DEUTSCHE EUROPEAN MID-CAP FUND
DEUTSCHE GERMAN EQUITY FUND
DEUTSCHE JAPANESE EQUITY FUND
DEUTSCHE GLOBAL BOND FUND
DEUTSCHE EUROPEAN BOND FUND
CLASS A SHARES AND CLASS B SHARES
AN OPEN-END MANAGEMENT PROSPECTUS
INVESTMENT COMPANY OCTOBER 10, 1997
DEUTSCHE EUROPEAN MID-CAP FUND
DEUTSCHE GERMAN EQUITY FUND
DEUTSCHE JAPANESE EQUITY FUND
DEUTSCHE GLOBAL BOND FUND
DEUTSCHE EUROPEAN BOND FUND
CLASS A SHARES AND CLASS B SHARES
Federated Investors Tower
Pittsburgh, PA 15222-3779
For information call toll-free 888-4-DEUTSCHE (888-433-8872)
This prospectus relates to the Deutsche European Mid-Cap Fund
("European Mid-Cap Fund"), Deutsche German Equity Fund ("German Equity
Fund") and Deutsche Japanese Equity Fund ("Japanese Equity
Fund")(collectively, the "Equity Funds") and Deutsche Global Bond Fund
("Global Bond Fund") and Deutsche European Bond Fund ("European Bond
Fund")(collectively, the "Bond Funds"). The Equity Funds and the Bond
Funds are referred to herein individually, as a "Fund" and
collectively, as the "Funds." Each Fund is a non-diversified series of
the Deutsche Funds, Inc., an open-end management investment company
organized as a Maryland corporation (the "Corporation"). The
investment objective of European Mid-Cap Fund and the German Equity
Fund is primarily to achieve high capital appreciation, and as a
secondary objective, reasonable dividend income. The investment
objective of Japanese Equity Fund is to achieve high capital
appreciation. The investment objective of the Bond Funds is to achieve
steady, high income.
Unlike other mutual funds which directly acquire and manage their own
portfolio of securities, each Fund seeks to achieve its investment
objective by investing all of its investable assets in a corresponding
non-diversified open-end management investment company (each, a
"Portfolio" and collectively, the "Portfolios"). Each Portfolio is a
series of the Deutsche Portfolios (the "Portfolio Trust") and has the
same investment objective as its corresponding Fund. Each Fund invests
in its corresponding Portfolio through the Hub and Spoke(R)
master-feeder investment fund structure. "Hub and Spoke" is a
registered service mark of Signature Financial Group, Inc.
Each Portfolio is managed by Deutsche Fund Management, Inc. ("DFM" or
the "Manager"), a registered investment adviser and an indirect
subsidiary of Deutsche Bank AG, a major global financial institution.
This Prospectus sets forth concisely the information about the Funds
that a prospective investor ought to know before investing and it
should be retained for future reference. Additional information about
the Funds has been filed with the Securities and Exchange Commission
in a Statement of Additional Information dated October 10, 1997. This
information is incorporated herein by reference and is available
without charge upon written request from the Funds' transfer agent,
Federated Shareholder Services Company or by calling toll-free
888-4-DEUTSCHE.
INVESTMENTS IN THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, DEUTSCHE BANK AG OR ANY OTHER BANK. SHARES
OF THE FUNDS ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENTAL AGENCY. AN INVESTMENT IN CLASS A SHARES OR CLASS B SHARES
IS SUBJECT TO RISKS THAT MAY CAUSE THE VALUE OF THE INVESTMENT TO
FLUCTUATE, AND WHEN THE INVESTMENT IS REDEEMED, THE VALUE MAY BE
HIGHER OR LOWER THAN THE AMOUNT ORIGINALLY INVESTED BY THE INVESTOR.
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.
Prospectus dated October 10, 1997
TABLE OF CONTENTS
Expense Summary............................................................. 2
The Funds................................................................... 4
Investment Objective, Policies and Restrictions............................. 4
Equity Funds................................................................ 4
Bond Funds.................................................................. 5
All Funds................................................................... 5
Risk Factors................................................................ 10
Equity Investments.......................................................... 10
Fixed Income Securities..................................................... 10
Foreign Investments......................................................... 10
Emerging Markets (Provesta Portfolio and
Global Bond Portfolio Only)................................................. 11
Futures, Options, and Warrants.............................................. 11
Local Securities Markets.................................................... 11
Management of the Corporation and
the Portfolio Trust......................................................... 12
Manager..................................................................... 12
Adviser..................................................................... 13
Historical Performance of
Corresponding DWS Funds..................................................... 13
Portfolio Management........................................................ 15
Investing in the Funds...................................................... 18
Class A Shares.............................................................. 18
Class B Shares.............................................................. 19
Purchase of Shares.......................................................... 19
Investing in Class A Shares................................................. 19
Special Purchase Features................................................... 23
Systematic Investment Program............................................... 23
Retirement Plans............................................................ 23
Exchange Privileges......................................................... 23
Class A Shares.............................................................. 23
Class B Shares.............................................................. 23
Requirements for Exchange................................................... 24
Tax Consequences............................................................ 24
Making an Exchange.......................................................... 24
Telephone Instructions...................................................... 24
Redemption of Shares........................................................ 24
Redeeming Shares Through a
Financial Intermediary...................................................... 24
Redeeming Shares by Telephone............................................... 25
Redeeming Shares by Mail.................................................... 25
Special Redemption Features................................................. 25
Systematic Withdrawal Program............................................... 25
Contingent Deferred Sales Charge............................................ 26
Class A Shares.............................................................. 26
Class B Shares.............................................................. 26
Class A Shares and Class B Shares........................................... 26
Elimination of Contingent Deferred Sales Charge............................. 26
Account and Share Information............................................... 27
Certificates and Confirmations.............................................. 27
Accounts with Low Balances.................................................. 27
Dividends and Distributions................................................. 27
Net Asset Value............................................................. 27
Organization................................................................ 28
Taxes....................................................................... 29
Additional Information...................................................... 30
Appendix A.................................................................. 30
EXPENSE SUMMARY
The following table summarizes estimated shareholder transaction and
annual operating expenses of Class A Shares and Class B Shares of each
Fund and the allocable operating expenses of its corresponding
Portfolio. The Directors of the Corporation believe that the aggregate
per share expenses of each Fund and the allocable operating expenses
of its corresponding Portfolio will be approximately equal to and may
be less than the expenses that the Fund would incur if it retained the
services of an investment adviser and invested its assets directly in
portfolio securities. Actual expenses may vary. A hypothetical example
based on the summary is also shown. For more information concerning
the expenses of each Fund and its corresponding Portfolio, see
"Management of the Corporation and the Portfolio Trust."
Shareholder Transaction Expenses
<TABLE>
<CAPTION>
Equity Funds Bond Funds
------------------------- --------------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)...................................... 5.50% None 4.50% None
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price)...................................... None None None None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, as applicable)............................. 0.00%(1) 5.00%(2) 0.00%(1) 5.00%(2)
Redemption Fees (as a percentage of amount redeemed, if applicable)...... None None None None
Exchange Fees............................................................ None None None None
</TABLE>
(1) Class A shares purchased without an initial sales charge (i)
based on an initial investment of $1,000,000 or more or (ii) with
proceeds of a redemption of shares of an unaffiliated investment
company purchased or redeemed with a sales charge and not
distributed by Edgewood may be charged a contingent deferred
sales charge of 1.00% for redemptions made within one full year
of purchase. See "Contingent Deferred Sales Charge."
(2) In the first year declining to 1.00% in the sixth year and 0% thereafter.
