed herein as Exhibit h(3).
i Not Applicable.
j(1) Consent of Independent Auditors is filed herein as Exhibit j(1).
j(2) Power of Attorney is filed herein as Exhibit j(2).
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>
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 Not Applicable.
o(1) Code of Ethics of Trust is filed herein as Exhibit o(1).
o(2) Code of Ethics of Bankers Trust Company is filed herein as Exhibit
o(2).
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 serves as investment adviser to each Portfolio of the Trust.
Bankers Trust, a New York banking corporation, is a wholly owned subsidiary of
Deutsche Bank A.G. 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 Corporation. Set forth below are the names and principal
businesses of the directors and officers of Bankers Trust who, to our knowledge
as of December 31, 1999, are engaged in any other business, profession, vocation
or employment of a substantial nature.
Josef Ackermann Chairman of the Board, Chief Executive Officer and President,
Bankers Trust; Member, Board of Managing Directors, Deutsche Bank A.G. Address:
Deutsche Bank AG, Taunusanlage 12, D-60262 Frankfurt am Main, Federal Republic
of Germany.
Hans Angermueller Director, Bankers Trust; Director of various corporations;
Shearman and Sterling, of counsel. Address: Shearman & Sterling, 599 Lexington
Avenue, New York, New York 10022
George B. Beitzel Director, Bankers Trust and Bankers Trust Corporation since
1977; Director of various corporations. Address: 29 King Street, Chappaqua, New
York 10514-3432.
George B. Beitzel Director, Bankers Trust and Bankers Trust Corporation since
1977; Director of various corporations. Address: 29 King Street, Chappaqua, New
York 10514-3432.
William R. Howell Director, Bankers Trust; Chairman Emeritus, J.C. Penney
Company, Inc.; Director of various corporations. Address: J.C. Penney Company,
Inc., P.O. Box 10001, Dallas, Texas 74301-1109.
Hermann-Josef Lamberti Director, Bankers Trust; Member, Board of Managing
Directors, Deutsche Bank A.G. Address: Deutsche Bank AG, Taunusanlage 12,
D-60262 Frankfurt am Main, Federal Republic of Germany.
John A. Ross Director, Bankers Trust; Regional Chief Executive Officer, Deutsche
Bank Americas Holding Corp. Address: Deutsche Bank, 31 West 52nd Street, New
York, New York 10019.
Ronaldo H. Schmitz Director, Bankers Trust; Member, Board of Managing Directors,
Deutsche Bank A.G. Address: Deutsche Bank AG, Taunusanlage 12, D-60262 Frankfurt
am Main, Federal Republic of Germany.
<PAGE>
Item 27. Principal Underwriters
(a) In addition to BT Insurance Funds Trust, Provident Distributors, Inc. (the
"Distributor") act as principal underwriter for the following investment
companies as of 2/1/00: International Dollar Reserve Fund I, Ltd., Provident
Institutional Funds Trust, Pacific Innovations Trust, Columbia Common Stock
Fund, Inc., Columbia Growth Fund, Inc., Columbia International Stock Fund, Inc.,
Columbia Special Fund, Inc., Columbia Small Cap Fund, Inc., Columbia Real Estate
Equity Fund, Inc., Columbia Balanced Fund, Inc., Columbia Daily Income Company,
Columbia U.S. Government Securities Fund, Inc., Columbia Fixed Income Securities
Fund, Inc., Columbia Municipal Bond Fund, Inc., Columbia High Yield Fund, Inc.,
Columbia National Municipal Bond Fund, Inc., GAMNA Series Funds, Inc., WT
Investment Trust, Kalmar Pooled Investment Trust, The RBB Fund, Inc., Robertson
Stephens Investment Trust, HT Insight Funds, Inc., Harris Insight Funds Trust,
Hilliard-Lyons Government Fund, Inc., Hilliard-Lyons Growth Fund, Inc.,
Hilliard-Lyons Research Trust, Senbanc Fund, Warburg Pincus Trust, ABN AMRO
Funds, Panorama Trust, Alleghany Funds, First Choice Funds Trust, LKCM Funds,
The Galaxy Fund, The Galaxy VIP Fund, Galaxy Fund II, IBJ Funds Trust, Wilshire
Target Funds, Inc., Undiscovered Managers Fund, New Covenant Funds, Forward
Funds, Inc., Light Index Funds, Inc. Weiss Peck & Greer Funds Trust, Weiss Peck
& Greer International Fund, WPG Growth Fund, WPG Growth & Income Fund, WPG Tudor
Fund, RWB/WPG U..S. Large Stock Fund, Tomorrow Funds Retirement Trust, The
Govett Funds, Inc., IAA Trust Growth Fund, Inc., IAA Trust Asset Allocation
Fund, Inc., IAA Trust Tax Exempt Bond Fund, Inc., IAA Trust Taxable Fixed Income
Series Fund, Inc., Matthews International Funds, MCM Funds, Metropolitan West
Funds, Smith Breeden Series Fund, Smith Breeden Trust, Stratton Growth Fund,
Inc., Stratton Monthly Dividend REIT Shares, Inc., The Stratton Funds, Inc.,
Trainer, Wortham First Mutual Funds and The BlackRock Funds, Inc. (Distributed
by BlackRock Distributors, Inc. a wholly owned subsidiary of Provident
Distributors, Inc.), Northern Funds Trust and Northern Institutional Funds Trust
(Distributed by Northern Funds Distributors, LLC. a wholly owned subsidiary of
Provident Distributors, Inc.) The Offit Variable Insurance Fund, Inc.
(Distributed by Offit Funds Distributor, Inc. a wholly owned subsidiary of
Provident Distributors, Inc., and The Offit Investment Fund, Inc. (Distributed
by Offit Funds Distributor, Inc. a wholly owned subsidiary of Provident
Distributors, Inc.). Provident Distributors, Inc. is registered with the
Securities and Exchange Commission as a broker-dealer and is a member of the
National Association of Securities Dealers. Provident Distributors, Inc. is
located at Four Falls Corporate Center, Suite 600, West Conshohocken,
Pennsylvania 19428-2961.
(b) The information required by this Item 27(b) with respect to
each director, officer or partner of Provident Distributors,
Inc. ("PDI") is incorporated by reference to Schedule A of
Form BD filed by PDI with the SEC pursuant to the Securities
Act of 1934 (File No. 8-46564). No director, officer, or
partner of PDI holds a position or office with the
Registrant.
(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) Provident Distributors, Inc.
Four Falls Corporate Center
West Conshohocken, PA 19428-2961.
(3) PFPC 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
a(2) Amendment No. 1 to Declaration of Trust.
a(3) Amendment No. 2 to Declaration of Trust.
a(4) Amendment No. 3 to Declaration of Trust.
a(5) Certificate of Amendment to Declaration of Trust.
d(1) Investment Management Agreement.
d(2) Investment Management Agreement.
d(3) Investment Management Agreement.
d(4) Investment Management Agreement.
e Distribution Agreement.
h(3) Amendment to Administration Agreement.
j(1) Consent of Independent Auditors.
j(2) Power of Attorney
o(1) Code of Ethics of Trust.
o(2) Code of Ethics of Bankers Trust Company.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, the Registrant certifies
that this Post-Effective Amendment No. 9 to the Registration Statement meets the
requirements for effectiveness pursuant to Rule 485(b) of the Securities Act of
1933, as amended, and the Registrant has duly caused this Post-Effective
Amendment No. 9 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Boston and the Commonwealth of Massachusetts on this
25th day of April, 2000.
BT Insurance Funds Trust
By: *
Gerald J. Holland
* By:
/s/Andrew M. Goldberg
Andrew M. Goldberg
as Attorney-in-Fact
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
<S> <C> <C>
Signatures Title Date
* Trustee April 25, 2000
- - ------------------------------
William E. Small
* President April 25, 2000
- - ------------------------------
Gerald J. Holland
* Treasurer April 25, 2000
- - ------------------------------
Brian J. O'Neill
* Trustee April 25, 2000
- - ------------------------------
Robert R. Coby
* Trustee April 25, 2000
- - ------------------------------
Desmond G. Fitzgerald
* Trustee April 25, 2000
- - ------------------------------
James S. Pasman
* Trustee April 25, 2000
- - ------------------------------
Edward C. Schmults
* Trustee April 25, 2000
- - ------------------------------
Werner Walbrol
* By:
/s/ Andrew M. Goldberg
Andrew M. Goldberg
as Attorney-in-Fact
</TABLE>
Exhibit a(2)
BT INSURANCE FUNDS TRUST
AMENDMENT NO. 1 TO THE DECLARATION OF TRUST
FOR
ESTABLISHMENT AND DESIGNATION OF ADDITIONAL SERIES
The undersigned, being all the Trustees of BT Insurance Funds Trust
(the "Trust"), hereby certify that pursuant to Article V, Section 5.11 of the
Trust's Declaration of Trust (the "Declaration of Trust") dated January 18,
1996, the following votes were duly adopted by the majority of the Trustees of
the Trust at a Board meeting held on July 16, 1996:
RESOLVED: That the Declaration of Trust of the Trust, as amended to date, is
hereby further -------- amended so as to establish and designate three new
series of the Trust, such series to be known as "Small Cap Index Fund",
"EAFE(R)Equity Index Fund" and "Equity 500 Index Fund", and that the number of
shares of each such series which the Trust is authorized to issue is an
unlimited number of shares of beneficial interest, par value $.001 per share,
with the shares of each such series having such relative rights and preferences
as set forth in the Declaration of Trust for separate series; and further
RESOLVED: That the appropriate officers of the Trust be, and each hereby is,
authorized and -------- empowered to execute all instruments and documents and
to take all actions, including the filing of an Amendment to the Trust's
Declaration of Trust with the Secretary of State of the Commonwealth of
Massachusetts and the Clerk of the City of Boston, Massachusetts, as they or any
one of them in his or her sole discretion deems necessary or appropriate to
carry out the intents and purposes of the foregoing vote; and further
RESOLVED: That the Board hereby authorizes the filing with the Securities and
Exchange Commission of a Post-Effective Amendment or Amendments to the Trust's
Registration Statement on Form N-1A, representing the addition of Small Cap
Index Fund, EAFE(R) Equity Index Fund and Equity 500 Index Fund to the Trust.
IN WITNESS WHEREOF, the undersigned has executed this amendment as of
this 16th day of July, 1996.
/s/William E. Small /s/Desmond G. FitzGerald
(William E. Small) (Desmond G. FitzGerald)
/s/Robert R. Coby /s/James S. Pasman, Jr.
(Robert R. Coby) (James S. Pasman, Jr.)
Exhibit a(3)
BT INSURANCE FUNDS TRUST
AMENDMENT NO. 2 TO THE DECLARATION OF TRUST
FOR
ESTABLISHMENT AND DESIGNATION OF ADDITIONAL SERIES
The undersigned, being all the Trustees of BT Insurance Funds Trust
(the "Trust"), hereby certify that pursuant to Article V, Section 5.11 of the
Trust's Declaration of Trust (the "Declaration of Trust") dated January 18,
1996, the following votes were duly adopted by the majority of the Trustees of
the Trust at a Board meeting held on September 9, 1996:
RESOLVED: That the Declaration of Trust of the Trust, as amended to date, is
hereby -------- further amended so as to establish and designate a new series of
the Trust, such series to be known as "Managed Assets Fund", and that the number
of shares of such series which the Trust is authorized to issue is an unlimited
number of shares of beneficial interest, par value $.001 per share, with the
shares of such series having such relative rights and preferences as are set
forth in the Declaration of Trust; and further
RESOLVED: That the appropriate officers of the Trust be, and each hereby is,
authorized -------- and empowered to execute all instruments and documents and
to take all actions, including the filing of an Amendment to the Trust's
Declaration of Trust with the Secretary of State of the Commonwealth of
Massachusetts and the Clerk of the City of Boston, Massachusetts, as they or any
one of them in his or her sole discretion deems necessary or appropriate to
carry out the intents and purposes of the foregoing vote; and further
RESOLVED: That the Board hereby authorizes the filing with the
Securities and Exchange Commission of a Pre-Effective
Amendment or Amendments to the Trust's Registration
Statement on Form N-1A, representing the addition of
Managed Assets Fund to the Trust.
IN WITNESS WHEREOF, the undersigned has executed this amendment as of this
9th day of September, 1996.
/s/William E. Small /s/Desmond G. FitzGerald
(William E. Small) (Desmond G. FitzGerald)
/s/Robert R. Coby /s/James S. Pasman, Jr.
(Robert R. Coby) (James S. Pasman, Jr.)
Exhibit a(4)
BT INSURANCE FUNDS TRUST
AMENDMENT NO. 3 TO THE DECLARATION OF TRUST
FOR
ESTABLISHMENT AND DESIGNATION OF ADDITIONAL SERIES
The undersigned, being all the Trustees of BT Insurance Funds Trust
(the "Trust"), hereby certify that pursuant to Article V, Section 5.11 of the
Trust's Declaration of Trust (the "Declaration of Trust") dated January 18,
1996, the following votes were duly adopted by the majority of the Trustees of
the Trust at a Board meeting held on June 12, 1997:
RESOLVED: That the Declaration of Trust of the Trust, as amended to date, is
hereby -------- further amended so as to establish and designate a new series of
the Trust, such series to be known as "U.S. Bond Index Fund", and that the
number of shares of such series which the Trust is authorized to issue is an
unlimited number of shares of beneficial interest, par value $.001 per share,
with the shares of such series having such relative rights and preferences as
are set forth in the Declaration of Trust; and further
RESOLVED: That the appropriate officers of the Trust be, and each hereby is,
authorized -------- and empowered to execute all instruments and documents and
to take all actions, including the filing of an Amendment to the Trust's
Declaration of Trust with the Secretary of State of the Commonwealth of
Massachusetts and the Clerk of the City of Boston, Massachusetts, as they or any
one of them in his or her sole discretion deems necessary or appropriate to
carry out the intents and purposes of the foregoing resolution; and further
RESOLVED: That the Board hereby authorizes the filing with the Securities and
Exchange Commission of a Post-Effective Amendment or Amendments to the Trust's
Registration Statement on Form N-1A, representing the addition of U.S. Bond
Index Fund to the Trust.
IN WITNESS WHEREOF, the undersigned has executed this amendment as of this
12th day of June, 1997.
/s/William E. Small /s/Desmond G. FitzGerald
(William E. Small) (Desmond G. FitzGerald)
/s/Robert R. Coby /s/James S. Pasman, Jr.
(Robert R. Coby) (James S. Pasman, Jr.)
Exhibit a(5)
BT INSURANCE FUNDS TRUST
CERTIFICATE OF AMENDMENT TO THE DECLARATION OF TRUST
The undersigned, being all the Trustees of BT Insurance Funds Trust
(the "Trust"), hereby certify that pursuant to Article VIII, Section 8.3 of the
Trust's Declaration of Trust (the "Declaration of Trust") dated January 18,
1996, the following resolutions were duly adopted by the majority of the
Trustees of the Trust at a Board meeting held on July 27, 1999:
RESOLVED: That the Declaration of Trust dated January 18, 1996, as amended to
date, is hereby further amended so as to change the address of the Trust to 101
Federal Street, Boston, MA 02110; and further
RESOLVED: That the appropriate officers of the Trust be, and each hereby is,
authorized -------- and empowered to execute all instruments and documents and
to take all actions, including the filing of an Amendment to the Trust's
Declaration of Trust with the Secretary of State of the Commonwealth of
Massachusetts and the Clerk of the City of Boston, Massachusetts, as they or any
one of them in his or her sole discretion deems necessary or appropriate to
carry out the intents and purposes of the foregoing vote.
IN WITNESS WHEREOF, the undersigned has executed this amendment as of this
9th day of September, 1999.
/s/William E. Small /s/Desmond G. FitzGerald
(William E. Small) (Desmond G. FitzGerald)
/s/Robert R. Coby /s/James S. Pasman, Jr.
(Robert R. Coby) (James S. Pasman, Jr.)
Exhibit d(1)
INVESTMENT MANAGEMENT AGREEMENT
AGREEMENT made as of June 4, 1999 by and between BT INSURANCE FUNDS
TRUST, a Massachusetts business trust (herein called the "Trust"), regarding
advisory services to be provided to MANAGED ASSETS FUND (the "Portfolio"), a
series of the Trust, and BANKERS TRUST COMPANY (herein called the "Investment
Manager").
WHEREAS, the Portfolio is registered as an open-end, non-diversified,
management investment company under the Investment Company Act of 1940;
WHEREAS, the Portfolio desires to retain the Investment Manager to
render investment advisory and other services, and the Investment Manager is
willing to so render such services on the terms hereinafter set forth;
NOW, THEREFORE, this Agreement
W I T N E S S E T H:
- - - - - - - - - - - - - -
In consideration of the promises and mutual covenants herein contained,
it is agreed between the parties hereto as follows:
1. APPOINTMENT. The Portfolio hereby appoints the Investment Manager to
act as investment manager to the Portfolio, to oversee the administration of all
aspects of the Portfolio's business and affairs and to supervise the performance
of professional services provided by others including the administrator,
transfer agent, custodian and the placement agent to the Portfolio for the
period and on the terms set forth in this Agreement. The Investment Manager
accepts such appointment and agrees to render the services herein set forth for
the compensation herein provided.
2. MANAGEMENT. Subject to the supervision of the Board of Trustees of
the Portfolio, the Investment Manager will provide a continuous investment
program for the Portfolio, including investment research and management with
respect to all securities, investments, cash and cash equivalents in the
Portfolio. The Investment Manager will determine from time to time what
securities and other investments will be purchased, retained or sold by the
Portfolio. The Investment Manager will provide the services rendered by it
hereunder in accordance with the Portfolio's investment objectives and policies
as stated in the then-current Prospectus and Statement of Additional
Information. The Investment Manager further agrees that it:
(a) will conform with all applicable Rules and Regulations of
the Securities and Exchange Commission (herein called the "Rules") and with the
Securities Act of 1933, the Securities Exchange Act of 1934, the Investment
Company Act of 1940 (the "1940 Act") and the Investment Advisers Act of 1940,
all as amended, and will in addition conduct its activities under this Agreement
in accordance with regulations of the Board of Governors of the Federal Reserve
System pertaining to the investment advisory activities of bank holding
companies and their subsidiaries;
(b) will place orders pursuant to its investment
determinations for the Portfolio either directly with the issuer or with any
broker or dealer selected by it. In placing orders with brokers and dealers, the
Investment Manager will use its reasonable best efforts to obtain the best net
price and the most favorable execution of its orders, after taking into account
all factors it deems relevant, including the breadth of the market in the
security, the price of the security, the financial condition and execution
capability of the broker or dealer, and the reasonableness of the commission, if
any, both for the specific transaction and on a continuing basis. Consistent
with this obligation, the Investment Manager may, to the extent permitted by
law, purchase and sell portfolio securities to and from brokers and dealers who
provide brokerage and research services (within the meaning of Section 28(e) of
the Securities Exchange Act of 1934) to or for the benefit of any fund and/or
other accounts over which the Investment Manager or any of its affiliates
exercises investment discretion. Subject to the review of the Portfolio's Board
of Trustees from time to time with respect to the extent and continuation of the
policy, the Investment Manager is authorized to pay to a broker or dealer who
provides such brokerage and research services a commission for effecting a
securities transaction which is in excess of the amount of commission another
broker or dealer would have charged for effecting that transaction if the
Investment Manager determines in good faith that such commission was reasonable
in relation to the value of the brokerage and research services provided by such
broker or dealer, viewed in terms of either that particular transaction or the
overall responsibilities of the Investment Manager with respect to the accounts
as to which it exercises investment discretion; and
(c) will maintain books and records with respect to the
Portfolio's securities transactions and will render to the Board of Trustees
such periodic and special reports as the Board may request.
3. SERVICES NOT EXCLUSIVE. The investment management services rendered
by the Investment Manager hereunder are not to be deemed exclusive, and the
Investment Manager shall be free to render similar services to others so long as
its services under this Agreement are not impaired thereby.
4. BOOKS AND RECORDS. In compliance with the requirements of Rule 31a-3
of the Rules under the 1940 Act, the Investment Manager hereby agrees that all
records which it maintains for the Portfolio are the property of the Portfolio
and further agrees to surrender promptly to the Portfolio any of such records
upon the Portfolio's request. The Investment Manager further agrees to preserve
for the periods prescribed by Rule 31a-2 under the 1940 Act the records required
to be maintained by Rule 31a-1 under the 1940 Act and to comply in full with the
requirements of Rule 204-2 under the Investment Advisers Act of 1940 pertaining
to the maintenance of books and records.
5. EXPENSES. During the term of this Agreement, the Investment Manager
will pay all expenses incurred by it in connection with its activities under
this Agreement other than the cost of securities (including brokerage
commissions, if any) purchased for the Portfolio.
In addition, if the expenses borne by the Portfolio in any fiscal year
of the Portfolio exceed the applicable expense limitations imposed by the
securities regulations of any state in which the beneficial interest in the
Portfolio are registered or qualified for sale to the public, if any, the
Investment Manager shall reimburse the Portfolio for the excess expense to the
extent required by state law.
6. COMPENSATION. For the services provided and the expenses assumed
pursuant to this Agreement, the Portfolio will pay the Investment Manager and
the Investment Manager will accept as full compensation therefor a fee, computed
daily and payable monthly, an amount equal to the annual rate of 0.10% of the
Portfolio's average daily net assets.