EXPENSE SUMMARY--CONTINUED
Expense Table
Annual Operating Expenses (After Expenses Reimbursement)
(As a percentage of projected average net assets)
<TABLE>
<CAPTION>
Equity Funds Bond Funds
-------------------- -----------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Advisory Fees 0.85% 0.85% 0.75% 0.75%
12b-1 Fees
Service 0.25% 0.25% 0.25% 0.25%
Distribution 0.00% 0.75% 0.00% 0.75%
Other Expenses (after expense reimbursement) 0.50% 0.50% 0.30% 0.30%
----- ----- ----- -----
Total Operating Expenses (after expense reimbursement) 1.60% 2.35% 1.30% 2.05%
----- ----- ----- -----
</TABLE>
EXAMPLE
- --------------------------------------------------------------------------------
An investor would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end of each
time period:
<TABLE>
<CAPTION>
Equity Funds Bond Funds
-------------------- -----------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
1 Year $ 70 $ 73 $58 $70
3 Years $103 $103 $84 $94
</TABLE>
You would pay the following expenses on the same investment assuming
no redemption:
<TABLE>
<S> <C> <C> <C> <C>
1 Year $ 70 $ 25 $58 $24
3 Years $103 $ 73 $84 $73
</TABLE>
The above expense table is designed to assist investors in
understanding the various estimated direct and indirect costs and
expenses that investors in a Fund would bear. Wire transferred
redemptions of less than $5,000 may be subject to additional fees. The
fees and expenses included in "Other Expenses" are estimated for each
Fund's first fiscal year and include (i) the fees paid to the
Administrator, Administrative Agent, Operations Agent, Transfer Agent,
Fund Accounting Agent, and Custodian (as each are defined herein),
(ii) amortization of organizational expenses, and (iii) other usual
and customary expenses of each Fund and each Portfolio. DFM has agreed
that it will reimburse each Fund through at least August 31, 1998 to
the extent necessary to maintain such Fund's ratio of total operating
expenses to average annual net assets at the level indicated above.
Assuming no reimbursement of expenses, estimated "Other Expenses" for
the first fiscal year European Mid-Cap Fund, German Equity Fund,
Japanese Equity Fund, Global Bond Fund and European Bond Fund would be
0.98%, 0.96%, 0.99%, 1.01% and 0.95%, respectively, and "Total
Operating Expenses" would be 2.08%, 2.06%, 2.09%, 2.01% and 1.95%,
respectively, of the Fund's average daily net assets attributed to
Class A shares, and 2.83%, 2.81%, 2.84%, 2.76% and 2.70%,
respectively, of the Fund's average daily net assets attributed to
Class B shares. For a more detailed description of contractual fee
arrangements, including expense reimbursements, see "Management of the
Corporation and the Portfolio Trust." In connection with the above
example, investors should note that $1,000 is less than the minimum
investment requirement for each Class of each Fund. See "Purchase of
Shares." Because the fees paid under the 12b-1 Plan of the Fund are
charged against the assets of the Fund, long-term shareholders may
indirectly pay an amount that is more than the economic equivalent of
the maximum front-end sales charge that such Fund would be permitted
to charge. THE EXAMPLE IS HYPOTHETICAL; IT IS INCLUDED SOLELY FOR
ILLUSTRATIVE PURPOSES. IT SHOULD NOT BE CONSIDERED A REPRESENTATION OF
FUTURE PERFORMANCE; ACTUAL EXPENSES MAY BE MORE OR LESS THAN THOSE
SHOWN.
THE FUNDS
Each Fund is a non-diversified, open-end management investment company
and is a series of shares of common stock of the Deutsche Funds, Inc.,
a Maryland corporation incorporated on May 22, 1997 (see
"Organization").
Each Fund seeks to achieve its investment objective by investing all
of its investable assets in a corresponding Portfolio that has the
same investment objective as the Fund. The European Mid-Cap Fund
invests all of its investable assets in the Provesta Portfolio (US
Dollar); the German Equity Fund invests all of its investable assets
in the Investa Portfolio (US Dollar); the Japanese Equity Fund invests
all of its investable assets in the Japanese Equity Portfolio (US
Dollar); the Global Bond Fund invests all of its investable assets in
the Global Bond Portfolio (US Dollar); and the European Bond Fund
invests all of its investable assets in the European Bond Portfolio
(US Dollar). The Provesta Portfolio (US Dollar), Investa Portfolio (US
Dollar) and Japanese Equity Portfolio (US Dollar) are referred to
herein individually, as an "Equity Portfolio" and collectively, as the
"Equity Portfolios." The Global Bond Portfolio (US Dollar) and the
European Bond Portfolio (US Dollar) are referred to herein
individually, as a "Bond Portfolio" and collectively, as the "Bond
Portfolios." The Equity Portfolios and the Bond Portfolios are
referred to herein individually, as a "Portfolio" and collectively, as
the "Portfolios." Each Portfolio is an open-end management investment
company and a series of shares of beneficial interest in the Deutsche
Portfolios, a trust organized under the laws of the State of New York
(see "Organization").
Shares of the Funds are sold continuously by the Funds' distributor, Edgewood
Services, Inc. ("Edgewood" or the "Distributor"). The Funds require a minimum
initial investment of $5,000. The minimum subsequent investment is $500 (see
"Purchase of Shares"). If a shareholder reduces his or her investment in a Fund
to less than the applicable minimum investment, the investment is subject to
mandatory redemption. See "Account and Share InformationNAccounts with Low
Balances."
Proceeds from the sale of shares of each Fund are invested in its
corresponding Portfolio, which then invests its assets in accordance
with its investment objective and policies. DWS International
Portfolio Management GmbH is the investment adviser of the Portfolios
(the "Adviser"). DFM and the Adviser are indirect subsidiaries of
Deutsche Bank AG. Federated Services Company is the administrator of
the Funds (the "Administrator") and the operations agent of the
Portfolios ("Operations Agent"). IBT Fund Services (Canada) Inc. ("IBT
(Canada)") is the fund accounting agent of the Funds and the
Portfolios ("Fund Accounting Agent"). Federated Shareholder Services
Company is the transfer agent and dividend disbursing agent of the
Funds ("Transfer Agent"). IBT Trust Company (Cayman) Ltd. ("IBT
(Cayman)") is the administrative agent of the Portfolios
("Administrative Agent"). Investors Bank & Trust Company ("IBT") is
the custodian of the Funds and the Portfolios ("Custodian"). The Board
of Directors of the Corporation and the Board of Trustees of the
Portfolio Trust provide broad supervision over the affairs of the
Funds and of the Portfolios, respectively. The Directors who are not
"interested persons" of the Corporation as defined in the Investment
Company Act of 1940, as amended (the "1940 Act")(the "Independent
Directors"), are the same as the Trustees who are not "interested
persons" of the Portfolio Trust as defined in the 1940 Act (the
"Independent Trustees"). A majority of the Corporation's Directors and
the Portfolio Trust's Trustees are not affiliated with the Manager,
the Adviser or the Distributor. For further information about the
Directors of the Corporation and the Trustees of the Portfolio Trust,
see "Management of the Corporation and the Portfolio Trust" herein and
in the Statement of Additional Information.
INVESTMENT OBJECTIVE, POLICIES
AND RESTRICTIONS
Each Fund seeks to achieve its investment objective by investing all
its investable assets in a corresponding Portfolio, an open end
management company that has the same investment objective and
investment policies as the Fund. Since the investment characteristics
and experience of each Fund will correspond directly with those of its
corresponding Portfolio, the discussion in this Prospectus focuses on
the investments and investment policies of the Portfolios. No Fund
represents a complete investment program, nor is each Fund suitable
for all investors.
Equity Funds
The investment objective of European Mid-Cap Fund and the German
Equity Fund is primarily to achieve high capital appreciation and, as
a secondary objective, reasonable dividend income. The investment
objective of Japanese Equity Fund is to achieve high capital
appreciation.
The Provesta Portfolio (US Dollar)("Provesta Portfolio") pursues its
(and the European Mid-Cap Fund's) investment objective by investing
primarily in the equity securities of issuers located in European
countries, including those which are member states of the European
Union, those which are party to the Convention on the European
Economic Area ("CEEA"), Switzerland, Slovakia, Czech
Republic, and Hungary.