7. LIMITATION OF LIABILITY OF THE INVESTMENT MANAGER; INDEMNIFICATION.
(a) The Investment Manager shall not be liable for any error of judgment or
mistake of law or for any loss suffered by the Portfolio in connection with the
matters to which this Agreement relates, except a loss resulting from a breach
of fiduciary duty with respect to the receipt of compensation for services or a
loss resulting from willful misfeasance, bad faith or gross negligence on the
part of the Investment Manager in the performance of its duties or from reckless
disregard by it of its obligations and duties under this Agreement.
(b) Subject to the exceptions and limitations contained in
Section 7(c) below:
(i) the Investment Manager shall be indemnified by the Portfolio to the fullest
extent permitted by law, against liability and against all expenses reasonably
incurred or paid by it in connection with any claim, action, suit or proceeding
in which it becomes involved, as a party or otherwise, by virtue of it being or
having been the investment manager of the Portfolio, and against amounts paid or
incurred by it in the settlement thereof;
(ii) the words "claim," "action," "suit," or
"proceeding" shall apply to all claims,
actions, suits or proceedings (civil, criminal or other, including appeals),
actual or threatened while in office or thereafter, and the words "liability"
and "expenses" shall include, without limitation, reasonable attorneys' fees,
costs, judgments, amounts paid in settlement, fines, penalties and other
liabilities.
(c) No indemnification shall be provided hereunder to the
Investment Manager:
(i) if the Investment Manager shall have been adjudicated by a court or body
before which the proceeding was brought (A) to be liable to the Portfolio or its
investors by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of its obligations and duties under this Agreement, or (B)
not to have acted in good faith in the reasonable belief that his action was in
the best interest of the Portfolio; or
(ii) in the event of a settlement, unless there has
been a determination that such
Covered Person did not engage in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office,
(A) by the court or other body approving the settlement; or
(B) by at least a majority of those Trustees who are neither Interested Persons
of the Portfolio nor are parties to the matter based upon a review of readily
available facts (as opposed to a full trial-type inquiry); or
(C) by written opinion of independent legal counsel
based upon a review of readily
available facts (as opposed to a full trial-type inquiry); provided, however,
that any shareholder of the Portfolio may, by appropriate legal proceedings,
challenge any such determination by the Trustees or by independent counsel.
(d) The rights of indemnification herein provided may be
insured against by policies maintained by the Portfolio, shall not be exclusive
of or affect any other rights to which the Investment Manager may now or
hereafter be entitled, shall continue as to the Investment Manager when it has
ceased to be the Portfolio's Investment Manager and shall inure to the benefit
of the successors and assigns of the Investment Manager. Nothing contained
herein shall affect any rights to indemnification to which Portfolio personnel
and any other persons, other than the Investment Manager, may be entitled by
contract or otherwise under law.
(e) Expenses in connection with the preparation and
presentation of a defense to any claim, suit or proceeding of the character
described in subsection (b) of this Section 7 may be paid by the Portfolio from
time to time prior to final disposition thereof, upon receipt of an undertaking
by or on behalf of the Investment Manager that such amount will be paid over by
it to the Portfolio if it is ultimately determined that the Investment Manager
is not entitled to indemnification under this Section 7; provided, however, that
either (i) the Investment Manager shall have provided appropriate security for
such undertaking, or (ii) the Portfolio shall be insured against losses arising
out of any such advance payments, or (iii) either a majority of the Trustees who
are neither "interested persons" of the Portfolio nor parties to the matter, or
independent legal counsel in a written opinion, shall have determined, based
upon a review of readily available facts as opposed to a trial-type inquiry or
full investigation), that there is reason to believe that the Investment Manager
will be entitled to indemnification under this Section 7.
(g) 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 instrument are
not binding upon any of the Trustees or Shareholders individually but are
binding only upon the assets and property of the Fund.
8. DURATION AND TERMINATION. This Agreement shall be effective as to
the Portfolio as of the date the Portfolio commences investment operations after
this Agreement shall have been approved by the Board of Trustees of the Trust
and the investor(s) in the Portfolio in the manner contemplated by Section 15 of
the 1940 Act and, unless sooner terminated as provided herein, shall continue
until the second anniversary of such date. Thereafter, if not terminated, this
Agreement shall continue in effect as to the Portfolio for successive periods of
12 months each, provided such continuance is specifically approved at least
annually (a) by the vote of a majority of those members of the Board of Trustees
of the Trust who are not parties to this Agreement or interested persons of any
such party, cast in person at a meeting called for the purpose of voting on such
approval, and (b) by the Board of Trustees of the Trust by vote of a majority of
the outstanding voting securities of the Portfolio; provided, however, that this
Agreement may be terminated by the Portfolio at any time, without the payment of
any penalty, by the Board of Trustees of the Trust or by vote of a majority of
the outstanding voting securities of the Portfolio on 60 days' written notice to
the Investment Manager, or by the Investment Manager as to the Portfolio at any
time, without payment of any penalty, on 60 days' written notice to the
Portfolio. This Agreement will immediately terminate in the event of its
assignment. (As used in this Agreement, the terms "majority of the outstanding
voting securities," "interested person" and "assignment" shall have the same
meanings as such terms have in the 1940 Act and the rules and regulatory
constructions thereunder.)
9. AMENDMENT OF THIS AGREEMENT. No material term of this Agreement may
be changed, waived, discharged or terminated orally, but only by an instrument
in writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought, and no amendment of a material term of this
Agreement shall be effective until approved by vote of a majority of the
Portfolio's outstanding voting securities.
10. (A) REPRESENTATIONS AND WARRANTIES. The Investment Manager hereby
represents and warrants as follows:
(1) The Investment Manager is exempt from registration under
the Investment Advisers Act of 1940;
(2) The Investment Manager has all requisite authority to
enter into, execute, deliver and perform its obligations
under, this Agreement;
(3) This Agreement is legal, valid and binding, and
enforceable in accordance with its terms; and
(4) The performance by the Investment Manager of its
obligations under this Agreement does not conflict with
any law to which it is subject.
(B) COVENANTS. The Investment Manager hereby covenants and agrees that, so long
as this Agreement shall remain in effect,
(1) The Investment Manager shall remain either exempt from, or
registered under, the registration provisions of the
Investment Advisers Act of 1940; and
(2) The performance by the Investment Manager of its
obligations under this Agreement shall not conflict with
any law to which it is then subject.
11. NOTICES. Any notice required to be given pursuant to this Agreement
shall be deemed duly given if delivered or mailed by registered mail, postage
prepaid, (1) to the Investment Manager at 130 Liberty Street, New York, New York
10006; (2) to Mutual Fund Services at One Bankers Trust Plaza, New York, New
York 10006 or (3) to the Portfolio c/o First Data Investor Services Group, Inc.,
53 State Street, Boston, Massachusetts 02109.
12. WAIVER. With full knowledge of the circumstances and the effect of
its action, the Investment Manager hereby waives any and all rights which it may
acquire in the future against the property of any investor in the Portfolio,
other than beneficial interests in the Portfolio at their then net asset value,
which arise out of any action or inaction of the Portfolio under this Agreement.
13. MISCELLANEOUS. The captions in 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. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby.
This Agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors and shall be governed by the
laws of the State of New York, without reference to principles of conflicts of
law.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
Very truly yours,
BT INSURANCE FUNDS TRUST
By: /s/Gerald J. Holland
AGREED TO AND ACCEPTED:
BANKERS TRUST COMPANY
By: /s/Ross C. Youngman
Exhibit d(2)
INVESTMENT MANAGEMENT AGREEMENT
June 4, 1999
Bankers Trust Company
Four Albany Street
New York, New York 10006
Dear Sirs:
BT Insurance Funds Trust, a business trust organized under the laws of
the Commonwealth of Massachusetts (the "Trust"), hereby confirms its agreement
with Bankers Trust Company (the "Manager") regarding investment management
services to be provided by the Manager to those portfolios of the Trust listed
on Appendix A attached hereto (each, a "Fund" and collectively, the "Funds"), as
set forth below.
1. Investment Description; Appointment
The Trust anticipates that each Fund will employ its capital
by investing and reinvesting in investments of the kind and in accordance with
the investment objective, policies and limitations specified in its Declaration
of Trust, dated January 19, 1996, as amended from time to time (the "Declaration
of Trust"), its By-laws, as amended from time to time, in the Funds'
prospectuses (the "Prospectus") and the statement of additional information (the
"Statement") filed with the Securities and Exchange Commission under the
Investment Company Act of 1940, as amended (the "1940 Act"), and the Securities
Act of 1933, as amended, as part of the Trust's Registration Statement on Form
N-1A, as amended from time to time, and in the manner and to the extent as may
from time to time be approved in the manner set forth in the Declaration of
Trust. Copies of the Funds' Prospectus, Statement, Declaration of Trust and
By-laws have been or will be submitted to the Manager. Each Fund desires to
employ and hereby appoints the Manager to act as its investment adviser, to
oversee the administration of all aspects of the Fund's business and affairs and
to supervise the performance of professional services provided by others,
including the administrator, transfer agent, custodian and distributor to the
Fund.
2. Services
Subject to the overall supervision and direction of the Board
of Trustees of the Trust, the Manager shall have general responsibility for the
investment and management of the Funds' assets, subject to and in accordance
with the Funds' investment objectives, policies and restrictions as stated in
the Prospectuses and Statement, as from time to time in effect, and the
Declaration of Trust and By-laws, the 1940 Act and the Investment Advisors Act
of 1940, as the same may from time to time be amended. In discharging its
responsibility, the Manager shall determine and monitor the investments of the
Funds' investment portfolios. In addition, the Manager shall have full authority
to implement its determinations by selecting and placing individual transactions
on behalf of each Fund.
3. Information Provided to the Funds
The Manager will keep the Funds informed of developments
materially affecting the Funds' portfolios and, in addition to providing the
Funds with whatever statistical or other information the Funds may reasonably
request with respect to their investments, the Manager will, on its own
initiative, furnish the Funds from time to time with whatever information the
Manager believes is appropriate for this purpose.
4. Standard of Care
The Manager shall exercise its best judgment in rendering the
services listed in paragraph 2 above. The Manager 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 matters to which this Agreement relates, provided that
nothing in this Agreement shall be deemed to protect or purport to protect the
Manager against any liability to the Trust or to holders of the Funds' shares
("Shareholders") to which the Manager would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence on its part in the
performance of its duties or by reason of the Manager's reckless disregard of
its obligations and duties under this Agreement.
5. Indemnification/Liability
(a) The Trust shall indemnify and hold the Manager 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 Manager or for which the Manager may be held
to be liable in connection with this Agreement or the Manager's performance
hereunder (a "Claim"), unless such Claim resulted from a grossly negligent act
or omission to act or bad faith by the Manager in the performance of its duties
hereunder.
(b) In any case in which the Trust may be asked to indemnify or
hold the Manager harmless, the Manager will notify the Trust promptly after
identifying any situation which it believes presents or appears likely to
present a claim for indemnification against the Trust although the failure to do
so shall not prevent recovery by the Manager and shall keep the Trust advised
with respect to all developments concerning such situation. The Trust shall have
the option to defend the Manager against any Claim which may be the subject of
this indemnification, and, in the event that the Trust so elects, such defense
shall be conducted by counsel chosen by the Trust and satisfactory to the
Manager, and thereupon the Trust shall take over complete defense of the Claim
and the Manager shall sustain no further legal or other expenses in respect of
such Claim. The Manager will not confess any Claim or make any compromise in any
case in which the Trust will be asked to provide indemnification, except with
the Trust's prior written consent. The obligations of the parties hereto under
this Section 5 shall survive the termination of this Agreement.
(c) A copy of the Declaration of Trust of the Funds 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 Funds as
Trustees and not individually and that the obligations of this instrument are
not binding upon any of the Trustees or Shareholders individually but are
binding only upon the assets and property of the Funds.
6. Compensation
In consideration of the services rendered pursuant to this
Agreement, each Fund will pay the Manager a fee at annual rates based on the
Fund's average daily net assets as set forth on Appendix A. These fees shall be
computed daily and shall be payable on the first business day of each month for
services performed the preceding month. Upon any termination of this Agreement
before the end of a month, the fee for such part of that month shall be prorated
according to the proportion that 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 the Manager, the value of each Fund's net
assets shall be computed at the times and in the manner specified in the Fund's
Prospectus and/or the Statement.
7. Expenses
The Manager will bear all expenses in connection with the
performance of its services under this Agreement. The Trust will bear certain
other expenses to be incurred in its operation, including: (a) payment of the
fees payable to the Manager under paragraph 6 hereof; (b) organization expenses;
(c) brokerage fees and commissions; (d) taxes; (e) interest charges on
borrowings; (f) the costs of liability insurance or fidelity bond coverage for
the Trust's officers and employees, and directors' and officers' errors and
omissions insurance coverage; (g) legal, auditing and accounting fees and
expenses; (h) charges of the Trust's Custodian and Transfer and Dividend
Disbursing Agent; (i) the Trust's pro rata portion of dues, fees and charges of
any trade association of which the Trust is a member; (j) the expenses of
printing, preparing, distributing and mailing proxies, stock certificates and
all reports required by the Securities and Exchange Commission and State
securities administrations, including the Funds' Prospectuses, Statement, and
notices to shareholders; (k) filing fees for the registration or qualification
of the Funds and their shares under federal or state securities laws; (l) the
fees and expenses involved in registering and maintaining registration of the
Funds' shares with the Securities and Exchange Commission and State securities
administrations; (m) the expenses of holding shareholder meetings; (n) the
compensation, including fees, of any of the Trust's unaffiliated directors,
officers or employees; (o) all expenses of computing the Funds' net asset values
per share, including any equipment or services obtained solely for the purpose
of pricing shares or valuing the Funds' investment portfolios; (p) expenses of
personnel performing shareholder servicing functions; and (q) litigation and
other extraordinary or non-recurring expenses and other expenses properly
payable by the Trust or the Funds.
8. Service to Other Companies or Accounts
The Trust understands that the Manager and its affiliates may
act as investment manager to fiduciary and other managed accounts and to one or
more other investment companies, and the Trust has no objection to their so
acting, provided that whenever the Trust and one or more other clients advised
by the Manager and its affiliates have available funds for investment,
investments suitable and appropriate for each will be allocated in a manner
believed by the Manager to be equitable to each client. The Trust recognizes
that in some cases this procedure may adversely affect whether a particular
security is available to the Trust, the size of the position obtainable for the
Trust or the price at which that position may be obtained or disposed. In
addition, the Trust understands that the persons employed by the Manager to
assist in the performance of the Manager's duties under this Agreement will not
devote their full time to such service and nothing contained in this Agreement
shall be deemed to limit or restrict the right of the Manager or any affiliate
of the Manager to engage in and devote time and attention to other businesses or
to render services of any kind or nature.
9. Term of Agreement
This Agreement shall become effective on the date hereof,
shall continue in effect for two years and thereafter shall continue for
successive annual periods, provided such continuance is specifically approved at
least annually by (i) the Trust's Board of Trustees or (ii) a vote of a
"majority" (as defined in the 1940 Act) of each Fund's outstanding voting
securities (as defined in the 1940 Act), provided that in either event the
continuance is also approved by a majority of the Trustees who are not
"interested persons" (as defined in the 1940 Act) of any party to this
Agreement, by vote cast in person at a meeting called for the purpose of voting
on such approval. This Agreement is terminable with respect to each Fund,
without penalty, on 60 days' written notice, by the Trust's Trustees or by vote
of holders of a majority of such Fund's outstanding voting securities, or upon
60 days' written notice, by the Manager. This Agreement will also terminate
automatically in the event of its assignment (as defined in the 1940 Act).
10. Governing Law
This Agreement shall be governed by and construed in
accordance with the laws of the State of New York giving effect to the conflict
of law rules thereof.
If the foregoing is in accordance with your understanding,
kindly indicate your acceptance of this Agreement by signing and returning the
enclosed copy of this Agreement.
Very truly yours,
BT INSURANCE FUNDS TRUST
By: /s/Gerald J. Holland
AGREED TO AND ACCEPTED:
BANKERS TRUST COMPANY
By: /s/Ross C. Youngman
<PAGE>
APPENDIX A
Compensation (as a Percentage
Name of Fund of Average Daily Net Assets)
Small Cap Fund 0.75%
International Equity Fund 0.98%
Exhibit d(3)
INVESTMENT MANAGEMENT AGREEMENT
June 4, 1999
Bankers Trust Company
Four Albany Street
New York, New York 10006
Dear Sirs:
BT Insurance Funds Trust, a business trust organized under the laws of
the Commonwealth of Massachusetts (the "Trust"), hereby confirms its agreement
with Bankers Trust Company (the "Manager") regarding investment management
services to be provided by the Manager to the Small Cap Index Fund, EAFE(R)
Equity Index Fund and Equity 500 Index Fund (each, a "Fund" and collectively,
the "Funds").
1. Investment Description; Appointment
The Trust anticipates that each Fund will employ its capital
by investing and reinvesting in investments of the kind and in accordance with
the investment objective, policies and limitations specified in its Declaration
of Trust, dated January 19, 1996, as amended from time to time (the "Declaration
of Trust"), its By-laws, as amended from time to time, in the Funds'
prospectuses (the "Prospectus") and the statement of additional information (the
"Statement") filed with the Securities and Exchange Commission under the
Investment Company Act of 1940, as amended (the "1940 Act"), and the Securities
Act of 1933, as amended, as part of the Trust's Registration Statement on Form
N-1A, as amended from time to time, and in the manner and to the extent as may
from time to time be approved in the manner set forth in the Declaration of
Trust. Copies of the Funds' Prospectuses, Statement, Declaration of Trust and
By-laws have been or will be submitted to the Manager. Each Fund desires to
employ and hereby appoint the Manager to act as their investment adviser, to
oversee the administration of all aspects of the Funds' business and affairs and
to supervise the performance of professional services provided by others,
including the administrator, transfer agent, custodian and distributor to the
Funds.
2. Services
Subject to the overall supervision and direction of the Board
of Trustees of the Trust, the Manager shall have general responsibility for the
investment and management of the Funds' assets, subject to and in accordance
with each Fund's investment objective, policies and restrictions as stated in
the Prospectus and Statement, as from time to time in effect, and the
Declaration of Trust and By-laws, the 1940 Act and the Investment Advisors Act
of 1940, as the same may from time to time be amended. In discharging its
responsibility, the Manager shall seek to replicate as closely as possible the
performance of the Russell 2000 Small Stock Index with respect to the Small Cap
Index Fund, EAFE(R) Index with respect to EAFE(R) Equity Index Fund and Standard
& Poor's 500 Composite Stock Price Index with respect to the Equity 500 Index
Fund, before the deduction of Fund expenses and shall determine and monitor the
investments of the Funds' investment portfolios accordingly.
<PAGE>
3. Information Provided to the Trust
The Manager will keep the Funds informed of developments
materially affecting the Funds' portfolios and, in addition to providing the
Trust with whatever statistical or other information the Trust may reasonably
request with respect to its investments, the Manager will, on its own
initiative, furnish the Trust from time to time with whatever information the
Manager believes is appropriate for this purpose.
4. Standard of Care
The Manager shall exercise its best judgment in rendering the
services listed in paragraph 2 above. The Manager 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 matters to which this Agreement relates, provided that
nothing in this Agreement shall be deemed to protect or purport to protect the
Manager against any liability to the Trust or to holders of the Funds' shares
("Shareholders") to which the Manager would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence on its part in the
performance of its duties or by reason of the Manager's reckless disregard of
its obligations and duties under this Agreement.
5. Indemnification/Liability
(a) The Trust shall indemnify and hold the Manager 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 Manager or for which the Manager may be held
to be liable in connection with this Agreement or the Manager's performance
hereunder (a "Claim"), unless such Claim resulted from a grossly negligent act
or omission to act or bad faith by the Manager in the performance of its duties
hereunder.
(b) In any case in which the Trust may be asked to indemnify or
hold the Manager harmless, the Manager will notify the Trust promptly after
identifying any situation which it believes presents or appears likely to
present a claim for indemnification against the Trust, although the failure to
do so shall not prevent recovery by the Manager, and shall keep the Trust
advised with respect to all developments concerning such situation. The Trust
shall have the option to defend the Manager against any Claim which may be the
subject of this indemnification, and, in the event that the Trust so elects,
such defense shall be conducted by counsel chosen by the Trust and satisfactory
to the Manager, and thereupon the Trust shall take over complete defense of the
Claim and the Manager shall sustain no further legal or other expenses in
respect of such Claim. The Manager will not confess any Claim or make any
compromise in any case in which the Trust will be asked to provide
indemnification, except with the Trust's prior written consent. The obligations
of the parties hereto under this Section 5 shall survive the termination of this
Agreement.
(c) A copy of the Declaration of Trust of the Funds 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 Funds as
Trustees and not individually and that the obligations of this instrument are
not binding upon any of the Trustees or Shareholders individually but are
binding only upon the assets and property of the Funds.
6. Compensation
In consideration of the services rendered pursuant to this Agreement,
each Fund will pay the Manager a fee at the annual rate of ** based on the
Funds' average daily net assets. These fees shall be computed daily and shall be
payable on the first business day of each month for services performed the
preceding month. Upon any termination of this Agreement before the end of a
month, the fee for such part of that month shall be prorated according to the
proportion that 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 the Manager, the value of the Funds' net assets
shall be computed at the times and in the manner specified in the Funds'
Prospectuses and/or the Statement."