The Provesta Portfolio seeks investment in companies which the Adviser
believes may grow at a higher rate than the average of other European
companies. These anticipated higher growth rates may cause the
performance of the Fund to be more volatile than that of other equity
funds, and therefore, investors should consider an investment in the
European Mid-Cap Fund to be subject to more risk and greater
volatility. See "Risk Factors."
Under normal circumstances, at least 65% of the Portfolio's total
assets are invested in European equity securities issued by companies
with market capitalizations of between $115 million and $19 billion.
The Investa Portfolio (US Dollar)("Investa Portfolio") pursues its
(and the German Equity Fund's) investment objective by investing
primarily in the equity securities of German companies.
Under normal circumstances, at least 65% of the Portfolio's total
assets are invested in equity securities issued by German issuers. In
pursuing the Portfolio's objective, the Adviser will emphasize German
companies that have some or all of the following attributes: high
market capitalization, large number of publicly held shares, high
trading volume, high liquidity, financial stability, or a widely known
name or product/service.
The Japanese Equity Portfolio (US Dollar)("Japanese Equity Portfolio")
pursues its (and the Japanese Equity Fund's) investment objective by
investing primarily in the equity securities of Japanese issuers.
Under normal circumstances, at least 65% of the Portfolio's total
assets are invested in equity securities issued by Japanese companies,
which may include, for the purpose of meeting such 65% minimum, up to
5% of total assets in securities that grant the right to acquire
Japanese securities.
FIXED INCOME SECURITIES
Each Equity Portfolio is permitted to invest in fixed income
securities, although it intends to remain invested in equity
securities to the extent practical in light of its objective. The
Provesta Portfolio's and Investa Portfolio's investment in fixed
income securities (excluding bank deposits and money market
instruments) will not exceed 20% of such Portfolio's net assets. The
Japanese Equity Portfolio's investment in fixed income securities
(excluding bank deposits and money market instruments) will not exceed
30% of the Portfolio's net assets. For purposes of each Portfolio's
investments, convertible bonds and bonds with warrants would be
considered equities, not fixed income securities. For the quality
criteria of the fixed income securities in which the Equity Portfolios
may invest, see "Quality of Fixed Income Securities" below.
Bond Funds
The investment objective of the Bond Funds is to achieve steady, high
income.
The Global Bond Portfolio (US Dollar)("Global Bond Portfolio") pursues
its (and the Global Bond Fund's) investment objective by investing
primarily in the fixed income securities (including convertible bonds
and bonds with warrants) of issuers worldwide.
Under normal circumstances, at least 65% of the Global Bond
Portfolio's total assets are invested in bonds and the Portfolio will
include securities of issuers organized in at least three different
countries.
The European Bond Portfolio (US Dollar)("European Bond Portfolio")
pursues its (and the European Bond Fund's) investment objective by
investing primarily in the fixed income securities of European
issuers.
Under normal circumstances, at least 65% of the Portfolio's total
assets are invested in bonds issued by European issuers.
Each Bond Portfolio's investment in equity securities will not exceed
25% of each Portfolio's net assets. For purposes of the foregoing
investment policies, the term "bonds" includes all fixed-income
securities.
All Funds
LISTED SECURITIES
Each Portfolio will invest primarily in listed securities ("Listed
Securities"). For purposes of this prospectus Listed Securities are
defined as securities meeting at least one of the following
requirements: (a) they are listed on a stock exchange in a member
state of the European Union ("Member State") or in another state which
is a party to the CEEA, or are included on another regulated market in
a Member State or in another state party to the CEEA which market is
recognized, open to the public and operates regularly; (b) they are
admitted to the official listing on one of the stock exchanges listed
in Appendix A or included on one of the regulated markets listed in
Appendix A; or (C) application is to be made for admission to official
listing on one of the aforementioned stock exchanges or inclusion in
one of the aforementioned regulated markets and such admission or
inclusion is to take place within 12 months of their issue.
UNLISTED SECURITIES AND NOTES
Up to a total of 10% of the net assets of each Portfolio may be
invested in:
(a) securities that are consistent with the Portfolio's investment
objective and policies, which are not admitted to official
listing on one of the stock exchanges or included on one of the
regulated markets, described above;
(b) interests in loans which are portions of an overall loan granted
by a third party and for which a note has been issued ("Notes"),
provided these Notes can be assigned at least twice after
purchase by the Portfolio, and the Note was issued by:
. the Federal Republic of Germany, a special purpose fund of the
Federal Republic of Germany, a state of the Federal Republic
of Germany, the European Union or a member state of the
Organisation for Economic Cooperation and Development (an
"OECD Member"),
. another German domestic authority, or a regional government or
local authority of another Member State or another state party
to the CEEA for which a zero weighting was notified according
to Article 7 of the Council Directive 89/647/EEC of 18
December 1989 on a solvency ratio for credit institutions
(Official Journal EC No. L386, p. 14),
. other corporate bodies or institutions organized under public law and
registered domestically in Germany or in another Member State or another
state party to the CEEA,
. other debtors, if guaranteed as to the payment of interest and repayment
of principal by one of the aforementioned bodies, or
. companies which have issued securities which are admitted to official
listing on a German or other foreign stock exchange.
Investments in Notes are subject to the Provesta Portfolio's and Investa
Portfolio's overall 20% limitation on fixed income securities and the Japanese
Equity Portfolio's overall 30% limitation on fixed income securities. See
"Equity Funds" above.
The current Member States and the states party to the CEEA and OECD
Members are listed in Appendix A.
QUALITY OF FIXED INCOME SECURITIES
The fixed income securities in which each Portfolio may invest will be
rated on the date of investment, within the four highest ratings of
Moody's Investors Service, Inc. ("Moody's"), currently Aaa, Aa, A and
Baa, or of Standard & Poor's ("S&P"), currently AAA, AA, A and BBB or,
if unrated, will be, in the opinion of the Adviser, of comparable
quality to such rated securities discussed above. See Appendix B to
the Statement of Additional Information for a description of these
ratings.
BANK DEPOSITS AND MONEY MARKET INSTRUMENTS
Each Portfolio may temporarily invest in bank deposits and money
market instruments maturing in less than 12 months. These instruments
include credit balances and bank certificates of deposit, discounted
treasury notes and bills issued by the Federal Republic of Germany
("FRG"), the states of the FRG, the European Union, OECD Members or
quasi-governmental entities of any of the foregoing.
Under normal circumstances each Portfolio will purchase bank deposits
and money market instruments to invest temporary cash balances or to
maintain liquidity to meet redemptions. However, each Portfolio may
temporarily invest in bank deposits and money market instruments, up
to 49% of its net assets, as a measure taken in the Adviser's judgment
during, or in anticipation of, adverse market conditions. Certificates
of deposit from the same credit institution may not account for more
than 10% of a Portfolio's total assets. See "Investment Objectives and
Policies" in the Statement of Additional Information.
OPTIONS TRANSACTIONS ON SECURITIES
Options transactions may be carried out for each Portfolio if the
securities options are admitted to official listing on a recognized
futures or securities exchange and the securities underlying the
options are within the applicable investment objective and policies of
the Portfolio. Each of these instruments is a derivative instrument as
its value derives from the underlying asset. Each Portfolio may use
options for hedging and risk management purposes and may purchase call
options and sell put options for speculation. See "Risk Factors."
By purchasing a put option, a Portfolio obtains the right (but not the
obligation) to sell the instrument underlying the option at a fixed
strike price. In return for this right, the Portfolio pays the current
market price for the option (known as the option premium). The
purchaser of a call option obtains the right to purchase, rather than
sell, the instrument underlying the option at the option's strike
price.
Put options on securities may be purchased only if the securities
underlying the option transaction are held by a Portfolio at the time
of the purchase of the put option.
When a Portfolio writes a put option, it takes the opposite side of
the transaction from the option's purchaser. In return for receipt of
the premium, the Portfolio assumes the obligation to pay the strike
price for the instrument underlying the option if the other party to
the option chooses to exercise it.
Writing a call option obligates a Portfolio to sell or deliver the
option's underlying instrument in return for the strike price upon
exercise of the option.
Call options on securities may be sold only if the securities
underlying the option transaction are held by a Portfolio at the time
of the sale. These securities may not be sold during the maturity of
the call option and may not be the subject of a securities loan.
There is no limitation on the value of the options that may be
purchased or written by a Portfolio. However, the strike prices of the
securities options, together with the strike prices of the securities
that underlie other securities options already purchased or granted
for the account of each Portfolio, may not exceed 20% of net assets of
the Portfolio. See "Risk Factors." With respect to the Provesta
Portfolio and the Investa Portfolio, the strike prices of options on
fixed income securities held by each Portfolio may not exceed 4% of
the net assets of the Portfolio (i.e., 20% of the 20% investment
limitation on fixed income securities). See "Equity FundsNFixed Income
Securities" above. Options on securities may only be purchased or
granted to a third party to the extent that the strike prices of such
options, together with the strike prices of options on securities of
the same issuer already purchased by or granted for the account of a
Portfolio, do not exceed 10% of the net assets of the Portfolio.
Options on securities may only be written (sold) to the extent that
the strike prices of such options, together with the strike prices of
options on securities of the same issuer already written for the
account of a Portfolio, do not exceed 2% of the net assets of the
Portfolio. When an option transaction is offset by a back- to-back
transaction (e.g., where a Portfolio writes a put option on a security
and purchases a put option on the same security having the same
expiration date), these two transactions will not be counted for
purposes of the limits set forth in this paragraph.
FUTURES CONTRACTS, OPTIONS ON FUTURES AND SECURITIES INDICES AND WARRANTS
Each Portfolio may purchase and sell stock index futures contracts and
interest rate futures contracts and may purchase options on interest
rate futures contracts, options on securities indices and warrants on
futures contracts and stock indices. A Portfolio will engage in
transactions in such instruments only if they are admitted to official
listing on a recognized futures or securities exchange and meet
certain other requirements stated below. A Portfolio may use these
techniques for hedging or risk management purposes or, subject to
certain limitations, for the purposes of obtaining desired exposure to
certain securities or markets.
For the purpose of hedging a Portfolio's assets, the Portfolio may
sell (but not purchase) stock index or interest rate futures contracts
and may purchase put or call options on futures contracts, options on
securities indices and any of the warrants described above. Any such
transaction will be considered a hedging transaction, and not subject
to the limitations on non-hedging transactions stated below, to the
extent that (1) in the case of stock index futures, options on
securities indices and warrants thereon, the contract value does not
exceed the market value of the shares held by the Portfolio for which
the hedge is intended and such shares are admitted to official listing
on a stock exchange in the country in which the relevant futures or
securities exchange is based or (2) in the case of interest rate
futures and options on securities indices and warrants thereon, the
contract value does not exceed the interest rate exposure associated
with the assets held in the applicable currency by the Portfolio. In
carrying out a particular hedging strategy, a Portfolio may sell
futures contracts and purchase options or warrants based on
securities, financial instruments or indices that have issuers,
maturities or other characteristics that do not precisely match those
of the Portfolio's assets for which such hedge is intended, thereby
creating a risk that the futures, options or warrants position will
not mirror the performance of such assets. A Portfolio may also enter
into transactions in futures contracts, options on futures, options on
indices and warrants for non-hedging purposes, as described below.
Each Portfolio may purchase or sell stock index or interest rate
futures contracts, put or call options on futures, options on
securities indices and warrants other than for hedging purposes.
Transactions for non-hedging purposes may be entered into only to the
extent that (1) the underlying contract values, together with the
contract values of any instrument then held by the Portfolio for
non-hedging purposes, do not exceed in the aggregate 20% of the net
assets of the Portfolio and (2) such instruments relate to categories
of assets which the Portfolio is permitted to hold. In addition, with
respect to the Provesta Portfolio and the Investa Portfolio, the
contract values of all interest rate futures contracts and options and
warrants on interest rate futures contracts held for non-hedging
purposes may not exceed 4% of the net assets of the Portfolio (i.e.,
20% of the 20% limitation on fixed income securities). See "Equity
Funds-Fixed Income Securities" above.
CURRENCY FORWARD CONTRACTS, OPTION RIGHTS AND WARRANTS ON CURRENCIES AND
CURRENCY FUTURES CONTRACTS
Each Portfolio may enter into foreign currency transactions to hedge
currency risks associated with the assets of each Portfolio
denominated or principally traded in foreign currencies. The Provesta
Portfolio and the Investa Portfolio, however, do not presently intend
to engage in such hedging activity but reserve the ability to do so
under circumstances in which the Adviser believes that one or more
currencies in which such Portfolio's assets are denominated may suffer
a substantial decline against the U.S. dollar. Each Portfolio other
than the Provesta Portfolio and the Investa Portfolio may also enter
into foreign currency transactions to hedge against currencies other
than the U.S. dollar.
A Portfolio may purchase or sell foreign currency contracts for
forward delivery, purchase option rights for the purchase or sale of
currencies or currency futures contracts or warrants which entitle the
holder to the right to purchase or sell currencies or currency futures
contracts or to receive payment of a difference, which is measured by
the performance of currencies or currency futures contracts, provided
that these option rights and warrants are admitted to official listing
on an exchange.
SECURITIES LOANS
Subject to applicable investment restrictions, each Portfolio is
permitted to lend its securities. These loans may not exceed 331U3% of
a Portfolio's total assets. The Portfolios may pay reasonable
administrative and custodial fees in connection with the loan of
securities. The following conditions will be met whenever portfolio
securities of a Portfolio are loaned: (1) the Portfolio must receive
at least 100% collateral from the borrower; (2) the borrower must
increase such collateral whenever the market value of the securities
loaned rises above the level of the collateral; (3) the Portfolio must
be able to terminate the loan at any time; (4) the Portfolio must
receive reasonable interest on the loan, as well as payments in
respect of any dividends, interest or other distributions on the
loaned securities, and any increase in market value; (5) the Portfolio
may pay only reasonable custodian and finder's fees in connection with
the loan; and (6) while voting rights on the loaned securities may
pass to the borrower, the Portfolio must terminate the loan and regain
the right to vote the securities if a material event conferring voting
rights and adversely affecting the investment occurs. In addition, a
Portfolio will consider all facts and circumstances, including the
creditworthiness of the borrowing financial institution. No Portfolio
will lend its securities to any officer, Trustee, Director, employee
or other affiliate of the Corporation or the Portfolio Trust, the
Manager, the Adviser or the Distributor, unless otherwise permitted by
applicable law.
Each Portfolio may lend its securities on a demand basis provided the
market value of the assets transferred in securities loans together
with the market value of the securities already transferred as a
securities loan for the Portfolio's account to the same borrower does
not exceed 10% of the net assets of the Portfolio.
BORROWING
Each Portfolio may borrow money from banks for temporary or short-term
purposes and then only in amounts not to exceed 10% of the Portfolio's
total assets, at the time of such borrowing.
WARRANTS
Each Portfolio may purchase warrants in value of up to 10% of the
Portfolio's net assets. The warrants in which the Portfolios invest
are a type of security that entitles the holder to buy a fixed amount
of securities of such issuer at a specified price at a fixed date or
for a fixed period of time (which may be in perpetuity) or to demand
settlement in cash based on the price performance of the underlying
security. If the market price of the underlying security is below the
exercise price set forth in the warrant on the expiration date, the
warrant will expire worthless.
Warrants do not entitle the holder to dividends or voting rights with
respect to the underlying securities and do not represent any rights
in the assets of the issuing company. Also the value of the warrant
does not necessarily change with the value of the underlying
securities and a warrant ceases to have value if it is not exercised
prior to the expiration date.
CONVERTIBLE SECURITIES
The convertible securities in which the Portfolios may invest include
any debt securities or preferred stock which may be converted into
common stock or which carry the right to purchase common stock.