7. Expenses
The Manager will bear all expenses in connection with the
performance of its services under this Agreement. The Trust will bear certain
other expenses to be incurred in its operation, including: (a) payment of the
fees payable to the Manager under paragraph 6 hereof; (b) organization expenses;
(c) brokerage fees and commissions; (d) taxes; (e) interest charges on
borrowings; (f) the costs of liability insurance or fidelity bond coverage for
the Trust's officers and employees, and directors' and officers' errors and
omissions insurance coverage; (g) legal, auditing and accounting fees and
expenses; (h) charges of the Trust's Custodian and Transfer and Dividend
Disbursing Agent; (i) the Trust's pro rata portion of dues, fees and charges of
any trade association of which the Trust is a member; (j) the expenses of
printing, preparing, distributing and mailing proxies, stock certificates and
all reports required by the Securities and Exchange Commission and State
securities administrations, including the Funds' prospectuses, Statements, and
notices to shareholders; (k) filing fees for the registration or qualification
of the Funds and their shares under federal or state securities laws; (l) the
fees and expenses involved in registering and maintaining registration of the
Funds' shares with the Securities and Exchange Commission and State securities
administrations; (m) the expenses of holding shareholder meetings; (n) the
compensation, including fees, of any of the Trust's unaffiliated directors,
officers or employees; (o) all expenses of computing the Funds' net asset value
per share, including any equipment or services obtained solely for the purpose
of pricing shares or valuing the Funds' investment portfolios; (p) expenses of
personnel performing shareholder servicing functions; and (q) litigation and
other extraordinary or non-recurring expenses and other expenses properly
payable by the Trust or the Funds.
8. Service to Other Companies or Accounts
The Trust understands that the Manager and its affiliates may
act as investment manager to fiduciary and other managed accounts and to one or
more other investment companies, and the Trust has no objection to their so
acting, provided that whenever the Trust and one or more other clients advised
by the Manager and its affiliates have available funds for investment,
investments suitable and appropriate for each will be allocated in a manner
believed by the Manager to be equitable to each client. The Trust recognizes
that in some cases this procedure may adversely affect whether a particular
security is available to the Trust, the size of the position obtainable for the
Trust or the price at which that position may be obtained or disposed. In
addition, the Trust understands that the persons employed by the Manager to
assist in the performance of the Manager's duties under this Agreement will not
devote their full time to such service and nothing contained in this Agreement
shall be deemed to limit or restrict the right of the Manager or any affiliate
of the Manager to engage in and devote time and attention to other businesses or
to render services of any kind or nature.
9. Term of Agreement
This Agreement shall become effective on the date hereof,
shall continue in effect for two years and thereafter shall continue for
successive annual periods, provided such continuance is specifically approved at
least annually by (i) the Trust's Trustees or (ii) a vote of a "majority" (as
defined in the 1940 Act) of each Fund's outstanding voting securities (as
defined in the 1940 Act), provided that in either event the continuance is also
approved by a majority of the Trustees who are not "interested persons" (as
defined in the 1940 Act) of any party to this Agreement, by vote cast in person
at a meeting called for the purpose of voting on such approval. This Agreement
is terminable with respect to each Fund, without penalty, on 60 days' written
notice, by the Trust's Trustees or by vote of holders of a majority of each
Fund's outstanding voting securities, or upon 60 days' written notice, by the
Manager. This Agreement will also terminate automatically in the event of its
assignment (as defined in the 1940 Act).
10. Governing Law
This Agreement shall be governed by and construed in
accordance with the laws of the State of New York giving effect to the conflict
of law rules thereof.
If the foregoing is in accordance with your understanding,
kindly indicate your acceptance of this Agreement by signing and returning the
enclosed copy of this Agreement.
Very truly yours,
BT INSURANCE FUNDS TRUST
By: /s/Gerald J. Holland
AGREED TO AND ACCEPTED:
BANKERS TRUST COMPANY
By: /s/Ross C. Youngman
Exhibit d(4)
INVESTMENT MANAGEMENT AGREEMENT
June 4, 1999
Bankers Trust Company
Four Albany Street
New York, New York 10006
Dear Sirs:
BT Insurance Funds Trust, a business trust organized under the laws of
the Commonwealth of Massachusetts (the "Trust"), hereby confirms its agreement
with Bankers Trust Company (the "Manager") regarding investment management
services to be provided by the Manager to the U.S. Bond Index Fund (the "Fund").
1. Investment Description; Appointment
The Trust anticipates that the Fund will employ its capital by
investing and reinvesting in investments of the kind and in accordance with the
investment objective, policies and limitations specified in its Declaration of
Trust, dated January 19, 1996, as amended from time to time (the "Declaration of
Trust"), its By-laws, as amended from time to time, in the Fund's prospectus
(the "Prospectus") and the statement of additional information (the "Statement")
filed with the Securities and Exchange Commission under the Investment Company
Act of 1940, as amended (the "1940 Act"), and the Securities Act of 1933, as
amended, as part of the Trust's Registration Statement on Form N-1A, as amended
from time to time, and in the manner and to the extent as may from time to time
be approved in the manner set forth in the Declaration of Trust. Copies of the
Fund's Prospectus, Statement, Declaration of Trust and By-laws have been or will
be submitted to the Manager. The Fund desires to employ and hereby appoints the
Manager to act as its investment adviser, to oversee the administration of all
aspects of the Fund's business and affairs and to supervise the performance of
professional services provided by others, including the administrator, transfer
agent, custodian and distributor to the Fund.
2. Services
Subject to the overall supervision and direction of the Board
of Trustees of the Trust, the Manager shall have general responsibility for the
investment and management of the Fund's assets, subject to and in accordance
with the Fund's investment objective, policies and restrictions as stated in the
Prospectus and Statement, as from time to time in effect, and the Declaration of
Trust and By-laws, the 1940 Act and the Investment Advisors Act of 1940, as the
same may from time to time be amended. In discharging its responsibility, the
Manager shall seek to replicate as closely as possible the performance of the
Lehman Brothers Aggregate Bond Index Portfolio before the deduction of Fund
expenses.
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3. Information Provided to the Trust
The Manager will keep the Fund informed of developments
materially affecting the Fund's portfolio and, in addition to providing the
Trust with whatever statistical or other information the Trust may reasonably
request with respect to its investments, the Manager will, on its own
initiative, furnish the Trust from time to time with whatever information the
Manager believes is appropriate for this purpose.
4. Standard of Care
The Manager shall exercise its best judgment in rendering the
services listed in paragraph 2 above. The Manager 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 matters to which this Agreement relates, provided that
nothing in this Agreement shall be deemed to protect or purport to protect the
Manager against any liability to the Trust or to holders of the Fund's shares
("Shareholders") to which the Manager would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence on its part in the
performance of its duties or by reason of the Manager's reckless disregard of
its obligations and duties under this Agreement.
5. Indemnification/Liability
5 (a) The Trust shall indemnify and hold the Manager 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 Manager or for which the Manager may be held
to be liable in connection with this Agreement or the Manager's performance
hereunder (a "Claim"), unless such Claim resulted from a grossly negligent act
or omission to act or bad faith by the Manager in the performance of its duties
hereunder.
(b) In any case in which the Trust may be asked to indemnify or hold
the Manager harmless, the Manager will notify the Trust promptly after
identifying any situation which it believes presents or appears likely to
present a claim for indemnification against the Trust although the failure to do
so shall not prevent recovery by the Manager and shall keep the Trust advised
with respect to all developments concerning such situation. The Trust shall have
the option to defend the Manager against any Claim which may be the subject of
this indemnification, and, in the event that the Trust so elects, such defense
shall be conducted by counsel chosen by the Trust and satisfactory to the
Manager, and thereupon the Trust shall take over complete defense of the Claim
and the Manager shall sustain no further legal or other expenses in respect of
such Claim. The Manager will not confess any Claim or make any compromise in any
case in which the Trust will be asked to provide indemnification, except with
the Trust's prior written consent. The obligations of the parties hereto under
this Section 5 shall survive the termination of this Agreement.
(c) 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 instrument are not binding
upon any of the Trustees or Shareholders individually but are binding only upon
the assets and property of the Fund.
6. Compensation
In consideration of the services rendered pursuant to this
Agreement, the Fund will pay the Manager a fee at the annual rate of 0.15% based
on the Funds' average daily net assets. The fee shall be computed daily and
shall be payable on the first business day of each month for services performed
the preceding month. Upon any termination of this Agreement before the end of a
month, the fee for such part of that month shall be prorated according to the
proportion that 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 the Manager, the value of the Fund's net assets
shall be computed at the time and in the manner specified in the Fund's
Prospectus and/or the Statement.
7. Expenses
The Manager will bear all expenses in connection with the
performance of its services under this Agreement. The Trust will bear certain
other expenses to be incurred in its operation, including: (a) payment of the
fees payable to the Manager under paragraph 6 hereof; (b) organization expenses;
(c) brokerage fees and commissions; (d) taxes; (e) interest charges on
borrowings; (f) the costs of liability insurance or fidelity bond coverage for
the Trust's officers and employees, and directors' and officers' errors and
omissions insurance coverage; (g) legal, auditing and accounting fees and
expenses; (h) charges of the Trust's Custodian and Transfer and Dividend
Disbursing Agent; (i) the Trust's pro rata portion of dues, fees and charges of
any trade association of which the Trust is a member; (j) the expenses of
printing, preparing, distributing and mailing proxies, stock certificates and
all reports required by the Securities and Exchange Commission and State
securities administrations, including the Fund's prospectus, Statements, and
notices to shareholders; (k) filing fees for the registration or qualification
of the Fund and its shares under federal or state securities laws; (l) the fees
and expenses involved in registering and maintaining registration of the Fund's
shares with the Securities and Exchange Commission and State securities
administrations; (m) the expenses of holding shareholder meetings; (n) the
compensation, including fees, of any of the Trust's unaffiliated directors,
officers or employees; (o) all expenses of computing the Fund's net asset value
per share, including any equipment or services obtained solely for the purpose
of pricing shares or valuing the Fund's investment portfolio; (p) expenses of
personnel performing shareholder servicing functions; and (q) litigation and
other extraordinary or non-recurring expenses and other expenses properly
payable by the Trust or the Fund.
8. Service to Other Companies or Accounts
The Trust understands that the Manager and its affiliates may
act as investment manager to fiduciary and other managed accounts and to one or
more other investment companies, and the Trust has no objection to their so
acting, provided that whenever the Trust and one or more other clients advised
by the Manager and its affiliates have available funds for investment,
investments suitable and appropriate for each will be allocated in a manner
believed by the Manager to be equitable to each client. The Trust recognizes
that in some cases this procedure may adversely affect whether a particular
security is available to the Trust, the size of the position obtainable for the
Trust or the price at which that position may be obtained or disposed. In
addition, the Trust understands that the persons employed by the Manager to
assist in the performance of the Manager's duties under this Agreement will not
devote their full time to such service and nothing contained in this Agreement
shall be deemed to limit or restrict the right of the Manager or any affiliate
of the Manager to engage in and devote time and attention to other businesses or
to render services of any kind or nature.
9. Term of Agreement
This Agreement shall become effective on the date hereof,
shall continue in effect for two years and thereafter shall continue for
successive annual periods, provided such continuance is specifically approved at
least annually by (i) the Trust's Trustees or (ii) a vote of a "majority" (as
defined in the 1940 Act) of the Fund's outstanding voting securities (as defined
in the 1940 Act), provided that in either event the continuance is also approved
by a majority of the Trustees who are not "interested persons" (as defined in
the 1940 Act) of any party to this Agreement, by vote cast in person at a
meeting called for the purpose of voting on such approval. This Agreement is
terminable, without penalty, on 60 days' written notice, by the Trust's Trustees
or by vote of holders of a majority of the Fund's outstanding voting securities,
or upon 60 days' written notice, by the Manager. This Agreement will also
terminate automatically in the event of its assignment (as defined in the 1940
Act).
10. Governing Law
This Agreement shall be governed by and construed in
accordance with the laws of the State of New York giving effect to the conflict
of law rules thereof.
If the foregoing is in accordance with your understanding,
kindly indicate your acceptance of this Agreement by signing and returning the
enclosed copy of this Agreement.
Very truly yours,
BT INSURANCE FUNDS TRUST
By: /s/Gerald J. Holland
AGREED TO AND ACCEPTED:
BANKERS TRUST COMPANY
By: /s/Ross C. Youngman
Exhibit e
DISTRIBUTION AGREEMENT
THIS AGREEMENT is made as of this 9th day of September, 1999 (the
"Agreement") by and between BT Insurance Funds Trust, a Massachusetts business
trust (the "Trust") and Provident Distributors, Inc. (the "Distributor"), a
Delaware corporation having its principal place of business at Four Falls
Corporate Center, West Conshohocken, Pennsylvania 19428-2961.
WHEREAS, the Trust is registered as a diversified, open-end management
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act"); and is currently offering units of beneficial interest (such units
of all series are hereinafter called the "Shares"), representing interests in
investment portfolios of the Trust identified on Schedule A hereto (the "Funds")
which are registered with the Securities and Exchange Commission (the "SEC")
pursuant to the Trust's Registration Statement on Form N-1A (the "Registration
Statement"); and
WHEREAS, the Trust desires to retain the Distributor as distributor for
the Funds to provide for the sale and distribution of the Shares of the Funds
identified on Schedule A to separate accounts of insurance companies and for
such additional classes or series as the Trust may issue, and the Distributor is
prepared to provide such services commencing on the date first written above.
NOW THEREFORE, in consideration of the premises and mutual covenants
set forth herein and intending to be legally bound hereby the parties hereto
agree as follows:
1. Service as Distributor
1.1 The Distributor will act on behalf of the Trust for the distribution of
the Shares covered by the Registration Statement under the Securities
Act of 1933, as amended (the "1933 Act"). In accordance with its duties
as Distributor of the Shares under this Agreement, the Distributor has
agreed to enter into participation agreements with insurance companies
for the sale of Shares.
1.2 The Trust understands that the Distributor is now, and may in the
future be, the distributor of the shares of several investment
companies or series (collectively, the "Investment Entities"),
including Investment Entities having investment objectives similar to
those of the Trust. The Trust further understands that investors and
potential investors in the Trust may invest in shares of such other
Investment Entities. The Trust agrees that the Distributor's duties to
such Investment Entities shall not be deemed in conflict with its
duties to the Trust under this Section 1.2.
1.3 The Distributor shall not utilize any materials in connection with the
sale or offering of Shares except the Trust's current prospectuses and
statements of additional information and such other materials as the
Trust shall provide or approve.
1.4 All activities by the Distributor and its employees, as distributor of
the Shares, shall comply with all applicable laws, rules and
regulations, including, without limitation, all rules and regulations
made or adopted by the SEC or the National Association of Securities
Dealers.
1.5 The Distributor will transmit any orders received by it for purchase or
redemption of the Shares to the transfer agent for the Trust.
1.6 Whenever in its judgment such action is warranted by unusual market,
economic or political conditions, the Trust may decline to accept any
orders for, or make any sales of, the Shares until such time as the
Trust deems it advisable to accept such orders and to make such sales.
1.7 The Trust shall furnish from time to time, for use in connection with
the sale of the Shares, such information with respect to the Trust and
the Shares as the Distributor may reasonably request; and the Trust
warrants that the statements contained in any such information shall
fairly show or represent what they purport to show or represent.
1.8 The Trust represents to the Distributor that all Registration
Statements and prospectuses filed by the Trust with the SEC under the
1933 Act with respect to the Shares have been prepared in conformity
with the requirements of the 1933 Act and the rules and regulations of
the SEC thereunder. As used in this Agreement, the term "Registration
Statement" shall mean any Registration Statement and any prospectus and
any statement of additional information relating to the Trust filed
with the SEC and any amendments or supplements thereto at any time
filed with the SEC. Except as to information included in the
Registration Statement in reliance upon information provided to the
Trust by the Distributor or any affiliate of the Distributor, the Trust
represents and warrants to the Distributor that any Registration
Statement, when such Registration Statement becomes effective, will
contain statements required to be stated therein in conformity with the
1933 Act and the rules and regulations of the SEC; that all statements
of fact contained in any such Registration Statement will be true and
correct when such Registration Statement becomes effective; and that no
Registration Statement when such Registration Statement becomes
effective will include an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to
make the statements therein not misleading to a purchaser of the
Shares. The Trust may but shall not be obligated to propose from time
to time such amendment or amendments to any Registration Statement and
such supplement or supplements to any prospectus as, in the light of
future developments, may, in the opinion of the Trust's counsel, be
necessary or advisable. The Trust shall promptly notify the Distributor
of any advice given to it by its counsel regarding the necessity or
advisability of amending or supplementing such Registration Statement.
If the Trust shall not propose such amendment or amendments and/or
supplement or supplements within fifteen days after receipt by the
Trust of a written request from the Distributor to do so, the
Distributor may, at its option, terminate this Agreement upon written
notice to the Trust. The Trust shall not file any amendment to any
Registration Statement or supplement to any prospectus without giving
the Distributor reasonable notice thereof in advance; provided,
however, that nothing contained in this Agreement shall in any way
limit the Trust's right to file at any time such amendments to any
Registration Statements and/or supplements to any prospectus, of
whatever character, as the Trust may deem advisable, such right being
in all respects absolute and unconditional.
1.9 The Trust authorizes the Distributor to use any prospectus or
statement of additional information in the form furnished from time to
time in connection with the sale of the Shares.
1.10 (a) Subject to the conditions set forth below, the Trust agrees to
indemnify and hold harmless the Distributor and each person, if any,
who controls the Distributor within the meaning of Section 15 of the
Securities Act of 1933 and Section 20 of the Securities Exchange Act of
1934, as amended, against any and all loss, liability, claim, damage
and expense whatsoever (including reasonable attorneys' fees) arising
out of or based upon any untrue statement or alleged untrue statement
of a material fact contained in the Registration Statement, any
Prospectuses or SAIs (as from time to time amended or supplemented) or
the omission or alleged omission therefrom of a material fact required
to be stated therein or necessary to make the statements therein not
misleading, unless such statement or omission was made in reliance upon
and in conformity with written information furnished to the Trust by
the Distributor or on behalf of the Distributor expressly for use in
the Registration Statement, any Prospectuses or SAIs or any amendment
or supplement thereof.
If any action is brought against the Distributor or any
controlling person thereof with respect to which indemnity may be
sought against the Trust pursuant to the foregoing paragraph, the
Distributor shall promptly notify the Trust in writing of the
institution of such action and the Trust shall assume the defense of
such action, including the employment of counsel selected by the Trust
and payment of expenses. The Distributor or any such controlling person
thereof shall have the right to employ separate counsel in any such
case, but the fees and expenses of such counsel shall be at the expense
of the Distributor or such controlling person unless the employment of
such counsel shall have been authorized in writing by the Trust in
connection with the defense of such action or the Trust shall not have
employed counsel to have charge of the defense of such action, in any
of which events such fees and expenses shall be borne by the Trust.
Anything in this paragraph to the contrary notwithstanding, the Trust
shall not be liable for any settlement of any such claim of action
effected without its written consent. The Trust agrees promptly to
notify the Distributor of the commencement of any litigation or
proceedings against the Trust or any of its officers or Trustees or
controlling persons in connection with the issue and sale of Shares in
connection with the Registration Statement, Prospectuses or SAIs.
(b) The Distributor agrees to indemnify and hold harmless the Trust,
each of its Trustees, each of its officers who have signed the
Registration Statement and each other person, if any, who controls the
Trust within the meaning of Section 15 of the Securities Act of 1933,
against any and all loss, liability, claim, damage and expense
whatsoever (including reasonable attorneys' fees) arising out of or
based upon any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement, any Prospectuses
or SAIs (as from time to time amended or supplemented) or the omission
or alleged omission therefrom of a material fact required to be stated
therein or necessary to make the statements therein not misleading, but
only with respect to alleged statements or alleged omissions or
statements or omissions, if any, made in the Registration Statement,
any Prospectus, SAI, or any amendment or supplement thereof in reliance
upon, in conformity with, written information furnished to the Trust by
the Distributor or on behalf of the Distributor expressly for use in
the Registration Statement or any Prospectus, SAI, or any amendment or
supplement thereof. In case any action shall be brought against the
Trust or any other person so indemnified based upon the Registration
Statement or any Prospectus, SAI, or any amendment or supplement
thereof, and with respect to which indemnity may be sought against the
Distributor, the Distributor shall have the rights and duties given to
the Trust, and the Trust and each other person so indemnified shall
have the rights and duties given to the Distributor by the provisions
of subsection (a) above.
(c) Nothing herein contained shall be deemed to protect any person
against liability to the Trust or its shareholders to which such person
would otherwise be subject by reason of willful misfeasance, bad faith
or negligence in the performance of the duties of such person or by
reason of the reckless disregard by such person of the obligations and
duties of such person under this Agreement.
1.11 No Shares shall be offered by either the Distributor or the Trust under
any of the provisions of this Agreement and no orders for the purchase
or sale of Shares hereunder shall be accepted by the Trust if and so
long as effectiveness of the Registration Statement then in effect or
any necessary amendments thereto shall be suspended under any of the
provisions of the 1933 Act, or if and so long as a current prospectus
as required by Section 5(b)(2) of the 1933 Act is not on file with the
SEC; provided, however, that nothing contained in this Section 1.11
shall in any way restrict or have any application to or bearing upon
the Trust's obligation to redeem Shares tendered for redemption by any
shareholder in accordance with the provisions of the Trust's
Registration Statement, Declaration of Trust, or bylaws.