Convertible securities entitle the holder to exchange the securities
for a specified number of shares of common stock, usually of the same
company, at specified prices within a certain period of time.
SHORT-TERM TRADING
Each Portfolio intends to manage its portfolio actively in pursuit of
its investment objective. A Portfolio may take advantage of short-term
trading opportunities that are consistent with its objective. To the
extent a Portfolio engages in short-term trading, it may realize
short-term capital gains or losses and incur increased transaction
costs. See "Taxes" below.
INVESTMENT RESTRICTIONS
The investment objective of each Fund and each Portfolio, together
with the fundamental investment restrictions described below and in
the Statement of Additional Information, except as noted, are deemed
fundamental policies, i.e., they may be changed only with the approval
of the holders of a majority of the outstanding voting securities of a
Fund and its corresponding Portfolio. Each Fund has the same
investment restrictions as its corresponding Portfolio, except that
each Fund may invest all of its investable assets in the corresponding
Portfolio. References below to the Portfolios' investment restrictions
also include the Funds' investment restrictions. Any other investment
policies of the Portfolios and the Funds described herein or in the
Statement of Additional Information are not fundamental and may be
changed without shareholder approval.
FUNDAMENTAL INVESTMENT RESTRICTIONS
Each Portfolio is classified as "non-diversified" under the 1940 Act,
which means that each corresponding Fund is not limited by the 1940
Act with respect to the portion of its assets which may be invested in
securities of a single company (although certain diversification
requirements are in effect imposed by the Internal Revenue Code of
1986, as amended (the "Code")). The possible assumption of large
positions in the securities of a small number of companies may cause
the performance of a Fund to fluctuate to a greater extent than that
of a diversified investment company as a result of changes in the
financial condition or in the market's assessment of the companies.
At least 65% of the Provesta Portfolio's total assets are invested in
European equity securities issued by companies with market
capitalizations of between $115 million and $19 billion. At least 65%
of the Investa Portfolio's total assets are invested in equity
securities issued by German companies. At least 65% of the Japanese
Equity Portfolio's total assets are invested in equity securities
issued by Japanese companies, which may include, for the purposes of
meeting such 65% minimum, up to 5% of the total assets in securities
that grant the right to acquire Japanese securities. At least 65% of
the Global Bond Portfolio's total assets are invested in bonds and
such Portfolio will include securities of issuers organized in at
least three different countries. At least 65% of the European Bond
Portfolio's total assets are invested in bonds issued by European
issuers.
No Portfolio may purchase securities or other obligations of issuers
conducting their principal business activity in the same industry if
its investments in such industry would equal or exceed 25% of the
value of the Portfolio's total assets, provided that the foregoing
limitation shall not apply to investments in securities issued or
guaranteed by the U.S. Government or its agencies or
instrumentalities.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
Each Portfolio generally will not borrow money. Each Portfolio may not
issue senior securities except as permitted by the 1940 Act or any
rule, order or interpretation thereunder. Each Portfolio may not
invest more than 10% of its net assets in the securities of any one
issuer or invest more than 40% of its net assets in the aggregate in
the securities of those issuers in which the Portfolio has invested in
excess of 5% but not more than 10% of its net assets.
For a more detailed discussion of the above investment restrictions,
as well as a description of certain other investment restrictions, see
"Investment Restrictions" in the Statement of Additional Information.
RISK FACTORS
Equity Investments
Because the assets of each Equity Portfolio are invested primarily in
equity securities, the Equity Portfolios are subject to market risk
and the risks associated with the individual companies in which the
Portfolios invest, meaning that stock prices in general may decline
over short or extended periods of time. As with any equity-based
investment company, the investor should be aware that unfavorable
economic conditions can adversely affect corporate earnings and cause
declines in stock prices.
With respect to the Provesta Portfolio, investing in equity securities
of mid-sized companies involves risks not typically associated with
investing in comparable securities of large companies. Assets of the
Portfolio are invested in companies which may have narrow product
lines and limited financial and managerial resources. Since the market
for the equity securities of mid-sized companies is often
characterized by less information and liquidity than that for the
equity securities of large companies, the Portfolio's investments can
experience unexpected sharp declines in their market prices.
Therefore, investments in the Portfolio may be subject to greater
declines in value than shares of equity funds investing in the equity
securities of large companies.
Fixed Income Securities
The value of fixed income securities generally goes down when interest
rates go up, and vice versa. Furthermore, the value of fixed income
securities may vary based on anticipated or potential changes in
interest rates. Changes in interest rates will generally cause bigger
changes in the prices of longer-term securities than in the prices of
shorter-term securities.
Prices of fixed income securities fluctuate based on changes in the
actual and perceived creditworthiness of issuers. The prices of lower
rated securities often fluctuate more than those of higher rated
securities. It is possible that some issuers will be unable to make
required payments on fixed income securities.
Foreign Investments
Each Portfolio invests in foreign securities. Investment in securities
of foreign issuers involves somewhat different investment risks from
those affecting securities of U.S. domestic issuers. There may be
limited publicly available information with respect to foreign
issuers, and foreign issuers are not generally subject to uniform
accounting, auditing and financial standards and requirements
comparable to those applicable to U.S. domestic companies. Dividends
and interest paid by foreign issuers may be subject to withholding and
other foreign taxes (such as capital gain taxes) which may decrease
the net return on foreign investments as compared to dividends and
interest paid to a Portfolio by U.S. domestic companies.
Investors should realize that the value of a Portfolio's investments
in foreign securities 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) currency 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 a Portfolio'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 domestic 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. Any foreign investments made by the Portfolios must be
made in compliance with foreign currency restrictions and tax laws
restricting the amounts and types of foreign investments.
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 domestic securities exchanges.
Accordingly, the Portfolios' 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, purchasers normally pay 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 located in foreign countries than in the United States.
Since each Portfolio's investments in foreign securities involve
foreign currencies, the value of the Portfolio's assets as measured in
U.S. dollars may be affected favorably or unfavorably by changes in
currency rates and in exchange control regulations, including currency
blockage. Because the Provesta Portfolio and Investa Portfolio do not
presently intend to engage in currency transactions to hedge currency
risks, these Portfolios may be more vulnerable to the aforementioned
currency risks. See "Foreign Currency Exchange Transactions" in the
Statement of Additional Information.
Emerging Markets (Provesta Portfolio and Global Bond Portfolio Only)
Investments in securities of issuers in emerging markets countries may
involve a high degree of risk and many may be considered speculative.
Investments in developing and emerging markets may be subject to
potentially greater risks than those of other foreign issuers. These
risks include: (i) the small current size of the markets for such
securities and the low volume of trading, which result in less
liquidity and in greater price volatility; (ii) certain national
policies which may restrict the Portfolio's investment opportunities,
including restrictions on investment in issuers or industries deemed
sensitive to national interests; (iii) foreign taxation; (iv) the
absence, until recently, of a capital market structure or market
oriented economy as well as issuers without a long period of
successful operations; (v) the possibility that recent favorable
economic developments may be slowed or reversed by unanticipated
political or social events in such countries or their neighboring
countries; and (vi) greater risks of expropriation, confiscatory
taxation, nationalization, and less social, political and economic
stability.
Futures, Options and Warrants
Each Portfolio's successful use of futures, options and warrants
depends on the ability of the Adviser to predict the direction of the
market or, in the case of hedging transactions, the correlation
between market movements and movements in the value of the Portfolio's
assets, and is subject to various additional risks. The investment
techniques and skills required to use futures, options and warrants
successfully are different from those required to select equity
securities for investment. The correlation between movements in the
price of the futures contract, option or warrant and the price of the
securities or financial instruments being hedged is imperfect and the
risk from imperfect correlation increases, with respect to stock index
futures, options and warrants, as the composition of a Portfolio's
portfolio diverges from the composition of the index underlying such
stock index futures, options or warrants. If a Portfolio has hedged
portfolio securities by purchasing put options or selling futures
contracts, the Portfolio could suffer a loss which is only partially
offset or not offset at all by an increase in the value of the
Portfolio's securities. As noted, a Portfolio may also enter into
transactions in future contracts, options and warrants for other than
hedging purposes (subject to applicable law), including speculative
transactions, which involve greater risk. In particular, in entering
into such transactions, a Portfolio may experience losses which are
not offset by gains on other portfolio positions, thereby reducing its
gross income. In addition, the markets for such instruments may be
volatile from time to time, which could increase the risk incurred by
a Portfolio in entering into such transactions. The ability of a
Portfolio to close out a futures, options or warrants position depends
on a liquid secondary market.