1.12 The Trust agrees to advise the Distributor as soon as reasonably
practical by a notice in writing delivered to the Distributor:
(a) of any request by the SEC for amendments to the Registration
Statement, prospectus or statement of additional information then in
effect or for additional information;
(b) in the event of the issuance by the SEC of any stop order
suspending the effectiveness of the Registration Statement, prospectus
or statement of additional information then in effect or the initiation
by service of process on the Trust of any proceeding for that purpose;
(c) of the happening of any event that makes untrue any statement of a
material fact made in the Registration Statement, prospectus or
statement of additional information then in effect or that requires the
making of a change in such Registration Statement, prospectus or
statement of additional information in order to make the statements
therein not misleading; and
(d) of all actions of the SEC with respect to any amendments to any
Registration Statement, prospectus or statement of additional
information which may from time to time be filed with the SEC.
For purposes of this section, informal requests by or acts of the Staff
of the SEC shall not be deemed actions of or requests by the SEC.
2. Limitation of Liability.
(a) Subject to the provisions of Section 1.10, the Distributor, 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 the Distributor's willful misfeasance, bad faith or negligence in
the performance of such obligations and duties, or by reason of its
reckless disregard thereof.
(b) Each party shall have the duty to mitigate damages for which the
other party may become responsible.
(c) 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.
3. Term
(a) This Agreement shall become effective immediately upon the
consummation of the acquisition of First Data Investor Services Group,
Inc. by a subsidiary of PNC Bank Corp., which the parties anticipate to
occur on or about December 1, 1999, and, unless sooner terminated as
provided herein, shall continue for an initial one-year term and
thereafter shall be renewed for successive one-year terms, provided
such continuance is specifically approved at least annually by (i) the
Trust's Board of Trustees or (ii) by a vote of a majority (as defined
in the 1940 Act and Rule 18f-2 thereunder) of the outstanding voting
securities of the Trust, provided that in either event the continuance
is also approved by a majority of the Trustees who are not parties to
this Agreement and who are not interested persons (as defined in the
1940 Act) of any party to this Agreement, by vote cast in person at a
meeting called for the purpose of voting on such approval. This
Agreement is terminable, without penalty, on at least sixty days'
written notice, by the Trust's Board of Trustees, by vote of a majority
(as defined in the 1940 Act and Rule 18f-2 thereunder) of the
outstanding voting securities of the Trust, or by the Distributor. This
Agreement will also terminate automatically in the event of its
assignment (as defined in the 1940 Act and the rules thereunder).
(b) In the event a termination notice is given by the Trust, all
expenses associated with movement of records and materials and
conversion thereof will be borne by the Trust.
4. EXCLUSION OF WARRANTIES
THIS IS A SERVICE AGREEMENT. EXCEPT AS EXPRESSLY PROVIDED IN THIS
AGREEMENT, THE DISTRIBUTOR 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. THE DISTRIBUTOR DISCLAIMS ANY WARRANTY
OF TITLE OR NON-INFRINGEMENT EXCEPT AS OTHERWISE SET FORTH IN THIS
AGREEMENT.
5. 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 the
Distributor unless said writing is executed by a Senior Vice President,
Executive Vice President or President of the Distributor. 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.
6. No Presumption Against Drafter
The Distributor 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 the Distributor, and
no presumptions arise favoring any party by virtue of the authorship of
any provision of this Agreement.
7. Publicity
Neither the Distributor 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.
8. 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.
9. 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.
10. Miscellaneous
(a) Any notice or other instrument authorized or required by this
Agreement to be given in writing to the Trust or the
Distributor 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 Insurance Funds Trust
Four Albany Street
New York, New York 10006
Attention:
With a copy to:
Burton Leibert, Esq.
Willkie Farr & Gallagher
153 East 53rd Street
New York, New York 10022
To the Distributor:
Provident Distributors, Inc.
Four Falls Corporate Center, 6th Floor
West Conshohocken, Pennsylvania 19428-2961
Attention: Philip Rinnander
(b) The laws of the State of New York, excluding the laws on
conflicts of laws, and the applicable provisions of the 1940
Act shall govern the interpretation, validity, and enforcement
of this Agreement. To the extent the provisions of New York
law or the provisions hereof conflict with the 1940 Act, the
1940 Act shall control.
(c) 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.
(d) 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.
(e) This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors
and is not intended to confer upon any other person any rights
or remedies hereunder.
11. 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 the Distributor shall exercise reasonable care to safeguard the
confidentiality of the Confidential Information of the other. The Trust and the
Distributor 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 the Distributor 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 the Distributor may,
however, disclose Confidential Information to its employees, auditors, counsel,
regulatory authorities and others agreed to by the Trust and the Distributor 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 the Distributor 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 11. Notwithstanding the previous sentence, in no event shall either the
Trust or the Distributor 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 the Distributor,
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 the Distributor 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 which
now exist or come into the control or possession of the other.
(d) Each Party 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 the other
Party for that harm. Each Party shall be entitled to equitable
relief, in addition to all other available remedies, to
redress any such breach.
12. Binding Obligations
The Trust and the Distributor agree that the obligations of the Trust
under the Agreement shall not be binding upon any of the Trustees,
shareholders, nominees, officers, employees or agents, whether past,
present or future, of the Trust individually, but are binding only upon
the assets and property of the Trust, as provided in the Declaration of
Trust of the Trust dated January 19, 1996 as filed with the
Commonwealth of Massachusetts. The execution and delivery of this
Agreement have been authorized by the Trustees of the Trust, and signed
by an authorized officer of the Trust, acting as such, and neither such
authorization by such Trustees nor such execution and delivery by such
officer shall be deemed to have been made by any of them or any
shareholder of the Trust individually or to impose any liability on any
of them or any shareholder of the Trust personally, but shall bind only
the assets and property of the Trust as provided in the Declaration of
Trust.
13. 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.
14. Declaration of Trust
The Distributor is hereby expressly put on notice of the limitation of
liability as set forth in the Declaration of Trust and agrees that the
obligations assumed by the Trust pursuant to this Agreement shall be
limited in any case to the Trust and its assets and the Distributor
shall not seek satisfaction of any such obligation from the
shareholders of the Trust, the Trustees, officers, employees or agents
of the Trust, or any of them.
15. Year 2000
The Distributor's services hereunder shall be rendered, and its
computer systems used in rendering such services shall operate and
function, without any Year 2000 Error. The term "Year 2000 Error"
means:
(a) any failure of the Distributor's systems to properly
record, store, process, calculate or present calendar dates
falling on and after (and, if applicable, spans of time
including) January 1, 2000 as a result of the occurrence or
use of data consisting of such dates;
(b) any failure of the Distributor's systems to calculate any
information dependent on or relating to dates on or after
January 1, 2000 in the same manner, and with the same
functionality, date integrity and performance, as such systems
record, store, process, calculate and present calendar dates
on or before December 31, 1999, or information dependent on or
relating to such dates; or
(c) any loss of functionality or performance with respect to
the introduction of records or processing of data containing
dates falling on or after January 1, 2000.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed all as of the day and year first above written.
BT INSURANCE FUNDS TRUST
By: /s/Gerald J. Holland
Name: Gerald J. Holland
Title: President
PROVIDENT DISTRIBUTORS, INC.
By: /s/Philip H. Rinnander
Name: Philip H. Rinnander
Title: President
<PAGE>
SCHEDULE A
to the Distribution Agreement
between BT Insurance Funds Trust and
Provident Distributors, Inc.
Name 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
BT INSURANCE FUNDS TRUST PROVIDENT DISTRIBUTORS, INC.
By: Gerald J. Holland By: /s/Philip H. Rinnander
Name: Gerald J. Holland Name: Philip H. Rinnander
Title: President Title: President
Exhibit h(3)
AMENDMENT TO
ADMINISTRATION AGREEMENT
This Amendment dated as of September 9, 1999, is entered into by BT
INSURANCE FUNDS TRUST (the "Company") and FIRST DATA INVESTOR SERVICES GROUP,
INC. ("Investor Services Group").
WHEREAS, the Company and Investor Services Group have entered into an
Administration Agreement dated as of December 10, 1998 (as amended or
supplemented, the "Agreement"); and
WHEREAS, the Company and Investor Services Group wish to amend the
Agreement to revise the description of services to be provided by Investor
Services Group to the Company and related matters;
NOW, THEREFORE, the parties hereto, intending to be legally bound
hereby, hereby agree as follows:
I. The following is hereby added to Schedule B of the Agreement:
Sales Support Services
Sales literature review and recommendations for compliance with NASD and SEC
rules and regulations Preparation of training materials for use by personnel of
the Company or the Adviser Preparation of ongoing compliance updates Provision
of advice and counsel to the Company with respect to regulatory matters,
including monitoring regulatory and legislative developments that may affect the
Company Assistance in the preparation of quarterly board materials with regard
to sales and other distribution related data reasonably requested by the board
II. This Amendment shall become effective immediately upon the consummation
of the acquisition of Investor Services Group by a subsidiary of PNC Bank Corp.,
which the parties anticipate to occur on or about December 1, 1999.
III. Except to the extent amended hereby, the Agreement shall remain
unchanged and in full force and effect and is hereby ratified and confirmed in
all respects as amended hereby.
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of
the date and year first written above.
BT INSURANCE FUNDS TRUST
By: /s/Gerald H. Holland
FIRST DATA INVESTOR SERVICES
GROUP, INC.
By: /s/James L. Fox
Exhibit j(1)
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the captions "Financial
Highlights" in the Prospectuses (Equity 500 Index Fund, Small Cap Index Fund and
EAFE Equity Index Fund) and to the incorporation by reference in this
Post-Effective Amendment No. 9 to the Registration Statement (Form N-1A) (No.
333-00479) of BT Insurance Funds Trust of our reports dated February 4, 2000,
included in the 1999 Annual Reports to shareholders.
/s/ ERNST & YOUNG LLP
Philadelphia, Pennsylvania
April 25, 2000
Exhibit j(2)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, being a Trustee
or Officer of BT Insurance Funds Trust, a Massachusetts business trust (the
"Trust"), does hereby make, constitute and appoint Elizabeth A. Russell, Julie
A. Tedesco, Linda J. Hoard, and Andrew M. Goldberg, and each of them,
attorneys-in-fact and agents of the undersigned with full power and authority of
substitution and resubstitution, in any and all capacities, to execute for and
on behalf of the undersigned any and all amendments to the Registration
Statement on Form N-1A relating to the shares of the Trust and any other
documents and instruments incidental thereto, and to deliver and file the same,
with all exhibits thereto, and all documents and instruments in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing that said attorneys-in-fact and agents,
and each of them, deem advisable or necessary to enable the Trust to effectuate
the intents and purposes hereof, and the undersigned hereby fully ratifies and
confirms all that said attorneys-in-fact and agents, or any of them, or their or
his or her substitute or substitutes, shall do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, the undersigned has subscribed his name this 1st
day of October, 1999.
/s/William E. Small /s/Desmond G. Fitzgerald
William E. Small Desmond G. Fitzgerald
/s/Robert R. Coby /s/James S. Pasman
Robert R. Coby James S. Pasman
/s/Edward C. Schmults /s/Werner Walbroel
Edward C. Schmults Werner Walbroel
/s/Gerald J. Holland /s/Brian J. O'Neill
Gerald J. Holland Brian J. O'Neill
Exhibit o(1)
Code of Ethics and Procedures
Pursuant to Rule 17j-1 under the
Investment Company Act of 1940
This Code of Ethics (the "Code") has been adopted by each Investment Company
listed on Exhibit A, attached hereto (each, a "Trust") to specify and prohibit
certain types of personal securities transactions deemed to create a conflict of
interest and to establish reporting requirements and preventive procedures
pursuant to the provisions of Rule 17j-1(b)(1) under the Investment Company Act
of 1940 (the "1940 Act").
I. DEFINITIONS
A. An "Access Person" means (i) any Trustee, Director, officer, or Advisory
Person (as defined below) of the Investment Company or any investment advisor
thereof, or (ii) any director or officer of a principal underwriter of the
Investment Company, who, in the ordinary course of his or her business, makes,
participates in or obtains information regarding the purchase or sale of
securities for the Investment Company for which the principal underwriter so
acts or whose functions or duties as part of the ordinary course of his or her
business relate to the making of any recommendation to the Investment company
regarding the purchase or sale of securities or (iii) notwithstanding the
provisions of clause (i) above, where the investment adviser is primarily
engaged in a business or businesses other than advising registered investment
companies or other advisory clients, any trustee, director, officer or Advisory
Person of the investment adviser who, with respect to the Investment Company,
makes any recommendation or participates in the determination of which
recommendations shall be made, or whose principal function of duties relate to
the determination of which recommendations shall be made to the Investment
Company or who in connection with his or her duties, obtains any information
concerning securities recommendations being made by such investment adviser to
the Investment Company.
B. An "Advisory Person" means any employee of the Investment Company or any
investment advisor thereof (or of any company in a control relationship to
the Investment Company or such investment adviser), who, in connection with
his or her regular functions or duties, makes, participates in or obtains
information regarding the purchase or sale of securities by the Investment
Company or whose functions relate to any recommendations with respect to
such purchases or sales and any natural person in a control relationship
with the Investment Company or adviser who obtains information regarding
the purchase or sale of securities.
C. A "Portfolio Manager" means any person or persons with the direct
responsibility and authority to make investment decisions affecting the
Investment Company.
D. "Access Persons", "Advisory Persons" and "Portfolio Managers" shall not,
unless otherwise provided in the code of ethics of the Investment Company's
investment adviser any subadviser, administrator or principal underwriter,
include any individual who is required to file quarterly reports with the
Investment Company's investment adviser, any subadviser, administrator or
principal underwriter pursuant to a code of ethics substantially in
conformity with Rule 17j-1 of the 1940 Act or Rule 204-2 of the Investment
Advisers Act of 1940 which has been approved by the Investment Company's
Board of Trustees.
E. "Beneficial Ownership" shall be interpreted subject to the provisions of
Rule 16a-1(a) (exclusive of Section (a)(1) of such Rule) of the Securities
Exchange Act of 1934.
F. "Control" shall have the same meaning as set forth in Section 2(a)(9) of the
1940 Act.
<PAGE>
G. "Disinterested Trustee" means a Trustee who is not an "interested person"
of the Investment Company within the meaning of Section 2(a)(19) of the
1940 Act. An "interested person" includes any person who is a trustee,
director, officer or employee of any investment adviser of the Investment
Company, or owner of 5% or more of the outstanding stock of any investment
adviser of the Investment Company. Affiliates of brokers or dealers are
also "interested persons", except as provided in Rule 2(a)(19)(1) under the
1940 Act.
H. "Review Officer" is the person designated by the Investment Company's Board
of Trustees to monitor the overall compliance with this Code. In the
absence of any such designation, the Review Officer shall be the Treasurer
or any Assistant Treasurer of the Investment Company.
I. "Preclearance Officer" is the person designated by the Investment Company's
Board of Trustees to provide preclearance of any personal security
transaction as required by this Code.
J. "Purchase or sale of a security" includes, among other things, the writing
of an option to purchase or sell a security or the purchase or sale of a
future or index on a security or option thereon.
K. "Security" shall have the meaning set forth in Section 2(a)(36) of the 1940
Act (in effect, all securities) except that is shall not include securities
issued by the U.S. Government (or any other "government security" as that
term is defined in the 1940 Act), bankers' acceptances, bank certificates
of deposit, commercial paper and such other money market instruments as may
be designated by the Trustees of the Investment Company, and shares of
registered open-end investment companies.
L. A security is "being considered for purchase or sale" when a recommendation
to purchase or sell the security has been made and communicated and, with
respect to the person making the recommendation, when such person seriously
considers making such a recommendation.
II. STATEMENT OF GENERAL PRINCIPLES
The following general fiduciary principles shall govern the personal investment
activities of all Access Persons.
Each Access Person shall:
A. At all times, place the interests of the Investment Company before his or her
personal interests;
B. Conduct all personal securities transactions in a manner consistent with
this Code, so as to avoid any actual or potential conflicts of interest, or
an abuse of position of trust and responsibility; and
C. Not take an inappropriate advantage of his or her position with or on behalf
of the Investment Company.
III. RESTRICTIONS OF PERSONAL INVESTING ACTIVITIES
A. Blackout Periods
1. No Access Person (other than a Disinterested Trustee) shall purchase or
sell, directly or indirectly, any security in which he or she has, or by
reason of such transaction acquires, any direct or indirect beneficial
ownership on a day during which he or she knows or should have known the
Investment Company has a pending "buy" and "sell" order in that same
security until that order is executed or withdrawn.
2. No Advisory Person or Portfolio Manager shall purchase or sell, directly or
indirectly, any security in which he or she has, or by reason of such
transaction acquires, any direct or indirect beneficial ownership within at
least seven calendar days before and after the Investment Company trades
(or has traded) in that security.
B. Initial Public Offerings
No Advisory Person shall acquire any security in an initial public offering
for his or her personal account.
C. Private Placements
With regard to private placements, each Advisory Person shall:
1. Obtain express prior written approval from the Preclearance Officer for
any acquisition of securities in a private placement (the Preclearance
Officer, in making such determination, shall consider, among other
factors, whether the investment opportunity should be reserved for the
Investment Company, and whether such opportunity is being offered to
such Advisory Person by virtue of his or her position with the
Investment Company); and
2. After authorization to acquire securities in a private placement has
been obtained, disclose such personal investment with respect to any
subsequent consideration by the Investment Company (or any other
investment company for which he or she acts in a capacity as an
Advisory Person) for investment in that issuer.
If the Investment Company decides to purchase securities of an
issuer the shares of which have been previously obtained for personal
investment by an Advisory Person, that decision shall be subject to an
independent review by Advisory Persons with no personal interest in the
issuer.
D. Short-Term Trading Profits
No Advisory Person shall profit from the purchase and sale, or sale and
purchase, of the same (or equivalent) securities of which such Advisory Person
has beneficial ownership within 60 calendar days. any profit so realized shall,
unless the Investment Company" Board of Trustees approves otherwise, be
disgorged as directed by the Investment Company's Board of Trustees.
E. Gifts
No Advisory Person shall receive any gift or other things of more than de
minimis value from any person or entity that does business with or on
behalf of the Investment Company.
F. Service as a Director or Trustee
1. No Advisory Person shall serve on the board of directors or trustees of
a publicly traded company without prior authorization from the Board of
Trustees of the Investment Company, based upon a determination that
such board service would be consistent with the interests of the
Investment Company and its investors.
2. If board service by an Advisory Person is authorized by the Board of
Trustees of the Investment Company such Advisory Person shall be
isolated from the investment making decisions of the Investment Company
with respect to the companies of which he or she is a director or
trustee.
G. Exempted Transactions
The prohibitions of Section III shall not apply to:
1. Purchases or sales effected in any account over which the Access Person has
no direct or indirect influence or control; 2. Purchases or sales that are
non-volitional on the part of the Access Person or the Investment Company,
including mergers, recapitalizations or similar transactions; 3. Purchases which
are part of an automatic dividend reinvestment plan; 4. Purchases effected upon
the exercise of rights issued by an issuer pro rata to all holders of a class of
securities, to the extent such rights were acquired from such issuer, and sales
of such rights so acquired; and 5. Purchases or sales that receive prior
approval in writing by the Preclearance Officer as (a) only remotely potentially
harmful to the Investment Company because they would be very unlikely to affect
a highly institutional market, (b) clearly not economically related to the
securities to be purchased or sold or held by the Investment company or client,
and (c) not representing any danger of the abuses proscribed by Rule 17j-1, but
only if in each case the prospective purchaser has identified to the Review
Officer all factors of which he or she is aware which are potentially relevant
to a conflict of interest analysis, including the existence of any substantial
economic relationship between his or her transaction and securities held or to
be held by the Investment Company.
IV. COMPLIANCE PROCEDURES
A. Preclearance
1. An Access Person (other than a Disinterested Trustee) may not, directly
or indirectly, acquire or dispose of beneficial ownership of a security
except as provided below unless:
a. Such purchase or sale has been approved by the Preclearance Officer;
b. The approved transaction is completed on the same day approval is
received; and c. The Preclearance Officer has not rescinded such
approval prior to execution of the transaction.
2. Each Access person may effect total purchase and sales of up to $25,000
of securities listed on a national securities exchange or on NASDAQ
within any six month period without preclearance from the Board of
Trustees or the Preclearance Officer provided that:
a. The six month period is a "rolling" period, i.e., the limit is applicable
between any two dates which are six months apart; b. Transactions in options and
futures, other than options or futures on commodities, will be included for
purposes of calculating whether the $25,000 limit has been exceeded. such
transactions will be measured by the value of the securities underlying options
and futures; and c. although preclearance is not required for personal
transactions in securities which fall into this "de minimis" exception, these
trades must still be reported on a quarterly basis pursuant to Section IV.B.2.
hereunder, if such transactions are reportable.
B. Reporting
1. Coverage: Each Access Person (other than Disinterested Trustees) shall file
with the Review Officer confidential quarterly reports containing the
information required in Section IV.B.2 hereunder with respect to all
transactions during the preceding quarter in any securities in which such person
has, or by reason of such transaction acquires, any direct or indirect
beneficial ownership, provided that no Access Person shall be required to report
transactions effected for any account over which such Access Person has no
direct or indirect influence or control (except that such an Access Person must
file a written certification stating that he or she has no direct or indirect
influence or control over the account in question).
2. Filings: Every report shall be made no later than ten days after the
end of the calendar quarter in which the transaction to which the
report relates was effected, and shall contain the following
information:
a. The date of the transaction, the title and the number of shares and the
principal amount of each security involved; b. The nature of the transaction
(i.e. purchase, sale, or any other type of acquisition or disposition); c. The
price at which the transaction was effected; and d. The name of the broker,
dealer or bank with or through whom the transaction was effected.
3. Any report may contain a statement that it shall not be construed as an
admission by the person making the report that he or she has any direct
or indirect beneficial ownership in the security to which the report
relates.
4. Confirmations: All Access Persons (other than Disinterested Trustees)
shall direct their brokers to supply the Investment Company's Review
Officer on a timely basis, duplicate copies of all personal securities
transactions.
C. Review
In reviewing transactions, the Review Officer shall take into account the
exemptions allowed under Section III.G. hereunder. Before making a determination
that a violation has been committed by an Access Person, the Review Officer
shall give such person an opportunity to supply additional information regarding
the transaction in question.
D. Disclosure of Personal Holdings
All Advisory Persons shall disclose personal securities holdings upon
commencement of employment and thereafter on an annual basis.
E. Certification of Compliance
Each Access Person is required to certify annually that he or she has read
and understood this Code and recognizes that he or she is subject to the Code.
Further, each Access Person is required to certify annually that he or she has
complied with all the requirements of this Code and that he or she has disclosed
or reported all personal securities transactions pursuant to the requirements of
the Code.
V. REQUIREMENTS FOR DISINTERESTED TRUSTEES
A. Every Disinterested Trustee shall file with the Review Officer a quarterly
report indicating that he or she had no reportable transactions of a report
containing he information required in Section IV.B.2. above with respect to
transactions (other than exempted transactions listed under Section III.G.)
in any securities in which such person has, or by reason of such
transactions acquires, any direct or indirect beneficial ownership, if such
Trustee, at the time of that transaction, knew or should have known, in the
ordinary course of pursuing his or her official duties as Trustee, that
during the fifteen day period immediately preceding or after the
transaction by the Trustee:
1. Such security was being purchased or sold by the Investment company; or
2. Such security was being considered for purchase or sale by the
Investment Company.
All Disinterested Trustees shall file reports, even when no transactions
have been effected, representing that no transactions subject to reporting
requirements were effected.
B. Notwithstanding the preceding section, any Disinterested Trustee may, at
his or her option, report the information described in Section IV.B.2.
above with respect to any one or more transactions and may include a
statement that the report shall not be construed as an admission that the
person knew or should have known of portfolio transactions by the
Investment Company in such securities.
VI. REVIEW BY THE BOARD OF TRUSTEES
At least annually, the Review Officer shall report to the Board of Trustees
regarding:
A. All existing procedures concerning Access Persons' personal trading
activities and any procedural changes made during the past year; B. Any
recommended changes to the Investment Company's Code or procedures; and C. A
summary of any violations which occurred during the past year with respect to
which significant remedial action was taken.
VII. SANCTIONS
A. Sanctions for Violations By Access Persons (Except Disinterested Trustees)
If the Review Officer determines that a violation of this Code has
occurred, he or she shall so advise the Board of Trustees and the Board may
impose such sanctions as it deems appropriate, including inter alia,
disgorgement of profits, censure, suspension or termination of the employment of
the violator. All material violations of the code and any sanctions imposed as a
result thereto shall be reported periodically to the Board of Trustees.
B. Sanctions for Violations by Disinterested Trustees
If the Review Officer determines that any Disinterested Trustee has
violated this code, he or she shall so advise the President of the Investment
Company and also a committee consisting of the Disinterested Trustees (other
than the person whose transaction is at issue) and shall provide the committee
with a report, including the record of pertinent actual or contemplated
portfolio transactions of the Investment Company and any additional information
supplied by the person whose transaction is at issue. The committee, at its
option, shall either impose such sanctions as it deems appropriate or refer the
matter to the full Board of Trustees of each Trust, which shall impose such
sanctions as it deems appropriate.
VIII. MISCELLANEOUS
A. Access Persons
The Review Officer of the Investment Company will identify all Access
Persons who are under a duty to make reports to the Investment Company and will
inform such person so of such duty. Any failure by the Review Officer to notify
any person of his or her duties shall not relieve such person of his or her
obligations hereunder.
B. Records
The Investment Company's administrator shall maintain records in the manner
and to the extent set froth below, which records may be maintained on
microfilm under the conditions described in Rule 31a-2(f) under the 1940
Act, and shall be available for examination by representatives of the
Securities and Exchange Commission ("SEC"):
1. A copy of this Code and any other code which is, or at any time within
the past five years has been, in effect shall be preserved in an easily
accessible place;
2. A record of any violation of this Code and of any action taken as a
result of such violation shall be preserved in an easily accessible
place for a period of not less than five years following the end of the
fiscal year in which the violation occurs;
3. A copy of each report made pursuant to this Code shall be preserved for
a period of not less than five years from the end of the fiscal year in
which it is made, the first two years in an easily accessible place;
and
4. A list of all persons who are required, or within the past five years
have been required, to make reports pursuant to this Code shall be
maintained in an easily accessible place.
C. Confidentiality
All reports of securities transactions and any other information filed
pursuant to this Code shall be treated as confidential, except to the extent
required by Law.
D. Interpretation of Provisions
The Board of Trustees of the Investment Company may from time to time adopt
such interpretations of this Code as it deems appropriate.
<PAGE>
BT INVESTMENT FUNDS UTILITY PORTFOLIO
BT INSTITUTIONAL FUNDS SHORT/INTERMEDIATE US GOVERNMENT SECURITIES
PORTFOLIO
THE LEADERSHIP TRUST EQUITY 500 INDEX PORTFOLIO
CASH MANAGEMENT PORTFOLIO ASSET MANAGEMENT PORTFOLIO
TREASURY MONEY PORTFOLIO CAPITAL APPRECIATION PORTFOLIO
TAX FREE MONEY PORTFOLIO INTERMEDIATE TAX FREE PORTFOLIO
NY TAX FREE MONEY PORTFOLIO BT INVESTMENT PORTFOLIOS
INTERNATIONAL EQUITY PORTFOLIO BT INSURANCE FUNDS TRUST
(each, an "Investment Company")
TRANSACTION REPORT
To: ____________________________, Review Officer
From: ______________________________________
(Your name)
This Transaction Report (the "Report") is submitted pursuant to Section
IV of the Code of Ethics, as of [ , 1996] (the Code), of the above referenced
Trust and supplies (below) information with respect to transactions in any
security in which I may be deemed to have, or by reason of such transaction
acquire, any direct or indirect beneficial ownership interest (whether or not
such security is a security held or to be acquired by the Investment Company)
for the calendar quarter ended ____________.
Unless the context otherwise requires, all terms used in this Report
shall have the same meaning as set forth in the Code.
For purposes of this Report, beneficial ownership shall be interpreted
subject to the provisions of the Code and Rule 16a-1(a) (exclusive of Section
(a)(1) of such Rule) of the Securities Exchange Act of 1934.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
- - ------ ------------------ ------------------- ------------------ ------------------ ------------------ ------------------
Title Date of Nature of Principal Amount Price at Which Name of the Nature of
of Disposition of Transaction, of Securities the Transaction Broker, Dealer, Securities*
SecuritTransaction Whether Purchase, Transaction was Effected or Bank with
Sale or Other Disposed Of Whom the
type of Acquired Ownership Was
Or Acquisition Effected
- - ------ ------------------ ------------------- ------------------ ------------------ ------------------ ------------------
- - ------ ------------------ ------------------- ------------------ ------------------ ------------------ ------------------
- - ------ ------------------ ------------------- ------------------ ------------------ ------------------ ------------------
*If appropriate, you may disclaim beneficial ownership of any security listed in this Report.
</TABLE>
<PAGE>
I HEREBY CERTIFY THAT I (1) HAVE READ AND UNDERSTAND THE CODE OF THE
INVESTMENT COMPANY (2) RECOGNIZE THAT I AM SUBJECT TOT HE CODE, (3) HAVE
COMPLIED WITH THE REQUIREMENTS OF THE CODE OVER THE PAST YEAR*, (4) HAVE
DISCLOSED ALL PERSONAL SECURITIES TRANSACTIONS OVER THE PAST YEAR* REQUIRED TO
BE DISCLOSED BY THE CODE, (5) HAVE SOUGHT AND OBTAINED PRECLEARANCE WHENEVER
REQUIRED BY THE CODE AND (6) CERTIFY THAT TO THE BEST OF MY KNOWLEDGE THE
INFORMATION FURNISHED IN THIS REPORT IS TRUE AND CORRECT.
NAME (Print): _________________________________________________________
SIGNATURE: ___________________________________________________________
DATE: _____________________________________________________________
(*) OR PORTION THEREOF DURING WHICH THE CODE HAS BEEN IN EFFECT.
<PAGE>
BT INVESTMENT FUNDS
BT INSTITUTIONAL FUNDS
BT PYRAMID MUTUAL FUNDS
THE LEADERSHIP TRUST
CASH MANAGEMENT PORTFOLIO
TREASURY MONEY PORTFOLIO
TAX FREE MONEY PORTFOLIO
NY TAX FREE MONEY PORTFOLIO
INTERNATIONAL EQUITY PORTFOLIO
UTILITY PORTFOLIO
SHORT/INTERMEDIATE U.S. GOVERNMENT SECURITIES PORTFOLIO
EQUITY 500 INDEX PORTFOLIO
ASSET MANAGEMENT PORTFOLIO
CAPITAL APPRECIATION PORTFOLIO
INTERMEDIATE TAX FREE PORTFOLIO
BT INVESTMENT PORTFOLIO
BT INSURANCE FUNDS TRUST
PERSONAL TRADING REQUEST AND AUTHORIZATION
This Personal Trading Request and Authorization is submitted pursuant
to the Code of Ethics as of [ , 1996] (the "Code") of the above referenced.
Unless the context otherwise requires, all terms used herein shall have the same
meaning as set forth in the Code.
Personal Trading Request (to be completed by Access Person prior to any personal
trade):
Name of Access Person: ___________________________________________________
Date of proposed transaction: ________________________________________________
Name of the issuer and dollar amount or number of securities of the issuer to be
purchased or sold:
- - -----------------------------------------------------------------------------
Nature of the transaction (i.e. purchase, sale)1:
- - -------------------------------------------------------------------------------
Are you or is a member of your immediate family an officer, trustee, or director
of the issuer of the securities
or any affiliate2 of the issuer? |_| Yes |_| No
If yes, please describe:
- - ---------------------------------------------------------------------------
- - ---------------------------------------------------------------------------
1If other than market order, please describe any proposed limits.
2For purposes of this question, "affiliate" includes (I) any entity that
directly or indirectly owns, controls or holds with power to vote 5% or more of
the outstanding voting securities of the issuer and (II) any entity under common
control with the issuer.
<PAGE>
Describe the nature of any direct or indirect professional or business
relationship that you may have with the issuer of the securities.3
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Do you have an material nonpublic information concerning the issuer? |_| Yes |_|
No
Do you beneficially own more than 1/2 of 1% of the outstanding equity securities
of the issuer?
|_| Yes |_| No
If yes, please report the name of the issuer and the total number of
shares "beneficially owned":
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Are you aware of any facts regarding the proposed transaction, including the
existence of any substantial economic relationship between the proposed
transaction and any securities held or to be acquired by the Investment Company,
that may be relevant to a determination as to the existence of a potential
conflict of interest?4 |_| Yes |_| No
If yes, please describe:
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shapeType20fFlipH0fFlipV0shapePath4fFillOK0fFilled0fArrowheadsOK1
- - -----------------------------------------------------------------------------
3 A "professional relationship" includes, for example, the provision of legal
counsel or accounting services. a "business relationship" includes, for example,
the provision of consulting services or insurance coverage.
4Facts that would be responsive to this question would include, for example the
receipt of "special favors" from a stock promoter, including participation in a
private placement or initial public offering as an inducement to purchase other
securities for the Investment Company. Another example would be investment in
securities of a limited partnership that in turn owned warrants of a company
formed for the purpose of effecting a leveraged buy-out in circumstances where
the Investment Company might invest in securities related to a leveraged
buy-out. The foregoing are only examples of pertinent facts and in no way limit
the types of facts that may be responsive to this question.
<PAGE>
To the best of my knowledge and belief, the answers I have provided above are
true and correct.
Dated: ______________________ _______________________________
Signature of Access Person
Approval or Disapproval of Personal Trading Request (to be completed by
Preclearance Officer) prior to personal trade:
___ I confirm that the above-described proposed transaction appears to be
consistent with the policies described in the Code and that the
conditions necessary5 for approval of the proposed transaction have been
satisfied.
___ I do not believe that the above-described proposed transaction appears to
be consistent with the policies described in the Code or that the
conditions necessary for the approval of the proposed transaction have
been satisfied.
Dated: ___________________________ ___________________________________
Signature of Preclearance Officer
- - -----------------------------------------------------------------------------
5In the case of a personal securities transaction by an Access Person of the
Investment Company (other than Disinterested Trustees), the Code requires that
the Preclearance Officer determine that the proposed personal securities
transaction (I) is not potentially harmful to the Investment Company (II) would
be unlikely to affect the market in which the Investment Company's portfolio
securities are traded, and (III) is not related economically to securities to be
purchased, sold, or held by the Investment Company. In addition, the Code
requires that the Preclearance Officer determine that the decision to purchase
or sell the security at issue is not he result of information obtained in the
course of the Access Person's relationship with the Investment Company.
<PAGE>
EXHIBIT A
BT INVESTMENT FUNDS
BT INSTITUTIONAL FUNDS
BT PYRAMID MUTUAL FUNDS
THE LEADERSHIP TRUST
CASH MANAGEMENT PORTFOLIO
TREASURY MONEY PORTFOLIO
TAX FREE MONEY PORTFOLIO
NY TAX FREE MONEY PORTFOLIO
INTERNATIONAL EQUITY PORTFOLIO
UTILITY PORTFOLIO
SHORT/INTERMEDIATE U.S. GOVERNMENT SECURITIES PORTFOLIO
EQUITY 500 INDEX PORTFOLIO
ASSET MANAGEMENT PORTFOLIO
CAPITAL APPRECIATION PORTFOLIO
INTERMEDIATE TAX FREE PORTFOLIO
BT INVESTMENT PORTFOLIO
BT INSURANCE FUNDS TRUST
Exhibit o(2)
Rules for Business Conduct
Issue Date: September 1998
Contents
(c) 1998 Bankers Trust Corporation
Bankers Trust
September 1998
To All Employees:
This is your personal copy of the Rules for Business Conduct, which sets forth
the Firm's code of business ethics. Please read this document carefully and
advise any staff members you may supervise to do so as well.
The Rules describe our commitment to conduct all business of Bankers Trust in
the spirit of fair dealings, consideration for the rights of others, and strict
principles of good corporate citizenship and practices. As employees, we have an
important responsibility to ensure that our own conduct meets the highest
standards of personal and corporate integrity. Only through the continuing
efforts of each of us to adhere to these principles can Bankers Trust's
reputation for high ethical and professional standards be maintained.
These Rules apply to all employees of Bankers Trust and its subsidiaries,
regardless of location. The policies and standards contained in the booklet
protect and guide each of us in making our business decisions, and in our
dealings on behalf of Bankers Trust. Your commitment to comply with the letter
and the spirit of these Rules, and your common sense and good judgment in
recognizing when you may need to seek guidance as to how they should be applied
to situations you encounter, are essential.
Should you ever have any question as to how to interpret or apply the Rules to
any event or circumstance, I encourage you to seek guidance from the Compliance
Department.
Sincerely,
Frank Newman
Chairman and
Chief Executive Officer
Introduction
The Rules for Business Conduct (the Rules) apply worldwide to all employees of
Bankers Trust Corporation and its subsidiaries (referred to herein as "Bankers
Trust" or the "Firm"). These Rules set forth the Firm's global commitment to
conduct all business of Bankers Trust lawfully and in accordance with high
standards of personal and corporate integrity.
Adhering to the Rules for Business Conduct is one of the conditions of
employment with Bankers Trust. Failure to comply may subject you to disciplinary
action, including possible dismissal.
No written rules can anticipate every situation. Common sense and good judgment
in responding to situations that may not seem to be specifically covered by
these Rules, and in recognizing when to seek advice regarding the application of
the Rules, are a must for each employee.
The Rules for Business Conduct incorporate certain requirements of U.S. Federal
and New York state laws and regulations. Where there is a conflict between the
provisions of the Rules for Business Conduct and the requirements of local laws
and regulations of other jurisdictions in which Bankers Trust does business,
those local laws will prevail.
Corporate Conduct
1. Bankers Trust's Reputation
The Firm's reputation for integrity is its most valuable asset, and the conduct
of its employees must protect this asset at all times. Accordingly, Bankers
Trust and its employees obligate themselves to conduct their business on behalf
of Bankers Trust in accordance with high ethical standards, and to avoid
personal conduct which may compromise the Firm's reputation.
2. Ethical Conduct
The Rules for Business Conduct are based on fundamental principles of fairness,
honesty and ethical behavior. All business of Bankers Trust should be conducted
in the spirit of fair dealings, consideration for the rights of others, and
strict principles of good corporate citizenship and practices.
3. Lawful Conduct
Bankers Trust requires compliance with the law in the conduct of its business.
Employees should consult with the Legal Department if they have any questions
regarding the laws of any country or jurisdiction where Bankers Trust does
business.
4. Bankers Trust Policies and Standards
All employees are required to maintain ongoing compliance with all statements of
policies, procedures and standards of Bankers Trust, and with lawful and ethical
business practices, whether or not they are specifically mentioned in the Rules
for Business Conduct.
5. Internal Reporting Obligation
You are required to report any known or suspected violations of the Rules to
your Managing Officer and to the Compliance Department. If for any reason you
believe that the matter cannot be raised through that channel, you should report
it directly to the head of Corporate Compliance in New York.
For purposes of these Rules, your "Managing Officer" is defined to be an officer
of at least the Managing Director level to whom you directly or indirectly
report, who is in charge of the unit or office to which you are assigned. Your
Managing Officer is senior to you and would generally be a Department Head,
Division Head, Function Head, Group Head, General Manager or Company President.
For purposes of these Rules, the "Compliance Department" refers to the Bankers
Trust Compliance Department and the BTAL Compliance Department. The Bankers
Trust Compliance Department is organized generally by U.S. business lines and
regionally for Asia, Europe/Middle East/Africa and Latin America, and is
comprised of the following groups:
o Broker-Dealer Compliance (including Latin America)
o Fiduciary Compliance
o Corporate Compliance
o Europe & Asia Regional Compliance
The BTAL Compliance Department is organized generally by business lines in
Australia and New Zealand.
6. Questions
If you are in doubt as to the specific application of these Rules or about the
propriety of any particular conduct, you must bring the matter to the attention
of your Managing Officer and the Compliance Department prior to taking action.
Rules for Dealing with Potential Conflicts of Interest
1. The Basic Rule
There must be no conflict, or appearance of conflict, between the self-interest
of any employee and the responsibility of that employee to Bankers Trust, its
shareholders or its customers.
2. Personal Benefit
You must never improperly use your position with Bankers Trust for personal or
private gain to you, your family or any other person.
3. Improper Payments or Gifts
You are prohibited from soliciting or accepting any personal payment or gift to
influence, support or reward any service, transaction or business involving
Bankers Trust, or that appears to be made or offered to you in anticipation of
any future service, transaction or business opportunity. A payment or gift
includes any fee, compensation, remuneration or thing of value.
Under the Bank Bribery Act and other applicable laws and regulations, severe
penalties may be imposed on anyone who offers or accepts such improper payments
or gifts. If you receive or are offered an improper payment or gift, or if you
have any questions as to the application or interpretation of Bankers Trust's
rules regarding the acceptance of gifts, you must bring the matter to the
attention of the Compliance Department.
4. Permissible Business Gifts
Subject to the prerequisites of honesty, absolute fulfillment of fiduciary duty
to Bankers Trust, relevant laws and regulations, and reasonable conduct on the
part of the employee, the acceptance of some types of reasonable business gifts
received by employees may be permissible, and the rules are as follows:
o Cash gifts of any amount are prohibited. This includes cash equivalents such
as gift certificates, bonds, securities or other items that may be readily
converted to cash.
o Acceptance of non-cash gifts, souvenirs, tickets for sporting or entertainment
events, and other items with a value less than U.S. $200 or its equivalent is
generally permitted, when it is clear that they are unsolicited, unrelated to a
transaction and the donor is not attempting to influence the employee. In
accordance with regulations and practices in various jurisdictions, as well as
the rules of the New York Stock Exchange (the "NYSE") and the National
Association of Securities Dealers (the "NASD"), employees of certain business
lines may be subject to more stringent gift giving and receiving guidelines. For
example, employees of BT Alex. Brown Incorporated (the U.S. Broker-Dealer) are
generally not permitted to offer or accept gifts with a value greater than U.S.
$100.
Acceptance of gifts, other than cash, given in connection with special occasions
(e.g., promotions, retirements, weddings, holidays), that are of reasonable
value in the circumstances are permissible.
Employees may accept reasonable and conventional business courtesies, such as
joining a customer or vendor in attending sporting events, golf outings or
concerts, provided that such activities involve no more than the customary
amenities.
The cost of working session meals or reasonable related expenses involving the
discussion or review of business matters related to Bankers Trust may be paid by
the customer, vendor or others, provided that such costs would have otherwise
been reimbursable to the employee by Bankers Trust in accordance with the Firm's
travel and entertainment and expense reimbursement policies.