The use of futures contracts potentially exposes the Portfolios to the
effects of "leveraging," which occurs when futures are used so a
Portfolio's exposure to the market is greater than it would have been
if the Portfolio had invested directly in the underlying instruments.
Leveraging increases a Portfolio's potential for both gain and loss.
As noted above, the Portfolios intend to adhere to certain policies
relating to the use of futures contracts, which should have the effect
of limiting the amount of leverage by the Portfolios. See "Futures and
Option Contracts" in the Statement of Additional Information.
Local Securities Markets
THE GERMAN SECURITIES MARKETS
Equity securities trade on the country's eight regional stock
exchanges of which Frankfurt accounted for approximately 79.5% of the
total volume in 1996.
Share prices of companies traded on German stock exchanges declined in
1991 and 1992 as the German economy entered a recessionary period
following unification of eastern and western Germany in 1990. The DM
total return of the CDAX German Composite Index of stocks was -6.39%
in 1992, 44.56% in 1993, -5.83% in 1994, 4.75% in 1995, 22.14% in
1996, and 29.96% for the first half of 1997.
Trading volume tends to concentrate on the relatively few companies
having both large market capitalization and a broad distribution of
their stock with few or no large holders. The five companies having
the largest annual trading volume of their stock in 1996 represented
46.8% of total trading volume on the German stock exchanges:
Daimler-Benz AG with DM 261.9 billion, Siemens AG with DM 256.1
billion, Deutsche Bank AG with DM 216.8 billion, Bayer AG with DM
186.4 billion, and Volkswagen AG with DM 162.2 billion.
JAPANESE EQUITY SECURITIES MARKETS
Listed securities in Japan trade on three Main Japanese Exchanges
(including the Tokyo Stock Exchange) and five regional stock
exchanges, although the Tokyo Stock Exchange ("TSE") has generally
represented over 75% of annual trade of volume. In 1996, three
industrial groups (banks, electric appliances and transportation
equipment) accounted for approximately 40% of the total market value
of TSE stocks. Share prices of companies traded on Japanese stock
exchanges reached historical peaks in 1989 and 1990. Afterwards stock
prices decreased significantly, reaching their lowest levels in 1992.
For example, the Nikkei index of 225 stocks fell from 38916 at
year-end 1989 to a low in 1992 of 14309, a drop of 63%. The index was
19361 at the end of 1996, and 20331 at June 30, 1997. The decline in
stock prices after 1989 has raised the cost of capital for industry
and has reduced the value of stock holdings by banks and corporations.
These effects have, in turn, contributed to the recent weakness in
Japan's economy and could continue to have an adverse impact in the
future.
MANAGEMENT OF THE CORPORATION
AND THE PORTFOLIO TRUST
The Board of Directors of the Corporation and the Board of Trustees of
the Portfolio Trust provide broad supervision over the affairs of each
Fund and each Portfolio, respectively. Each Fund has retained the
services of Federated Services Company as Administrator, Federated
Shareholder Services Company as Transfer Agent, IBT (Canada) as Fund
Accounting Agent and IBT as Custodian but has not retained the
services of an investment manager or adviser since each Fund seeks to
achieve its investment objective by investing all of its investable
assets in its corresponding Portfolio. Each Portfolio has retained the
services of DFM as Manager, Federated Services Company as Operations
Agent, IBT (Canada) as Fund Accounting Agent, IBT (Cayman) as
Administrative Agent and IBT as Custodian. DFM has retained the
services of DWS International Portfolio Management GmbH as Adviser for
each Portfolio.
Manager
The Portfolio Trust has retained the services of DFM as investment
manager to each Portfolio. DFM, with principal offices at 31 West
52/nd/ Street, New York, New York 10019, is a Delaware corporation and
registered investment adviser under the Advisers Act of 1940.
DFM is a wholly-owned subsidiary of Deutsche Fonds Holding GmbH
("DFH"), a company with limited liability organized under the laws of
Germany and a consolidated subsidiary of Deutsche Bank AG, a major
global banking institution. With total assets the equivalent of $570
billion and 75,000 employees as of year-end 1996, Deutsche Bank AG is
Europe's largest universal bank. It is engaged in a wide range of
financial services, including retail and commercial banking,
investment banking and insurance. Deutsche Bank AG's creditworthiness
ranks it among the most highly rated financial institutions in the
world. For example, Deutsche Bank AG has been rated AAA by Standard &
Poor's, New York. Deutsche Bank AG and its affiliates may have
commercial lending relationships with companies whose securities may
be held by a Portfolio.
DFH subsidiaries include German-based DWS Deutsche Gesellschaft fuer
Wertpapiersparen mbH ("DWS") and others based in Luxembourg, Austria,
Switzerland, Singapore, France and Italy. Together, DFH subsidiaries
serve as manager and/or investment adviser to more than 150 mutual
funds outside the United States, having aggregate assets under
management of more than the equivalent of $68 billion as of August
1997. DFH and its subsidiaries employ approximately 500 professionals
and is the largest mutual fund operator in Europe based on assets
under management.
The primary subsidiary of DFH is DWS. Founded in 1956, it is the
largest mutual fund company in Germany, holding a 25% share of the
German mutual fund market based on assets under management as of
August 1997. DFH and its subsidiaries are known in the financial
market as "DWS Group, Investmentgroup of Deutsche Bank."
DFH subsidiaries have received widespread industry recognition in
Europe. For example, Micropal, Europe's leading fund rating
organization, has accorded DWS the following awards: 1994: best fund
manager for 1-, 3-, and 5-year periods; 1995: best fund manager for
1-, 3-, and 5-year periods; 1996: best fund manager for 3- and 5-year
periods. These awards were given to fund managers having 10 or more
funds registered for sale in Germany, based on the manager with the
highest number of funds ranked first within various categories of
investment objective defined by Micropal. Fund rankings are based on
above-average performance in Deutsche Mark ("DM") terms and
below-average volatility.
Subject to the overall supervision of the Portfolio Trust's Trustees,
DFM is responsible for the day-to-day investment decisions, the
execution of portfolio transactions and the general management of each
Portfolio's investments and provides certain supervisory services.
Under its investment management agreement with the Portfolio Trust
(the "Management Agreement"), DFM is permitted, subject to the
approval of the Board of Trustees of the Portfolio Trust, to delegate
to a third party responsibility for management of the investment
operations of each Portfolio. DFM has delegated this responsibility to
the Adviser. DFM retains overall responsibility, however, for
supervision of the investment management program for each Portfolio.
See "Manager" in the Statement of Additional Information.
As compensation for the services rendered and related expenses borne
by DFM under the Management Agreement with the Portfolio Trust with
respect to each Equity Portfolio, DFM receives a fee from each Equity
Portfolio, which is computed daily and paid monthly, equal to 0.85% of
the average daily net assets of each Equity Portfolio on an annualized
basis for the Portfolio's then-current fiscal year. As compensation
for the services rendered and related expenses borne by DFM under the
Management Agreement with the Portfolio Trust with respect to each
Bond Portfolio, DFM receives a fee from each Bond Portfolio, which is
computed daily and paid monthly, equal to 0.75% of the average daily
net assets of each Bond Portfolio on an annualized basis for the
Portfolio's then-current fiscal year. See also "Expenses."
Adviser
Pursuant to an investment advisory agreement ("Advisory Agreement")
between DFM and DWS International Portfolio Management GmbH, the
Adviser provides investment advice and portfolio management services
to each Portfolio. Subject to the overall supervision of DFM, the
Adviser conducts the day-to-day investment decisions of each
Portfolio, arranges for the execution of portfolio transactions and
furnishes a continuous investment program for each Portfolio.
The Adviser is an SEC-registered investment adviser and an indirect
subsidiary of Deutsche Bank AG. The offices of the Adviser are located
at Grueneburgweg 113-115, 60323 Frankfurt am Main, Germany.
For these services, the Adviser receives from DFM a fee, which is
computed daily and may be paid monthly, equal to 0.60% of the average
daily net assets of each Equity Portfolio and 0.50% of the average
daily net assets of each Bond Portfolio on an annualized basis for the
Portfolio's then-current fiscal year.
Historical Performance of Corresponding DWS Funds
Provesta and Investa are German-registered mutual funds and are
referred to herein as the "DWS Funds." Each of their investment
policies and restrictions are the same as those of its corresponding
Portfolio except as noted below. The Provesta and Investa Portfolios
(and therefore indirectly the corresponding European Mid-Cap Fund and
German Equity Fund) are designed to produce investment results
substantially the same as the DWS Funds, Provesta and Investa,
respectively. The Provesta and Investa Portfolios seek to accomplish
this by duplicating to the extent practical the portfolio holdings and
transactions of Provesta and Investa. The Adviser will manage the
investment operations of each Portfolio with a portfolio manager and a
staff of investment professionals that is composed of the same persons
as those that manage and have full discretionary authority over the
selection of investments for the corresponding DWS Fund.
The European Mid-Cap Fund and its corresponding Provesta Portfolio and the
German Equity Fund and its corresponding Investa Portfolio commenced operations
in 1997 and have no operating or performance history.
Information about the performance of the two corresponding DWS
FundsNProvesta (corresponding to European Mid-Cap Fund) and Investa
(corresponding to German Equity Fund) is set forth below. Although
each Equity Fund and its corresponding Portfolio have the same
investment objectives, policies, and restrictions as their
corresponding DWS Fund, and each Portfolio has the same staff of
investment professionals and the same portfolio manager as its
corresponding DWS Fund, the DWS Fund are separate funds and you should
not assume that a Fund offered by this Prospectus will have the same
future performance as its corresponding DWS Fund. The DWS Funds
operate under the German regulatory and tax framework and the
Portfolios operate under the U.S. regulatory and tax framework
(diversification requirements, specific tax restrictions and
investment limitations). Since the historical performance of the DWS
Funds would not have been materially affected by the differences in
the regulation of investment companies under U.S. federal securities
and tax laws and regulations, the differences in regulation are not
expected to result in any material differences in performance between
the DWS Funds and their corresponding Portfolios going forward.
Investors should note that the past performance of the DWS Funds is
not predictive of the future performance of the European Mid-Cap Fund
or the German Equity Fund or their corresponding Portfolios.
The following tables show the average annualized total return for the
Provesta and Investa Funds for the one-, three-, five- and ten-year
periods ended June 30, 1997 and of securities indices believed by the
Adviser to be suitable for performance comparisons with the Provesta
and Investa Portfolios and the DWS Funds. These figures, which are
unaudited, are based on the actual gross investment performance of the
DWS Funds with the adjustments indicated below. These figures were not
adjusted to reflect the expense ratios of the Funds (described in the
expense table under "Expenses") which are higher than the actual
expenses of the DWS Funds (which bear a combined fund management and
expense fee of 0.50% per annum of net assets). Any such adjustment
would reduce the performance shown below.
PROVESTA(1)
(Corresponding to the Provesta Portfolio and European Mid-Cap Fund)
Average Annual Return for the Periods Ended June 30, 1997
<TABLE>
<CAPTION>
Historical Performance
in U.S. Dollars
------------------------------- CDAX Index
Without With (in U.S. Dollars,
Sales Load(2) Sales Load(3) Annualized)(4)
------------- ------------- -----------------
<S> <C> <C> <C>
One Year 27.82% 20.79% 23.91%
Three Years 17.78% 15.58% 15.93%
Five Years 15.11% 13.81% 11.30%
Ten Years 13.50% 12.86% 10.51%
</TABLE>
(1) Net Assets as of 6/30/97 were DM 1,730 million ($992 million).
Provesta commenced investment operations in November 1985.
(2) The sales load may be reduced or eliminated on the purchase of Class A
shares in certain circumstances. See "Purchase of SharesNReducing or
Eliminating the Sales Charge."
(3) Adjusted to reflect deduction for the maximum sales charge of 5.50%
applicable to Class A shares.
(4) The DAX Composite Index ("CDAX") is a total rate of return index
of all domestic stocks traded on the Frankfurt Stock Exchange. It
is a broad-based index consisting of 16 industry groups. "CDAX"
is a registered trademark of Deutsche Bsrse AG.
INVESTA(1)
(Corresponding to the Investa Portfolio and German Equity Fund)
Average Annual Returns for the Periods Ended June 30, 1997
<TABLE>
<CAPTION>
Historical Performance
in U.S. Dollars
------------------------------- DAX Index
Without With (in U.S. Dollars,
Sales Load(2) Sales Load(3) Annualized)(4)
------------- ------------- -----------------
<S> <C> <C> <C>
One Year 30.29% 23.12% 28.97%
Three Years 19.85% 17.61% 19.58%
Five Years 14.21% 12.93% 13.59%
Ten Years 11.98% 11.35% 11.10%
</TABLE>
(1) Assets as of 6/30/97 were DM 3,451 million ($1,980 million).
Investa commenced investment operations in December 1956.
(2) The sales load may be reduced or eliminated on the purchase of Class A
shares in certain circumstances. See "Purchase of SharesNReducing or
Eliminating the Sales Charge."
(3) Adjusted to reflect deduction for the maximum sales charge of 5.50%
applicable to Class A shares.
(4) DAX is a total rate of return index consisting of 30 selected
German stocks traded on the Frankfurt Stock Exchange. "DAX" is a
registered trademark of Deutsche Bsrse AG.
The above results are shown in U.S. dollars on the basis of conversion
at the rate of DM values to U.S. dollars at the end of each month at
the prevailing rate. The results assume all dividends and capital gain
distributions have been reinvested with no sales charge.
In calculating the historical performance of the two DWS Funds shown
above the first step was to calculate the historical performance
according to a methodology generally acknowledged in Germany and
developed by the BVI Bundesverband Deutscher InvestmentNGesellschaften
(Association of German Fund Companies) ("BVI"). The BVI method
measures total return by comparing the net asset value per share of a
fund in DM at the beginning and at the end of the relevant measurement
period, assuming the reinvestment of distributions made by the fund
during such period. For this purpose, the reinvestment of
distributions is increased by including the corporate income tax
credit that is available to shareholders of German fund companies in
connection with such distributions. The BVI method does not take
account of any sales load charged to an investor on the initial
investment.
Second, for purposes of calculating the equivalent U.S. dollar returns
from the DM returns yielded by the BVI method, DWS made the following
adjustments: (1)the credit for the German corporate tax credit
referred to above was subtracted from the distributions reinvested
since it will not be available to shareholders of the Funds (but the
effect of corporate income taxes incurred by the corresponding DWS
Funds was not eliminated); and (2) the DM returns (including capital
gains and income) were converted to U.S. dollars at prevailing
exchange rates as of the end of each month.
These adjustments resulted in the performance indicated in the first
column. The second column, "With Sales Load," made a further
adjustment by reducing the performance by assuming the maximum sales
load was charged to the investor on the initial investment.
Except as described below in the case of Investa, it is not expected
that there will be any material differences in the securities held by
the Provesta and Investa Portfolios and their corresponding DWS Funds
and thus the investment characteristics of each Portfolio, such as
industry diversification, country diversification, portfolio beta,
portfolio quality, average maturity of fixed-income assets and
equity/non-equity mix will be substantially the same as the investment
characteristics of its corresponding DWS Fund. The Investa Portfolio
may not invest in securities issued by Deutsche Bank AG or its
affiliated persons that are engaged in securities-related businesses,
although Investa was and is permitted to invest in such securities.