5. Bankers Trust Gifts to Persons Other than Government Officials
In appropriate circumstances, it may be acceptable and customary for Bankers
Trust to extend gifts to customers or others who do business with the Firm. You
should be certain that the gift will not give rise to a conflict of interest, or
appearance of conflict, and that there is no reason to believe that the gift
will violate applicable codes of conduct of the recipient. Employees with
appropriate authority to do so may make business gifts at the Firm's expense,
provided that the following requirements are met:
o Gifts in the form of cash or cash equivalents may not be given regardless of
amount.
o The gift must be of reasonable value in the circumstances, and should not
exceed a value of U.S. $200 (or U.S. $100 if the gift falls under NYSE, NASD or
similar applicable rules) unless the specific prior approval of the appropriate
Managing Officer is obtained.
o The gift must be lawful and in accordance with generally accepted business
practices of the governing jurisdictions.
o The gift must not be given with the intent to influence or reward any person
regarding any business or transaction involving Bankers Trust.
6. Bankers Trust Gifts to Government Officials
You must contact the Compliance Department prior to making any gift to a
governmental employee or official. You should be aware that various government
agencies, legislative bodies and jurisdictions may have rules and regulations
regarding the receipt of gifts by their employees or officials. In some cases,
government employees or officials may be prohibited from accepting any gifts. ()
7. Business Affiliations
As a general rule, a conflict of interest, or the appearance of a conflict,
might arise if your Bankers Trust duties involve any actual or potential
business with a person, entity or organization in which you or your Family
Members have a substantial personal or financial interest. Accordingly, the
following rules apply:
a. You may not act on behalf of Bankers Trust in connection with any business or
potential business involving any person, entity or organization in which you or
your Family Members have direct or indirect (i) managerial influence, such as
serving as an executive officer, director, general partner or similar position
or (ii) substantial ownership or beneficial interest.
b. You must promptly notify your Managing Officer and the Compliance Department
of any business affiliation that you or your Family Members have that might give
rise to a conflict of interest, or the appearance of a conflict, by virtue of
your Bankers Trust duties and position, the nature of the activities of your
business unit and the nature of your outside business affiliation. If, in the
judgment of Bankers Trust, the situation presents a concern, steps will be taken
to resolve it.
c. You must obtain the permission of a member of the Bankers Trust Management
Committee prior to accepting any appointment to serve as an executive officer,
director, general partner or similar position of any person, entity or
organization which is an existing or prospective customer, supplier or
competitor of Bankers Trust.
d. If you are an officer of any Bankers Trust entity, you are required to report
certain information about your business affiliations annually to the Office of
the Secretary. In addition, you must report to the Office of the Secretary,
within 10 days of each occurrence, any situation involving an existing or
prospective customer, supplier or competitor of Bankers Trust in which either
you or your Family Members:
o serve or accept an appointment to serve as an executive officer, director,
general partner or similar position; or o hold or acquire any substantial
ownership or beneficial interest, or have a 10% or greater ownership or
controlling interest.
You must determine whether any of the following definitions apply to your
business affiliation or the situation of the person, entity or organization with
which you are affiliated, and you should raise any questions about their
application to your Managing Officer and the Compliance Department. The
following definitions help you determine how this rule applies to your
particular circumstances:
"Family Members" For purposes of the Rules for Business Conduct, your Family
Members include your spouse, minor children, and any other person who resides in
your household or depends on you or your spouse for financial support.
"Substantial Interest" Whether a particular ownership or beneficial interest is
"substantial" depends on the circumstances, such as the size and nature of the
entity's business and the nature of its relationship to Bankers Trust; your
Bankers Trust duties in relation to that entity; and the size and nature of the
interest in that entity in relation to your compensation and net worth.
"Existing or Prospective Customer, Supplier or Competitor" An existing or
prospective customer or supplier of Bankers Trust includes any person, entity or
organization that (i) has done business with Bankers Trust within the past year,
or (ii) has been in contact with Bankers Trust during the past year regarding
potential business, regardless of whether or not you work in the particular unit
that deals with that customer or supplier. A competitor of Bankers Trust
includes any person, entity or organization that does business in competition
with any unit of Bankers Trust.
8. Borrowing Arrangements
In general, you should borrow only from banks, thrifts, consumer finance
companies, brokerage firms, and other institutions that regularly lend money and
extend credit in the ordinary course of their business (herein called "Financial
or Consumer Lenders"). The following additional rules apply:
o You are not permitted to solicit or accept treatment from any lender which the
lender would not in the ordinary course of business extend to any unrelated
third party.
o You are not permitted to borrow from an existing or prospective customer,
supplier or competitor of Bankers Trust unless it is a Financial or Consumer
Lender, and the credit is extended in the ordinary course of its business and
involves only the usual and customary terms.
o You are required to obtain the written permission of your Managing Officer
prior to borrowing from other than a Consumer and Financial Lender.
o In general, you are permitted to borrow personally from your parents,
grandparents or other close relatives. However, you must still ensure that such
borrowing will not give rise to a conflict of interest regarding Bankers Trust
or your Bankers Trust duties.
If you are a Bankers Trust officer, borrowing arrangements from other than a
Financial or Consumer Lender must be reported to the Office of the Secretary
within 10 days of being incurred.
9. Outside Employment
You may not engage in any employment or activity outside of Bankers Trust that
could reasonably be expected to conflict with the interests of Bankers Trust or
interfere with your Bankers Trust responsibilities. You must obtain the written
permission of your Managing Officer prior to accepting any outside employment,
consultancy or position for which you will receive compensation.
You are permitted to engage on a voluntary basis in lawful charitable, civic,
religious or political organizations, and to receive reimbursement of reasonable
and normal expenses from such an organization. No Managing Officer approval is
required if your volunteer activities do not interfere with your ability to
perform your Bankers Trust duties, and there is no conflict of interest, or
appearance of a conflict, resulting from any relationship between the
organization and Bankers Trust.
10. Personal Fiduciary Arrangements with Customers
You may not directly or indirectly accept any bequest or legacy from a customer,
or accept personal appointment to serve as a customer's executor, administrator,
trustee or guardian, unless that customer is your Family Member (as previously
defined), or is closely related to you (such as your parents or grandparents).
Additionally, you may not personally accept power of attorney or sole signing
authority on behalf of any customer account. Any exception to the foregoing
requires the written approval of a member of the Bankers Trust Management
Committee.
11. Personal Investments
You must always act to avoid any actual or potential conflict of interest
between your Bankers Trust duties and responsibilities, and your personal
investment activities. To avoid potential conflicts, you should not personally
invest in securities issued by companies with which you have significant
dealings on behalf of Bankers Trust, or in investment vehicles sponsored by
them. Additional rules that apply to securities transactions by employees,
including the requirement for employees to pre-clear personal securities
transactions and rules regarding how Employee Related Accounts must be
maintained, are described in the booklet entitled Personal Securities
Transactions by Employees, a supplement to the Firm's policy statement
Confidential Information, Insider Trading and Related Matters. Copies of these
policies can be obtained from the Compliance Department.
Rules for Dealing with Governmental Officials and Political Candidates
1. Corporate Payments or Political Contributions
No corporate payments or gifts of value may be made to any outside party,
including any government official or political candidate or official, for the
purpose of securing or retaining business for the Firm, or influencing any
decision on its behalf.
o Bankers Trust maintains a Political Action Committee, supported by voluntary
contributions from its officers, through which contributions are made to
political parties or candidates. The Political Action Committee is the only
means by which Bankers Trust may lawfully participate in U.S. Federal elections.
o Corporate contributions to political parties or candidates in jurisdictions
not involving U.S. Federal elections are permitted only when such contributions
are made in accordance with applicable local laws and regulations, and the prior
approval of a member of the Bankers Trust Management Committee has been
obtained.
Under the Foreign Corrupt Practices Act, Bank Bribery Law, Elections Law and
other applicable regulations, severe penalties may be imposed on Bankers Trust
and on individuals who violate these laws and regulations. Similar laws and
regulations may also apply in various countries and legal jurisdictions where
Bankers Trust does business.
2. Personal Political Contributions
No personal payments or gifts of value may be made to any outside party,
including any government official or political candidate or official, for the
purpose of securing business for Bankers Trust or influencing any decision on
its behalf. You should always exercise care and good judgment to avoid making
any political contribution that may give rise to a conflict of interest, or the
appearance of conflict. For example, if your business unit engages in business
with a particular governmental entity or official, you should avoid making
personal political contributions to officials or candidates who may appear to be
in a position to influence the award of business to Bankers Trust.
Certain employees, such as those who are engaged in Bankers Trust's municipal
finance and municipal securities activities, are subject to the requirements set
forth in Bankers Trust's policy "Complying with MSRB G-37." In addition,
employees assigned to certain areas of BT Alex. Brown Incorporated are required
to obtain approval of the Compliance Department prior to making or soliciting
political contributions. Contact your supervisor or the Compliance Department to
obtain a copy of this policy or if you have any questions regarding political
contributions.
3. Entertainment of Government Officials
Entertainment and other acts of hospitality toward government or political
officials should never compromise or appear to compromise the integrity or
reputation of the official or Bankers Trust. When hospitality is extended, it
should be with the expectation that it will become a matter of public knowledge.
Rules for Dealing with Information
1. Insider Trading
Purchasing or selling securities, futures, loans or other financial instruments
while in possession of material nonpublic information about or affecting them,
or improperly disclosing such nonpublic information directly or indirectly to
others, is prohibited. This prohibition applies to personal transactions as well
as transactions effected in the course of your employment, and to all material
nonpublic information, regardless of whether you obtained it as a result of your
employment with Bankers Trust. If you are uncertain whether information in your
possession is material or nonpublic, you must consult the Compliance Department
before making a purchase or sale to which it is relevant. Violation of
applicable insider trading laws and regulations could subject you to substantial
personal civil or criminal penalties.
2. Confidential Information
Improper disclosure or misuse of confidential information, such as information
related to specific transactions, Bankers Trust, its customers or others, is
prohibited. You are required to treat confidential information in a responsible
and proper manner, and in accordance with the policies and procedures of Bankers
Trust.
You must read and comply with Bankers Trust's policies and procedures regarding
the protection and use of confidential information, as set forth in the policy
statement "Confidential Information, Insider Trading and Related Matters." You
should contact the Compliance Department if you need a copy of this policy.
3. Proprietary Information
Bankers Trust's trade secrets and know-how, financial information concerning
Bankers Trust, its customers, and its employees, and specifications, programs,
materials and documentation relating to all financial models and products,
computer and telecommunications systems, software, hardware and applications
developed or used by Bankers Trust are confidential and proprietary to Bankers
Trust. You are prohibited from using or divulging such information except as
permitted or required in connection with your work on behalf of Bankers Trust,
and you may not use it for your personal or private benefit, or for the benefit
of any other person or entity, during or after your employment with Bankers
Trust.
4. Proprietary Products and Transactions
Transactions and business opportunities developed by other employees or by you
in connection with your work activities on behalf of Bankers Trust belong to
Bankers Trust, and may not be used for your personal or private benefit, or for
the benefit of any other person or entity, during or after your employment with
Bankers Trust.
5. Information Technology
The unauthorized duplication of software developed internally or obtained from
outside suppliers is prohibited, regardless of whether such unauthorized
duplication is for business or personal use. Additionally, you must adhere to
the Firm's standards and policies regarding the use of its technology and
computer equipment. Copies of Bankers Trust's "End-User Technology Policy" can
be obtained from the Technology Strategic Planning Department or from your local
or regional Human Resources Officer.
6. Privacy of Electronic and Other Information
If you use Bankers Trust equipment, systems or electronic mail to prepare, store
or transmit information of a personal or private nature, you waive your right to
privacy regarding such information. Under certain circumstances, Bankers Trust
audit, compliance, security and other investigatory personnel may be permitted
to access all information on such equipment.
7. Financial and Accounting Information
Accounting and other records must accurately, completely and properly describe
the transactions they record. All transactions, contracts, assets, liabilities,
revenues and expenses of Bankers Trust must be recorded in its regular books of
account and records, and all commitments, assets held in custody for clients and
other "off-balance sheet" items must be completely, accurately and properly
reported. No secret or unrecorded transaction, contract, fund or asset may be
created or maintained for any purpose. False, fictitious or misleading entries
regarding any transaction or account are prohibited.
8. Regulatory and Other Reporting
Bankers Trust will disclose, on a timely basis, information required to evaluate
the fairness of its financial presentation, soundness of its financial condition
and the propriety of its operations. All such reports, whether they are required
in connection with specific regulations or otherwise, must be fair, complete and
accurate. Concealment, alteration or withholding of information from authorized
auditors or regulatory agencies is prohibited.
9. Information and Accounting Controls
Employees having control or input regarding Bankers Trust assets or transactions
are required to handle them with the strictest integrity, and ensure that such
transactions and the acquisition or disposal of assets are in accordance with
management's general or specific authorization. Adherence to prescribed
accounting and control policies and procedures is required at all times.
10. Governmental or Regulatory Inquiries
Governmental agencies and regulatory organizations may from time to time conduct
surveys or make inquiries that request information about Bankers Trust, its
customers or others that would generally be considered to be confidential or
proprietary. If you receive such a request that is outside the normal course of
your business unit's activities, you should notify your Managing Officer and the
Compliance Department before you respond.
11. Responding to Media Inquiries and Requests for Speeches
All requests for speeches, interviews or comments for use in broadcasts,
newspapers, magazines or other media should be referred to, or cleared by,
Corporate Affairs (in the U.S. and Australia), the designated Communications
Officer (in London), Marketing Services (in Asia) or the head of your Bankers
Trust office (for all other international locations). When practical, these
departments should be furnished with, given an opportunity to comment on, the
text or outline of the statement or speech and responses to any likely
questions.
Rules for Dealing with Customers, Suppliers and the Public
1. The Basic Rule
Bankers Trust will compete for business only on the basis of quality, price of
product and service to its customers. All dealings with existing and prospective
customers of Bankers Trust, and with others, must be handled with honesty,
integrity and high ethical standards, and must adhere to the letter and the
spirit of applicable laws and regulations.
2. New Business Activities
The types of products and services offered and sold to customers must be
permissible under applicable regulations, and must meet the Firm's standards
regarding product disclosure, approval and other matters. New products and
business initiatives require special approval before they can initially be sold
to customers as described in Bankers Trust's New Business Activity Policy ,
copies of which can be obtain from the Compliance Department.
3. New Client Approval
Certain information must be reviewed and approved by management prior to
establishing a business relationship with a new customer. Bankers Trust's
policy, New Client Approval, can be obtained from the Compliance Department.
4. "Know Your Customer"
If you have responsibilities for managing customer relationships, you should
ensure that appropriate "know your customer" procedures are properly applied
throughout the duration of Bankers Trust's relationship with the customer. Such
procedures should be sufficient to provide reasonable assurance that the
customer is not using Bankers Trust for the furtherance of illegal or improper
activities as described further in the Firm's policy statement Prevention and
Detection of Money Laundering and Reporting of Criminal and Suspicious Activity.
5. Communication with Customers and the Public
Communication with customers and others must be fair, balanced and honest.
Misleading, exaggerated or false claims about Bankers Trust's products, services
or their characteristics should never be made to customers or others.
6. Pricing and Terms
Product pricing and related terms and conditions of products and services must
comply with applicable laws and regulations, and must be consistent with Bankers
Trust standards of fairness and integrity.
7. Customer Complaints
Customer complaints, disputes or dissatisfaction with the products or services
of Bankers Trust must be addressed fairly and promptly. Customer complaints of a
severe or unusual nature that may affect the overall reputation of Bankers Trust
should be immediately brought to the attention of your Managing Officer and the
Compliance Department.
8. Improper Customer Conduct
Knowingly aiding or assisting any customer or other person in the violation of
laws and regulations that apply to such customer or other person is prohibited.
9. Special Regulatory Matters Involving Customers
Bankers Trust may, from time to time, receive notification that a customer is
under investigation by regulatory or law enforcement authorities, describing
certain information, account blockages or other actions that may be required.
You should not inform the customer of such regulatory action, or of any response
submitted by Bankers Trust, without the prior specific permission of the Legal
Department or the Compliance Department.
10. Anti-Competitive Conduct
All business of Bankers Trust must be conducted in fair and open competition.
Under no circumstances should an employee discuss or commit the Firm to any
arrangement with competitors affecting pricing or marketing policies. Violation
of anti-trust laws and regulations (referred to in some jurisdictions as
competition laws) could subject you and the Firm to substantial civil and
criminal penalties.
11. Tying Arrangements
Anti-trust and competition laws and regulations of many jurisdictions may
prohibit or restrict anti-competitive conduct, including certain forms of tying
arrangements. Bankers Trust is also subject to additional anti-tying
restrictions as set forth in the Bank Holding Company Act and Regulation Y, as
interpreted by the Federal Reserve Board (the "Federal Reserve tying rules").
Recently, the Federal Reserve modified these rules to eliminate certain types of
tying restrictions while continuing to prohibit others. Since the laws and
regulations that apply to tying arrangements are complex, you should seek
guidance from the Compliance Department or Legal Department if you are unsure as
to whether a proposed tying arrangement is permissible.
Bank tying arrangements are generally those in which the extension of credit,
the provision of a service or the related pricing is varied or conditioned upon
the customer obtaining additional products or services from Bankers Trust. Tying
could involve linking products and services to be provided by the same or
another Bankers Trust entity.
As a general matter, the Federal Reserve tying rules are more restrictive when
Bankers Trust Company ("BTCo") or another affiliated bank is involved in the
proposed tying arrangement. The Federal Reserve tying rules no longer apply if
BTCo or another affiliated bank is not involved in the tying arrangement.
Restricting Availability or Varying the Pricing of Bank Products
A bank is prohibited under the Federal Reserve tying rules from conditioning the
availability of a loan or other product or service, or vary the pricing thereof,
on the condition that a customer obtains an additional product or service
offered by the bank or another affiliate unless the additional product or
service is a "traditional" bank product, such as a loan, deposit or trust
service.
For example, it would be permissible under the Federal Reserve tying rules for
the bank to condition its loan on the requirement that the customer must
maintain a deposit account with the bank or another affiliate. However, it would
not be permissible for the bank to condition the availability or vary the
pricing of its loan on the requirement that the customer chooses an affiliate as
an underwriter of the customer's securities.
Safe Harbors
If BTCo or another affiliated bank is not involved in providing or varying the
pricing of the product or services, or in restricting the customer's ability to
use a competitor's product or service, then the Federal Reserve tying rules do
not apply.
For example, it would be permissible under the Federal Reserve tying rules for a
nonbank affiliate to tie a merger and acquisition advisory service to the
customer's appointment of that affiliate (or another nonbank affiliate) as the
underwriter of the customer's securities.
Subject to compliance with applicable local laws and regulations, a safe harbor
under the Federal Reserve tying rules also exists for "foreign" transactions,
that is, where the customer is an entity organized and having its principal
place of business outside of the U.S. or, if the customer is a natural person,
he or she is a citizen of a foreign country other than the U.S. In such
instances, the Federal Reserve tying rules would not apply even if the tying
arrangement involves BTCo or another affiliated bank.
As stated earlier, the requirements of the Federal Reserve tying rules and
applicable local laws and regulations can be complex. If a tying arrangement is
contemplated, you should contact the Compliance Department or Legal Department
if you have questions.
12. Purchases and Commitments
Purchases and commitments on behalf of Bankers Trust must be made, and contracts
awarded and orders given, solely on a sound commercial basis in consideration of
quality, price and service, and may only be made by Bankers Trust personnel who
have been given express authority to do so.
Rules for Dealing with Other Employees
1. The Basic Rule
All dealings with other employees should be consistent with the Firm's
commitment to honesty, integrity and ethical behavior.
2. Cooperation
Every employee should cooperate fully with Bankers Trust internal and
independent auditors, attorneys, compliance and security personnel, and other
authorized parties acting on behalf of the Firm, and you should never withhold
information from them.
3. Awareness
Employees should obtain sufficient knowledge about the laws, regulations and
policies that apply to their particular Bankers Trust duties to enable them to
avoid possible violations, or recognize when they need to seek guidance from
their supervisor or others to avoid possible violations.
4. Supervision
The Firm's business activities must be subject to appropriate supervision by
Bankers Trust supervisory personnel.
You are a supervisor if your Bankers Trust duties involve managing or directing
the work of others. As a supervisor, you have a responsibility to ensure that
the Bankers Trust activities of the employees you supervise are properly
directed toward achieving the general and specific objectives of Bankers Trust,
in accordance with applicable policies and procedures. The supervisor is
accountable for the Bankers Trust activities performed under his or her
direction.
5. Due Care in Delegation
The supervisor should delegate responsibilities to other employees only if
satisfied that such other employees possess the necessary skills and experience
to properly fulfill the responsibilities assigned.
6. Instruction and Training
The supervisor should provide adequate training and instruction regarding the
objectives of the responsibilities delegated, and the manner in which they are
to be carried out in accordance with Bankers Trust policies.
7. Review and Monitoring
The supervisor should understand how the employees are performing the
responsibilities delegated to them. This monitoring should be sufficient in the
particular circumstances to reasonably ensure that the supervisor will promptly
identify errors or improper work-related activities.
8. Correction and Follow-Up
The supervisor should take prompt corrective action if errors or improper
conduct are identified. Depending on the severity and nature of the errors or
improper conduct, the supervisor is responsible for reporting such matters to
his or her Managing Officer and the Compliance Department.
9. Preferential Treatment
No employee should give or receive any preferred conditions of employment
because of family or personal relationships. Personnel decisions must be based
on sound management practices and not on personal concerns.
10. Unlawful Conduct
The Firm's policy prohibits employees from engaging in unlawful conduct that may
represent a threat to Bankers Trust or to the safety of any other employee or
agent of Bankers Trust. Any employee convicted of a serious crime, including but
not limited to the sale, possession or use of illegal drugs or substances, will
be subject to disciplinary action, including possible dismissal.
11. Human Resources Policies
Additional policies setting forth the Firm's standards regarding personnel
matters, such as equal opportunity and affirmative action, performance
evaluation and counseling, compensation and benefit programs, and other matters
related to employment with Bankers Trust, are issued by the Human Resources
Department. These Human Resources policies meet legal and regulatory
requirements of various jurisdictions in which Bankers Trust does business, and
you are required to comply with the letter and the spirit of these policies.
Copies of applicable policies can be obtained from the Human Resources
Department or your local or regional Human Resources Officer.
12. Off-Premise Requirement for Employees in Sensitive Positions
Employees in "sensitive positions" (as determined and notified by the employee's
manager) are required to be off-premises for a period of at least two
consecutive weeks each year. The off-premises period may be satisfied by using
available vacation, or through a combination of vacation, holiday, medical
leave, jury duty or other authorized absences.
Sensitive positions generally include those in which the employee has authority
and access to make entries to the books and records of the Firm, effect wire
transfers or move funds, or enter into specific transactions such as extending
credit or trading securities on behalf of the Firm.
During the required off-premises period, such employees are prohibited from
directing activity, entering transactions or changing the Firm's records in any
manner, whether through an off-site computer link, written instruction of any
kind, or by telephone or other sort of communication. Only communications of a
general business nature are permitted during the off-premises period.
Regional management and individual business units may also require employees in
non-sensitive positions to be off-premises for a period of at least two
consecutive weeks each year. Additional information about Bankers Trust's
"Vacation & Off-Premises Policy" can be obtained from the Compliance Department.
Rules for Dealing with Certain Legal, Judicial or Regulatory Matters;
Reports of Violations
1. General Matters
You must promptly inform your Managing Officer of matters about which you become
aware which might adversely affect the reputation of Bankers Trust or be a
threat to its assets.
2. Violations of Bankers Trust Policies
You must promptly report to your Managing Officer and the Compliance Department
every known or suspected violation of Bankers Trust's policies, including the
Rules for Business Conduct, regardless of whether such violation involves you or
another employee.
3. Fraudulent Activity
You must promptly report to the Compliance Department or Investigative Services
every known or suspected work-related event of questionable, fraudulent or
dishonest nature of which you become aware, whether such activity involves
employees or outsiders.
4. Arrests, Indictments and Convictions
You must promptly notify your Managing Officer and the Compliance Department if
you are arrested, indicted or convicted of any crime or violation of applicable
law, other than those involving minor traffic infractions.
5. Employee Involvement in Regulatory and Other Formal Proceedings
You are required to promptly report, to your Managing Officer and the Compliance
Department, your involvement in certain governmental proceedings (such as
judicial, legislative or administrative proceedings) or regulatory hearings.
Your involvement is reportable regardless of whether it involves your testimony
as a witness, an actual or prospective party or target, or otherwise, and such
involvement:
o calls into question in any way your character, integrity or honesty; or
o concerns Bankers Trust or another Bankers Trust employee, customer or
supplier; or
o concerns you, and has received or is likely to receive publicity.
6. Lobbying, Public Testimony and Related Matters
Regarding matters which may affect the business, reputation or standing of
Bankers Trust, you may not appear as a witness, give testimony or sign a
statement advocating a position at the request of outside parties, except as
required by law, and you may not lobby before any government, legislative,
judicial or administrative body without the specific prior approval of your
Managing Officer and the Government Relations Department.
7. Managing Officer Reporting
Each Managing Officer who receives a report or becomes aware of conduct,
behavior or other circumstance that is questionable or prohibited by the Rules
for Business Conduct must ensure that such matter is brought to the attention of
the Compliance Department.
Other Matters
1. Ongoing Compliance
Your adherence to the Rules for Business Conduct, and to all lawful policies and
procedures of Bankers Trust, is required of you. Failure to comply with them may
subject you to disciplinary action, including possible dismissal.
2. Resignation and Termination
None of the policies contained or referred to in these Rules constitutes or
grants a legal right of any nature to any employee of Bankers Trust, nor do any
of them confer any right or privilege upon any employee or on any particular
group of employees. The Rules do not constitute an employment contract. Subject
to relevant local law and the terms of any applicable individual written
employment contract, employment with Bankers Trust is "at will" and you have the
right to resign at any time. Conversely, Bankers Trust has the right to
terminate the employment of any employee at any time in its sole discretion, for
any lawful reason.
3. Modifications to or Waivers of the Rules
Modifications to or waivers of the Rules may be made only by a member of the
Bankers Trust Management Committee.
4. Confirming Your Compliance with the Rules
Annually, employees of Bankers Trust are required to sign a statement
acknowledging that they have received the Rules for Business Conduct and
confirming their adherence to Bankers Trust's policies.
5. If You Have Questions
All questions regarding the Rules, the propriety of an action not covered by the
Rules, or other compliance-related matters should be referred to the Compliance
Department.
NOTE: An Employee's failure to report matters required to be reported under the
Rules for Business conduct is itself a violation of these Rules and represents
an independent ground for disciplinary action, up to and including discharge.
Confidential Information, Insider Trading
and Related Matters
Issue Date: September 1998
Contents
(c) 1998 Bankers Trust Corporation
Bankers Trust
September 1998
To All Employees:
This is your personal copy of Bankers Trust's Employee Compliance Guide,
Confidential Information, Insider Trading and Related Matters. These policies
and procedures are designed to protect the Firm against inadvertent leaks of
sensitive data and possible violations of various securities laws, as well as to
protect the reputation of the Firm and its employees. They are extremely
important.
The policies and procedures described in this booklet are comprehensive and are
supported by three basic guiding principles:
1. Information that you receive as a Bankers Trust employee is confidential and
intended to be used solely for the business purposes of the Firm or its clients.
You must safeguard confidential information at all times.
2. If you possess material nonpublic information about or affecting securities
or their issuer, you may not buy or sell such securities regardless of the
source of the information.
3. Whenever potential conflicts of interest arise, you should place our
fiduciary duty to clients ahead of Bankers Trust's immediate interests, and you
should place the interests of Bankers Trust ahead of your personal financial
interests.
Thank you for your attention to both the letter and spirit of these standards of
professional conduct. Should you ever have a question on how to apply these
policies to some event or circumstance, I encourage you to seek the guidance of
the Compliance Department.
Sincerely,
Frank Newman
Chairman and
Chief Executive Officer
Introduction
This policy statement, Confidential Information, Insider Trading and Related
Matters, applies worldwide to all employees of Bankers Trust Corporation and its
subsidiaries (referred to herein as "Bankers Trust" or the "Firm"). For legal
and business reasons, it is essential that our clients, prospective customers
and others are confident that they can rely on our integrity and discretion to
protect and properly use the confidential information they entrust to us.
Adhering to the policies and standards of conduct described in this booklet is a
condition of your employment with Bankers Trust. Failure to comply with them may
subject you to disciplinary action, including possible dismissal and civil or
criminal penalties. Also, if you become aware of an apparent violation of these
policies and procedures by another employee, you must report the relevant facts
to the Compliance Department.
No written policy can anticipate every situation. Use common sense and good
judgment when responding to situations that may not be specifically covered by
these standards, and recognize when to seek advice regarding their application.
Protecting Confidential Information
1. The Basic Policy
Improper disclosure or misuse of confidential information is prohibited. You are
required to treat confidential information in a responsible and proper manner,
and in accordance with the policies and procedures of Bankers Trust.
2. Nature of Confidential Information
Confidential information refers to business matters not generally known or made
available to the public. You should generally presume that all business
information acquired in connection with your responsibilities at Bankers Trust
regarding the Firm, its clients and business transactions is confidential unless
the contrary is clearly evident. This includes proprietary information, products
and transactions developed or used by Bankers Trust as explained further in the
Firm's Rules for Business Conduct.
Examples of Confidential Information
o a client's planned acquisition target or restructuring plan; o forthcoming
investment research recommendations; o information about a client's accounts or
borrowings; o proprietary or fiduciary trading positions and strategies; o
customer, supplier, creditor and investor lists; and o unannounced information
about Bankers Trust's earnings or transactions.
3. Safeguarding Documents and Files
When handling confidential information contained in written documents, computer
files or other modes of communication and storage, you have a personal
responsibility to protect it. Also, each department should develop appropriate
policies and procedures to properly protect confidential information within its
control.
Recommended Practices to Safeguard
Confidential Documents and Files
o mark confidential documents as CONFIDENTIAL;
o prevent unrestricted copying of confidential documents and keep track of
copies made; o shred confidential documents that are no longer needed; o protect
documents and files by using locked cabinets and limiting computer access; o use
caution when carrying confidential documents and files in public areas; o keep
desks and conference rooms clear; o when appropriate, use code names to protect
the identities of participants in a transaction; and o restrict access by
visitors (including Bankers Trust personnel from other departments) in areas
where they can observe or overhear confidential information.
4. Securing Communications
Avoid discussing confidential information in public areas such as elevators,
hallways, taxicabs, airplanes or restaurants where others may be listening. Be
careful when using speakerphones, cellular phones, e-mail, the Internet and
similar methods of communication because conversations and messages can be
overheard or intercepted. Also, don't share information over the telephone until
you have identified the caller. When asked informally by friends or at social
gatherings about confidential matters concerning Bankers Trust, its clients or
others, as a general rule you should decline to comment.
Those "in the know" can protect the Firm, family and friends - and themselves -
by keeping workplace information at the workplace.
5. Temporary Staff and Outside Services
If consultants or temporary staff are utilized in your department, exercise care
to ensure they do not gain unauthorized access to or mishandle confidential
information. Also recognize that certain functions or areas within Bankers Trust
may be too sensitive to entrust to temporary workers or outside service
organizations. When deemed appropriate by business line management or when
required by local regulations, outside personnel should sign a confidentiality
agreement (as approved by the Legal Department) to confirm their awareness and
understanding of the requirement to protect confidential information and not
misuse it.
6. Client Confidentiality Agreements
A confidentiality agreement with a client or a prospective customer may impose
additional obligations on the Firm with respect to protecting confidential
information. Business line management should establish appropriate internal
procedures and provide instructions to employees to ensure compliance with its
terms.
When initially drafted, some confidentiality agreements can be overly broad in
scope and could impair our ability to pursue other business opportunities during
or after the term of the agreement. Therefore, the Legal Department should
review confidentiality agreements prior to being signed by a duly authorized
department manager or their designee.
7. Inquiries from Outside Parties
Unless specifically consented to by the customer, we generally do not disclose
any confidential information about our customer's dealings with us to any
outside party. An exception to this general rule occurs when regulators and
other proper legal authorities or process require that we disclose specific
information. Before releasing information or taking any action, you should
immediately report the matter to your supervisor and seek the advice of either
the Compliance Department or the Legal Department.
Other financial institutions may ask that we respond to credit inquiries
concerning our dealings with existing or former customers. To avoid potential
liability, such responses should be limited to a very narrow statement of
objective factual matters known to us directly and should never express an
opinion as to the client's creditworthiness or integrity. Also, no response to a
credit inquiry should be made without first obtaining the approval of a
departmental credit officer or an officer in the Credit Policy Department.
8. Customer Inquiries Regarding Investment Advice
When appropriate in responding to a customer inquiry regarding investment
advice, departments engaged in investment research, investment management or
investment advisory functions should make sure that their customers understand
that we maintain a Chinese Wall and that Bankers Trust personnel who make
investment decisions or recommendations cannot gain access to, nor benefit from,
any confidential information obtained by the Private Functions of the Firm (see
page 11).
9. Public Statements and Shareholder Communications
When Bankers Trust information is released to the public, it must be accurate
and disclosed in a proper way. Since a public statement made by a Bankers Trust
employee - even a statement that does not release any confidential information -
could embarrass the Firm or subject it to liability, all contacts with
shareholders and security analysts should be cleared in advance with Corporate
Affairs in New York.
All requests for speeches, interviews or comments for use in broadcasts,
newspapers, magazines or other media should be referred to, or cleared by,
Corporate Affairs (in the U.S. and Australia), the designated Communications
Officer (in London), Marketing Services (in Asia) or the head of your Bankers
Trust office (for all other international locations). When practical, these
departments should be furnished with, and given an opportunity to comment on,
the text or outline of the statement or speech and responses to any likely
questions.
Insider Trading and Conflict of Interest
1. The Basic Policy
Trading securities or other financial instruments for the accounts of Bankers
Trust, its clients or for personal interests while you are in possession of
material nonpublic information about or affecting them (regardless of how it was
obtained) is prohibited. You are also prohibited from disclosing material
nonpublic information to third parties except in accordance with the policies
and procedures described in this booklet or where disclosure is required by law.
Avoid situations that may appear to be a conflict of interest, let alone any
actual conflict, in both business and personal securities transactions.
Under various securities laws, violations might occur if you trade securities
(or their derivatives such as options) while in possession of material nonpublic
information about them, or disclose such information to third parties who, in
turn, trade those securities or derivatives. The securities laws of various
jurisdictions provide a broad range of remedies to protect and maintain the
integrity of the securities markets. Violation of applicable insider trading
laws and regulations could subject you to substantial civil or criminal
penalties.
2. Nature of Material Nonpublic Information
Material nonpublic information (also known as price sensitive information in
some jurisdictions) refers to confidential information about or affecting a
particular issuer or its securities that is not generally known to the investing
public and a reasonable investor would likely consider important when making an
investment decision. While no single rule can define whether a particular item
is in fact material, information that, if known to the public, would likely
affect the price of a publicly traded security (or would likely influence
decisions to buy, sell or hold a security) has a high probability of being
material.
Examples of Nonpublic Information
About Issuers Likely to be Material
o knowledge of unannounced tender offers; o plans to issue or redeem securities;
o new products or major contracts; o liquidity problems or covenant defaults; o
significant management developments; o estimates about revenues and earnings;
and o significant mergers, acquisitions or divestitures.
3. Insider Trading
"Insiders" are persons who owe a fiduciary duty to a company's stockholders and
typically include a company's officers, directors and employees. Insiders also
may include a company's outside advisors, bankers, lawyers, underwriters and
printers when they receive material nonpublic information about the company for
a specific purpose.
As a Bankers Trust employee, you should generally assume that any nonpublic
information coming into your possession is material and you may not trade in or
recommend any related securities while in possession of that information. Also,
you may not disclose such information to others (a practice generally referred
to as "tipping") since such conduct may be unethical and illegal. In fact,
indirect receipt of nonpublic information may subject you to these rules if you
knew, or should have known, that the information originated from the company or
from someone who had a duty not to disclose it.
The securities laws governing insider trading are complex and evolving. You
should consult the Compliance Department if uncertain whether the information
you possess is material or nonpublic before making a purchase, sale or
recommendation to which it relates.
4. "Frontrunning"
You are prohibited from buying or selling securities for the account of Bankers
Trust, as well as for your own account, on the basis of your knowledge about our
clients' trading positions, plans or strategies, or our own forthcoming research
recommendations.
5. Dealing With Rumors
Various securities laws prohibit the circulation of rumors where the underlying
intent is to manipulate the price of publicly traded securities. As a general
rule, you should refrain from conveying rumors to others. If you have reason to
believe that a particular rumor is being circulated to influence the market, you
should report the matter to the Compliance Department.
Securities trading on the basis of unsubstantiated rumors may subject you or the
Firm to regulatory scrutiny and possible civil or other penalties. Keep in mind
that recommendations and other statements to clients must have a reasonable
basis in fact. Contact your supervisor if uncertain how to handle a particular
rumor.
6. Unintentional Receipt of Confidential Information
Sometimes, confidential information is inadvertently or improperly communicated
to a person who should not have access to that information. To help avoid this
situation, you should clearly describe your position at the Firm when calling on
clients, prospects and in general discussions with others.
Contact the Compliance Department immediately if you inadvertently or improperly
receive nonpublic information that may be material to determine what action, if
any, is appropriate in the circumstances.
7. Personal Securities Trading by Employees
You must always avoid any actual or potential conflicts of interest between your
Bankers Trust duties and responsibilities, and your personal investment
activities. Restrictions that pertain to personal securities transactions by
employees, including opening and maintaining Employee Related Accounts (as
defined) and the requirement to pre-clear personal securities transactions, are
described in a separate booklet that supplements this policy statement entitled
Personal Securities Transactions by Employees.
Sharing Information Within Bankers Trust - The "Chinese Wall"
1. The Basic Policy
Absent appropriate consent, confidential and material nonpublic information,
whether relating to Bankers Trust, its clients or others, should not be
disclosed to anyone other than relevant Bankers Trust personnel, the Firm's
outside lawyers, advisors and accountants, and where appropriate concerning a
transaction, the participants in the transaction. You are permitted to share
confidential information within Bankers Trust only when the communication
observes our Chinese Wall policies and procedures, it complies with our duty of
confidentiality owed to clients and the recipient of the information:
o has a legitimate need to know the information in connection with his or her
Bankers Trust duties;
o has no responsibilities, whether to Bankers Trust, its clients or others, that
are likely to give rise to conflict of interest or a misuse of the information;
and
o understands that the information is confidential, as well as the limitations
on further distribution of the information.
This policy is extremely important. You must exercise caution before sharing
confidential information and, when appropriate, verify the identity of the
recipient and ascertain that he or she has a legitimate need for the information
and has no conflicting duties.
2. The "Chinese Wall"
Because Bankers Trust is a multi-faceted financial institution, some areas of
the Firm may have material nonpublic information about a particular company
while other areas of the Firm may wish to buy, sell or recommend that company's
securities. The controls provided by our "Chinese Wall" policies and procedures
allow us to engage in these diverse activities without violating the law or
breaching our fiduciary responsibilities.
The Chinese Wall separates the "Private" areas of the Firm ("Potential Insider
Functions") that are likely to come into possession of material nonpublic
information in the ordinary course of business from the "Public" areas of the
Firm ("Trading and Advising Functions") that trade securities or other
instruments for our own account or for the accounts of others, or that render
investment advice. Generally, material nonpublic information obtained by anyone
who works in the Potential Insider Functions should not be communicated to
anyone outside those functions, and particularly must not be communicated to
anyone in the Firm's Trading or Advising Functions.
Private Functions
Public Functions
Examples include:
o mergers, acquisitions and corporate advisory;
o commercial lending and credit;
o corporate finance; and
o corporate trust.
Examples include:
o trading, sales and funding;
o brokerage;
o investment management; and
o investment research.
Employees assigned to certain infrastructure and control groups, such as
Operations and Product Controllers, may obtain confidential information while
conducting their normal activities. In addition, members of senior management
and the Compliance, Legal, Audit and Credit departments are generally considered
"above the Chinese Wall" and therefore have ready access to confidential
information. If you are a member of one of these groups or a similar function
within the Firm, be careful to avoid any improper disclosure of confidential
information, particularly with respect to personnel on the "Public" side of the
Chinese Wall.
3. Crossing the Chinese Wall
In limited situations, communicating material nonpublic information to a person
involved in a Trading or Advising Function may be necessary to achieve a
legitimate business purpose. For example, an investment research analyst's
expertise in a particular industry may be necessary concerning a proposed
corporate finance transaction.
Unless the Compliance Department has expressly approved a particular
department's procedures for conducting Chinese Wall crossings, any communication
of material nonpublic information from the "Private" side of the Chinese Wall to
an employee on the "Public" side of the Chinese Wall must be handled through the
Compliance Department. Further, for departments that do not have approved
procedures, the Compliance Department must be notified regarding the proposed
communication prior to initiating any contact with the employee.
You should contact the Compliance Department if uncertain whether a proposed
communication of material nonpublic information is permissible. Also, the
Compliance Department should be notified immediately if you believe such
information may have been improperly communicated either within Bankers Trust or
elsewhere.
4. Avoid Unintended "Backflow" of Information
In principle, the Chinese Wall need not inhibit the flow of information from the
"Public" side to the "Private" side of the Wall. Communication of this type,
however, may cause an unintended "backflow" of confidential information. For
example, a request for public information on a particular company by a mergers
and acquisitions specialist (Private Function) to an investment research analyst
(Public Function) may provide the research analyst a hint as to a possible
material development.
All unnecessary business communications (in either direction) between the
Private Functions and Public Functions should be avoided and care must be
exercised whenever an employee engaged in a Private Function deems it necessary
to obtain information from an employee in a Public Function. Questions in this
regard should be directed to the Compliance Department.
5. Additional Walls
Beyond the Chinese Wall described above, we often establish other walls - some
temporary and some permanent - to insulate confidential information held within
certain business lines from other personnel who should not have access to that
information.
Examples of Additional Walls
o While our research functions that publish investment recommendations for
distribution to the public are generally considered to be on the "Public" side
of the Chinese Wall, information such as an analyst's plan to significantly
change an existing recommendation regarding particular securities is
confidential and should generally not be disclosed to personnel in the Firm's
trading and sales functions (unless prior approval has been obtained from the
Compliance Department) until such research is released to customers.
o Investment management personnel who become aware of a significant client
investment plan that will likely affect market prices should not reveal the plan
to personnel who handle Bankers Trust's proprietary trading and investing.
o In the lending areas of the Firm, information relating to a proposed loan to
one company should be insulated from personnel working on a proposed loan to
another company if the two companies are competing to acquire the same target
company.
The Restricted List and the Gray List
1. What Are the Restricted and Gray Lists?
For legal, regulatory and business reasons, the Compliance Department maintains
a Restricted List and a Gray List of securities. Securities may be placed on
these lists when certain conditions are met, such as when a business area within
Bankers Trust:
o possesses material nonpublic information about or affecting the securities or
their issuer;
o is involved in a securities offering or significant transaction affecting the
securities or their issuer; or
o may be issuing to the public a significant change in the Firm's investment
recommendation regarding certain securities or issuers.
The Restricted List is comprised of securities in which the normal trading or
recommending activity of the Firm and its employees is prohibited or subject to
specified restrictions as described in the List. While the Restricted List is
distributed quite extensively within Bankers Trust, its composition is generally
considered confidential and should not be shared with others outside of the
Firm. In response to any inquiry, you should reply simply that we are not able
to take a position or make a recommendation regarding the particular security at
this time.
The Gray List is a highly confidential list maintained by the Compliance
Department to check the integrity of the Chinese Wall, and to prevent or address
potential conflicts of interest concerning trading decisions and investment
recommendations. Securities may be placed on the Gray List when the Firm is
involved in an unannounced material transaction, or for other confidential
monitoring purposes.
2. Updates and Distribution of the Lists
The Compliance Department determines when securities should be added to or
removed from both the Restricted List and Gray List and distributes the
Restricted List to appropriate personnel within the Firm. Business line
management of the various Private Functions is responsible for informing and
updating the Compliance Department concerning details of the Firm's involvement
in certain confidential transactions.
Certain business units that are routinely involved in the Firm's investment
banking and advisory businesses follow specific procedures for providing deal
information to the Compliance Department. If you are assigned to a department
that does not have such procedures and you become aware of material nonpublic
information about or affecting a publicly traded company or its securities, you
should immediately notify the Compliance Department.
3. Trading Restrictions - The Restricted List
Personnel in the Firm's Public Functions, such as trading and sales, investment
management and investment research, must refer to the Restricted List regularly
and comply with its trading restrictions. Generally, the trading restrictions
may limit or prohibit:
o transactions involving securities on the Restricted List in the accounts of
Bankers Trust, its employees and its customers; and
o solicitation and investment advising activities, such as commenting about,
recommending or soliciting orders involving securities on the Restricted List,
or issuing research regarding such securities.
Trading restrictions may apply to customer accounts where Bankers Trust
exercises investment discretion, but do not generally apply to unsolicited
customer trades executed on an "agency" basis (i.e., where the Firm is not
acting as principal). Special rules apply to customer and proprietary accounts
connected with certain defined index, passive or basket trading strategies where
a transaction involving securities on the Restricted List is dictated by
contract or predetermined formula. Additional information about these special
rules can be obtained from the Compliance Department.
The Restricted List describes the various types of trading restrictions imposed
on Bankers Trust and its employees in light of certain legal, regulatory and
business requirements.
Trading Restrictions -- The Restricted List
Full Restriction
When securities are subject to "Full Restriction," the following activities with
respect to such securities are generally prohibited:
o trading for the Firm's proprietary account;
o trading for Employee Related Accounts;
o trading for customer accounts over which Bankers Trust exercises investment
discretion; o basket trading for an account, such as an index fund, where the
transaction is dictated by a contract or predetermined formula; o market making
activities; o solicitation of customer orders; o issuance or distribution of
written research or rendering oral recommendations; and o execution of
unsolicited customer orders, unless such orders are executed on an "agency"
basis only.
Note: For securities not subject to "Full Restriction," the Restricted List
identifies which of the above specific activities are prohibited.
4. Waivers and Exceptions to Trading Restrictions
Waivers and exceptions to any trading restrictions identified on the Restricted
List require the specific prior approval of the Compliance Department. Violation
of the trading restrictions could subject the Firm and the employee involved to
civil or criminal penalties, as well as other disciplinary actions.
Other Matters
1. The Compliance Department
As used in this policy statement, the "Compliance Department" refers to the
Bankers Trust Compliance Department and the BTAL Compliance Department.
The Bankers Trust Compliance Department is organized generally by U.S. business
lines and regionally for Asia, Europe/Middle East/Africa and Latin America, and
is comprised of the following groups:
o Broker-Dealer Compliance (including Latin America);
o Fiduciary Compliance;
o Corporate Compliance; and
o Europe & Asia Regional Compliance.
The BTAL Compliance Department is organized generally by business lines in
Australia and New Zealand.
2. Waivers and Exceptions
Bankers Trust policies regarding confidential information, insider trading and
related matters as described in this booklet are necessarily a general summary.
In practice, some situations may arise that warrant making exceptions to some
general rules set forth herein, and you must obtain approval from the Compliance
Department before taking action regarding such an exception.
3. Confirming Your Compliance With Policies
Annually, you are required to sign a statement as a Bankers Trust employee
acknowledging that you have received this policy statement Confidential
Information, Insider Trading and Related Matters and confirm your adherence to
Bankers Trust's standards of conduct.
4. If You Have Questions
You should refer to the Compliance Department all questions concerning the
interpretation or application of these policies, the propriety of any particular
conduct, or other compliance-related matters.
NOTE -- Refer to Personal Securities Transactions by Employees, a separate
booklet that supplements this policy statement, for additional information
regarding opening and maintaining Employee Related Accounts (as defined),
pre-clearance of trades and other rules and restrictions regarding personal
securities transactions by employees.
Personal Securities Transactions by Employees
Issue Date: September 1998
Contents
Note: The policies contained in this booklet should be read in conjunction with
the policy statement Confidential Information, Insider Trading and Related
Matters.
(c) 1998 Bankers Trust Corporation
Introduction
This policy statement, Personal Securities Transactions by Employees, applies
worldwide to all employees of Bankers Trust Corporation and its subsidiaries
(referred to herein as "Bankers Trust" or the "Firm"). Along with the standards
provided in this booklet, you should be familiar with the contents of the Firm's
related policy statement Confidential Information, Insider Trading and Related
Matters.
As used in this Guide, "securities" transactions include those involving equity
or debt securities, derivatives of securities (such as options, warrants and
indexes), futures, commodities and similar instruments.
You should always conduct your personal trading activities lawfully, properly
and responsibly, and are encouraged to adopt long-term investment strategies
that are consistent with your financial resources and objectives. The Firm
generally discourages short-term trading strategies, and you are cautioned that
such strategies may inherently carry a higher risk of regulatory and other
scrutiny. In any event, excessive or inappropriate trading that interferes with
your job performance, or compromises the duty that Bankers Trust owes to its
clients and shareholders, will not be tolerated.
Summary
This booklet is organized to help you comply with Bankers Trust's policies and
procedures, and to protect you and the Firm from potential liability. In
summary, the section entitled:
o Opening and Maintaining Employee Related Accounts describes the types of
accounts you must disclose to the Compliance Department upon joining the Firm
and your requirement to obtain explicit permission from the Compliance
Department prior to opening and maintaining Employee Related Accounts (as
defined);
o Pre-Clearing Transactions in Employee Related Accounts describes the
procedures you must follow to pre-clear your personal securities transactions
with the Compliance Department before you place any order with your broker; and
o Restrictions Regarding Personal Securities Transactions describes certain
trading prohibitions and procedures you must observe to avoid violating the
Firm's policies and various securities laws and regulations.
Questions about this policy and the matters discussed herein should be directed
to your Compliance Officer or to the Compliance Department at (212) 250-5812.
Opening and Maintaining Employee Related Accounts
1. The Basic Policy
All employees must obtain the explicit permission of the Compliance Department
prior to opening a new Employee Related Account. Upon joining Bankers Trust, new
employees are required to disclose all of their Employee Related Accounts (as
defined below) to the Compliance Department and must carry out the instructions
provided to conform such accounts, if necessary, to the Firm's policies.
Under no circumstance are you permitted to open or maintain any Employee Related
Account that is undisclosed to the Compliance Department. Also, the policies,
procedures and rules described throughout this Guide apply to all of your
Employee Related Accounts.
2. Employee Related Accounts Defined
"Employee Related Accounts" include all accounts in which you have an ownership
or beneficial interest (or can exercise investment discretion or control) and
have the capability of holding securities, or in which securities transactions
may be executed, even if the accounts are inactive. Employee Related Accounts
include:
o your own accounts;
o your spouse's accounts and the accounts of your minor children and other
relatives (whether by marriage or otherwise) living in your home; o accounts in
which you, your spouse, your minor children or other relatives living in your
home have a beneficial interest; and o accounts over which you or your spouse
exercise investment discretion or control.
Although they are securities in the technical sense, money market funds and
open-ended mutual funds held directly with the fund or its transfer agent are
not considered Employee Related Accounts for the purposes of applying the above
definition.
3. "Designated Broker" Rule
Depending on your Bankers Trust location, you may be required to open and
maintain your Employee Related Accounts with a "Designated Broker," which refers
to brokerage firms specifically identified by the Compliance Department for
employee use. Employee Related Accounts with the Designated Brokers must be
opened in accordance with local Compliance Department procedures.
Employees who wish to open and maintain an Employee Related Account in the U.S.
must do so with one of the following Designated Brokers:
o BT Alex. Brown Incorporated
o Quick & Reilly (Wall Street Office)
o Salomon Smith Barney (the Rasweiler Group, New York)
Information about opening such an account can be obtained from the Compliance
Department at (212) 250-5812.
Employees assigned to Bankers Trust offices outside the U.S. are provided local
guidelines regarding Designated Brokers (and instructions about opening and
maintaining Employee Related Accounts) by Regional Compliance Groups for Asia,
Australia/New Zealand, Europe/Middle East/Africa and Latin America. You should
contact your Regional Compliance Officer if you have questions.
4. Waivers to the Designated Broker Rule
In very limited situations, the Compliance Department may grant you permission
to open or maintain an Employee Related Account at a brokerage firm other than a
Designated Broker. Generally, such permission is limited to the following types
of situations:
o your spouse or close relative, by reason of employment, is required by his or
her employer to maintain their brokerage accounts with a firm other than a
Designated Broker; or
o your Employee Related Account is maintained on a "discretionary" basis. This
means that full investment discretion has been granted to an outside bank,
investment manager or trustee, and neither you nor a close relative participates
in the investment decisions or is informed in advance regarding transactions in
the account.
An employee's request to the Compliance Department for an exemption to the
Designated Broker policy must be submitted in writing. If permission is granted,
duplicates of account statements and transaction confirmations must be provided
to the Compliance Department. Your continued eligibility for an exception to the
Designated Broker policy is periodically reviewed and evaluated and can be
revoked at any time.
NOTE -- Do not open an account with another brokerage firm until you receive
authorization to do so from the Compliance Department.
5. Monitoring Employee Related Accounts
To ensure adherence to Bankers Trust's policies, the Compliance Department
monitors transactions in Employee Related Accounts, whether they are maintained
with a Designated Broker or otherwise. If you violate the Firm's policies and
procedures as described herein, you may be required to cancel, reverse or freeze
any transaction or position in your Employee Related Account at your expense,
regardless of where the account is held. Such action may be required without
advance notice.
Pre-Clearing Transactions In Employee Related Accounts
1. The Basic Policy
You must contact the Compliance Department to pre-clear all transactions
involving securities or their derivatives in your Employee Related Accounts
(other than transactions involving only U.S. Treasury securities or open-ended
mutual funds) prior to placing an order with your broker. You are personally
responsible for ensuring that your proposed transaction does not violate the
Firm's policies or applicable securities laws and regulations by virtue of your
Bankers Trust responsibilities or information you may possess about the
securities or their issuer.
2. Pre-Clearance Procedures
Proposed transactions in your Employee Related Accounts must be personally
pre-cleared with the Compliance Department. After providing the requested
information about the transaction, you will be informed whether you have been
granted permission to place the order with your broker which is valid for the
day given and the next business day. If permission is denied to proceed with the
proposed transaction, such denial is confidential and should not be disclosed to
others.
For employees assigned to Bankers Trust offices in the U.S. and Canada,
securities transactions can be pre-cleared by contacting the Compliance
Department at (212) 250-5812.
Employees assigned to Bankers Trust offices outside of the U.S. and Canada are
provided local guidelines and contacts for pre-clearing securities transactions
by Regional Compliance Groups for Asia, Australia/New Zealand, Europe/Middle
East/Africa and Latin America. You should contact your Regional Compliance
Officer if you have questions.
3. Additional Supervisory Pre-Clearance
Depending on your area of assignment, you may be subject to additional
departmental policies that require you to first pre-clear your proposed
securities transaction with your supervisor prior to requesting pre-clearance
from the Compliance Department. If you are assigned to one of the Bankers Trust
departments in which employees are subject to this requirement, you will be
informed of this fact when you contact the Compliance Department for
pre-clearance.
4. Private Securities Transactions
Investment transactions in private securities, such as limited partnerships or
the securities of private companies, are likely to be made directly with the
sponsor and not executed in your Employee Related Account. Prior to engaging in
a private securities transaction, you must first obtain the approval of your
supervisor and then pre-clear the transaction with the Compliance Department.
Private securities transactions that give rise to actual or apparent conflicts
of interest are prohibited.
Restrictions Regarding Personal Securities Transactions
1. The Basic Policy
You have a personal obligation to conduct your investing activities and related
securities transactions lawfully and in a manner that avoids actual or potential
conflicts between your own interests and the interests of Bankers Trust and its
customers. You must carefully consider the nature of your Bankers Trust
responsibilities - and the type of information you might be deemed to possess in
light of any particular securities transaction - before you engage in that
transaction.
2. Material Nonpublic Information
If you possess material nonpublic information about or affecting securities, or
their issuer, you are prohibited from buying or selling such securities, or
advising any other person to buy or sell such securities.
3. Corporate and Departmental Restricted Lists
You are not permitted to buy or sell any securities that are included on the
Corporate Restricted List and/or other applicable departmental restricted lists.
4. "Frontrunning"
You are prohibited from engaging in "frontrunning," which means that you may not
buy or sell securities or other instruments for your Employee Related Accounts
so as to benefit from your knowledge of the Firm's or a client's trading
positions, plans or strategies, or forthcoming research recommendations.
5. Employee Transactions in Bankers Trust Securities
Bankers Trust recognizes the special interest many employees have in investing
in the securities of Bankers Trust Corporation. Observe, however, that your
employment relationship with the Firm gives rise to special rules concerning
such transactions to avoid potential conflicts of interest.
a. Transactions Subject to Special Rules
Personal trading activity in Bankers Trust Corporation securities that are
subject to special rules are generally transactions that change your beneficial
ownership interest, such as:
o purchases, sales or other transactions in Employee Related Accounts;
o employee investment elections in Bankers Trust benefit plans, such as
investment elections affecting the Bankers Trust Common Stock Fund in the
PartnerShare Plan;
o exercise of Bankers Trust stock options granted as part of an employee's
compensation;
o optional cash purchases of common stock through Bankers Trust's Dividend
Reinvestment and Common Stock Purchase Plan; and
o gifts or donations of Bankers Trust Corporation stock to charitable
organizations, relatives or others.
b. Special Rules
The following special rules apply to all transactions that change your
beneficial ownership interest in the securities of Bankers Trust Corporation:
o all employees must pre-clear transactions involving Bankers Trust Corporation
securities with Corporate Compliance in New York (212) 250-5812, even if
assigned to an office outside the U.S. or Canada;
o Bankers Trust Corporation securities may not be pledged or used as collateral
for any loan except for a margin loan associated with an Employee Related
Account;
o any short sale of Bankers Trust Corporation securities is prohibited;
o any transaction that involves options or warrants referenced to Bankers Trust
Corporation securities, other than exercising stock options granted under a
Bankers Trust incentive compensation plan, is prohibited; and
o over-the-counter derivative transactions that are referenced to the value of
Bankers Trust Corporation securities are prohibited.
c. "Blackout" Periods
During certain times of the year, you are prohibited from conducting
transactions in Bankers Trust Corporation securities which affect your
beneficial interest in the Firm. These "blackout" periods surround the end of
each fiscal quarter or year and begin on the first day of each calendar quarter
and end 48 hours after public release of the financial reports for the quarter
or year.
Additional restricted periods may be required for certain individuals and
events, and you will be informed of whether such a restricted period is in
effect when you request pre-clearance of your proposed transaction involving
Bankers Trust Corporation securities. Any questions concerning whether you are
subject to additional restrictions should be directed to the Compliance
Department.
6. Avoiding Conflicts with Your Bankers Trust Job Responsibilities
You are prohibited from buying, selling or holding positions in securities and
other instruments for your Employee Related Accounts that give rise to a
conflict of interest, or the appearance of conflict, between your personal
financial interests and your Bankers Trust job responsibilities.
Following is a summary of the Firm's basic rules and procedures that are
designed to prevent actual or apparent conflicts of interest. If you believe a
proposed personal securities transaction may give rise to a potential conflict
of interest, or may not comply with the following rules and procedures, you
should resolve the matter with your Compliance Officer before placing the order.
a. Securities in Companies With Which You Have Significant Dealings
You are prohibited from buying or selling, for your Employee Related Accounts,
securities of companies with which you have significant dealings on behalf of
Bankers Trust, or for which you have ongoing relationship management
responsibilities on behalf of the Firm. This rule applies to all employees who
have significant dealings with the Firm's customers, counterparties, suppliers
or vendors. Also, you are generally prohibited from acquiring an interest in any
private equity investment vehicle sponsored by such companies.
b. Securities In Which You Have Trading or Trading-Related Responsibilities
To prevent actual or apparent conflicts of interest, employees with "trading or
trading-related responsibilities" with respect to particular types of securities
or instruments may be limited or prohibited from buying or selling the same
types of securities or instruments for their Employee Related Accounts.
Employees have trading or trading-related responsibilities with respect to
particular types of securities or instruments if their duties:
o involve the Firm's proprietary dealing or investing activities (e.g., where
committing the Firm's capital may be involved); and
o are associated with the origination, structuring, trading, market making,
positioning, bookrunning, distribution, sales, research or analysis of
particular types of securities or instruments.
If you have trading or trading-related responsibilities for equity securities,
investment grade debt securities or U.S. Government, Government Agency or
municipal securities (including derivatives thereof), you are permitted to buy
or sell such securities for your Employee Related Accounts subject to compliance
with certain departmental guidelines that may require supervisory approval and
minimum holding periods.
If you have trading or trading-related responsibilities for non-investment grade
debt securities, commodities, futures, FX or other instruments (including
derivatives thereof), you are prohibited from buying or selling the same type of
securities or instruments for your Employee Related Accounts.
c. Portfolio Managers, Investment Advisory Professionals and "Access Persons"
If you are a portfolio manager, investment advisory professional or "access
person" associated with the Firm's asset or funds management businesses, you may
be subject to certain rules designed to prevent conflicts of interest. You can
obtain more information about these rules from your supervisor or the Compliance
Department.
d. Transactions Subject to Minimum Holding Periods
Securities bought or sold for your Employee Related Accounts may be subject to a
minimum holding period to address potential conflicts of interest. Examples of
the type of job functions and transactions that typically require a minimum
holding period include:
o equity securities bought or sold by an employee with proprietary equity
trading or trading-related responsibilities (60-day holding period);
o certain debt securities bought or sold by an employee with proprietary trading
or trading-related responsibilities for U.S. Government, Government Agency,
municipal or investment-grade corporate debt securities (60-day holding period);
o securities bought or sold by an equity research analyst, falling within the
research analyst's assigned industry group (up to a six-month holding period);
and
o securities bought or sold by employees assigned to most Bankers Trust offices
outside the U.S. (holding period varies by region).
e. Additional International Procedures
Regional Compliance Groups for Asia, Australia/New Zealand, Europe/Middle
East/Africa and Latin America may modify the procedures described in this
section to reflect local market practices and regulatory requirements. You
should contact your Regional Compliance Officer to obtain information about
local modifications, if any, to these requirements.
7. Initial Public Offerings and New Issues
For regulatory reasons, you are prohibited from purchasing or subscribing for
securities connected with an initial public offering or a new issue where a
U.S.-registered broker-dealer is involved in the distribution, or where any part
of the distribution is offered in the U.S. This prohibition applies even if
Bankers Trust has no role or involvement in the distribution.
For initial public offerings and new issues of securities of non-U.S. companies
distributed entirely outside of the U.S., employees assigned to international
offices of Bankers Trust may be permitted to purchase or subscribe for such
securities, provided that the appropriate Regional Compliance Group of the
Compliance Department approves such proposed transaction in advance. You should
contact your Regional Compliance Officer for local guidelines that apply.
Other Matters
1. Waivers and Exceptions
Bankers Trust policies regarding personal securities transactions by employees
as described in this booklet is necessarily a general summary. In practice, some
situations may arise to warrant making exceptions to some general rules set
forth herein, and you must obtain approval from the Compliance Department before
taking action regarding such an exception.
2. Confirming Your Compliance with Policies
Annually, you are required to sign a statement as a Bankers Trust employee
acknowledging that you have received this supplement to the policy statement
Confidential Information, Insider Trading and Related Matters and confirm your
adherence to Bankers Trust's standards of conduct.
3. If You Have Questions
You should refer all questions concerning the interpretation or application of
these policies, the propriety of any particular conduct, or other
compliance-related matters to the Compliance Department.
NOTE -- Adhering to the policies and standards of conduct discussed in this
Guide is one of the conditions of employment with Bankers Trust. Failure to
comply with them may subject you to disciplinary action, including possible
dismissal. In addition, violation of the rules described in this Guide may also
subject you to possible civil or criminal penalties in accordance with the
securities laws or regulatory rules applicable in various jurisdictions.