However, the elimination of Deutsche Bank AG securities from Investa's
portfolio during the periods shown in the table above would not have
materially affected Investa's performance. Consequently, there is no
regulatory or tax difference between either of the two Portfolios and
its corresponding DWS Fund that would be expected to have material
effect on the investment performance of the Portfolio as compared to
its corresponding DWS Fund.
Portfolio Management
Elisabeth Weisenhorn is the senior portfolio manager for the Investa
Portfolio and the Provesta Portfolio. Ms. Weisenhorn also serves as
portfolio manager for Investa and Provesta, the Portfolios'
corresponding DWS Funds. She has held this position since 1991. Ms.
Weisenhorn has 12 years of experience as an investment manager and
joined the DWS Group in 1985. She is Senior Investment Officer, head
of the German equity team, supervising funds holding assets under
management of DM 8 billion ($4.7 billion) as of March 31, 1997. Ms.
Weisenhorn is based at DWS Group's office in Frankfurt, Germany.
Hannah Cunliffe is the portfolio manager for the Japanese Equity
Portfolio. Ms. Cunliffe also serves as portfolio manager of the
DWS-Japan Fonds, a German registered mutual fund with the same
objective, policies, and restrictions as the Japanese Equity
Portfolio. She has held this position since February 1994. Prior to
this, she was the Asian equity market analyst for Deutsche Bank
Research. Ms. Cunliffe joined the Deutsche Bank Group in 1989.
Heinz-Wilhelm Fesser is senior portfolio manager for the Global Bond
Portfolio and European Bond Portfolio. Mr. Fesser joined the DWS Group
in 1987, where he has been engaged in the management of global fixed
income funds. He is Senior Investment Officer, head of the global
fixed-income team, supervising funds holding assets under management
of DM 19.5 billion ($11.5 billion) as of March 31, 1997.
ADMINISTRATOR
Under a master agreement for administration services with the
Corporation, Federated Services Company serves as Administrator to the
Funds. In connection with its responsibilities as Administrator,
Federated Services Company, among other things (i) prepares, files and
maintains the Funds' governing documents, registration statements and
regulatory documents; (ii) prepares and coordinates the printing of
publicly disseminated documents; (iii) monitors declaration and
payment of dividends and distributions; (iv) projects and reviews the
Funds' expenses; (v) performs internal audit examinations; (vi)
prepares and distributes materials to the Directors of the
Corporation, (vii) coordinates the activities of all service
providers; (viii) monitors and supervises collection of tax reclaims;
and (ix) prepares shareholder meeting materials.
As Administrator, Federated Services Company receives a fee from each
Fund, which is computed daily and may be paid monthly, at the annual
rate of 0.065% of the average daily net assets of each Fund up to $200
million and 0.0525% of the average daily net assets of each Fund
greater than $200 million for the Fund's then-current fiscal year. The
Administrator will receive a minimum fee of $75,000 per Fund annually,
except that during the first two years of the agreement a minimum
aggregate fee for each Portfolio, corresponding Fund and any other
fund investing in the Portfolio, taken together, of $75,000 for the
first year of the Fund's operation and $125,000 for the second year
will be paid to the Operations Agent and the Administrator.
OPERATIONS AGENT
Under an operations agency agreement with the Portfolio Trust,
Federated Services Company serves as Operations Agent to the
Portfolio. In connection with its responsibilities as Operations
Agent, Federated Services Company, among other things, (i) prepares
governing documents, registration statements and regulatory filings;
(ii) performs internal audit examinations; (iii) prepares expense
projections; (iv) prepares materials for the Trustees of the Portfolio
Trust, (v) coordinates the activities of all service providers; (vi)
conducts compliance training for the Adviser; (vii) prepares investor
meeting materials and (viii) monitors and supervises collection of tax
reclaims.
As Operations Agent of the Portfolios, Federated Services Company
receives a fee from each Portfolio, which is computed daily and paid
monthly, at the annual rate of 0.035% of the average daily net assets
of each Portfolio for the Portfolio's then-current fiscal year. The
Operations Agent of the Portfolios will receive a minimum fee of
$60,000 per Portfolio annually and a minimum aggregate fee for each
Portfolio, corresponding Fund and any other fund investing in the
Portfolio, taken together, of $75,000 for the first year of the
Portfolio's operation and $125,000 for the second year, in each case
payable to the Operations Agent, the Administrator, and Transfer Agent
combined.
ADMINISTRATIVE AGENT
Under an administration agreement with the Portfolio Trust, IBT
(Cayman) provides certain services to the Portfolios, including (i)
filing and maintaining the governing documents, registration
statements and other regulatory filings; (ii) maintaining a telephone
line; (iii) approving annual expense budgets; (iv) authorizing
expenses; (v) distributing materials to the Trustees of the Portfolio
Trust; (vi) authorizing dividend distributions; (vii) maintaining
books and records; (viii) filing tax returns; and (ix) maintaining the
investor register.
As Administrative Agent of the Portfolios, IBT (Cayman) receives a fee
from each Portfolio, which may be paid monthly, at the annual rate of
$5,000.
DISTRIBUTOR
Edgewood serves as principal distributor for shares of each Fund.
Edgewood is located at Federated Investors Tower, Pittsburgh,
Pennsylvania 15222-3779. It is a New York corporation organized on
October 26, 1993, and is the principal distributor for a number of
investment companies. Edgewood is a subsidiary of Federated Investors
and an affiliate of Federated Services Company.
Securities laws may require certain Financial Intermediaries (as
defined below) such as depository institutions to register as dealers.
The Distributor may pay dealers an amount up to 5.0% of the net asset
value of Class B shares purchased by their clients or customers as an
advance payment. These payments will be made directly by the
Distributor from its assets, and will not be made from the assets of a
Fund. Dealers may voluntarily waive receipt of all or any portion of
these advance payments. The Distributor may pay all or a portion of
the distribution fee discussed below to Financial Intermediaries (a
defined below) that waive all or any portion of the advance payments.
Under a distribution and services plan adopted in accordance with Rule
12b-1 of the 1940 Act, Class B shares are subject to a distribution
plan (the "Distribution Plan") and Class A shares and Class B shares
are subject to a service plan (the "Service Plan").
Under the Distribution Plan, Class B shares of each Fund will pay a
fee to the Distributor in an amount computed at an annual rate of
0.75% of the average daily net assets of the Fund represented by Class
B shares to finance any activity which is principally intended to
result in the sale of Class B shares of the Fund subject to the
Distribution Plan. Because distribution fees to be paid by a Fund to
the Distributor may not exceed an annual rate of 0.75% of Class B
shares' average daily net assets, it will take the Distributor a
number of years to recoup the expenses, including payments to other
dealers, it has incurred for its sales services and
distribution-related support services pursuant to the Distribution
Plan.
The Distribution Plan is a compensation-type plan. As such, a Fund
makes no payments to the Distributor except as described above.
Therefore, a Fund does not pay for unreimbursed expenses of the
Distributor, including amounts expended by the Distributor in excess
of amounts received by it from a Fund, interest, carrying or other
financing charges in connection with excess amounts expended, or the
Distributor's overhead expenses. However, the Distributor may be able
to recover such amounts or may earn a profit from payments made by
shares under the Distribution Plan.
Under the Service Plan, each Fund pays to DFM for the provision of
certain services to the holders of Class A shares and Class B shares a
fee computed at an annual rate of 0.25% of the average daily net
assets of each such Class of shares. The service provided may include
personal services relating to shareholder accounts, such as answering
shareholder inquiries regarding the Fund, providing reports and other
information to shareholders and financial intermediaries ("Financial
Intermediaries"), and services related to the maintenance of
shareholder accounts, and other services. DFM determines the amounts
to be paid to Financial Intermediaries, the schedules of such fees and
the basis upon which such fees will be paid.
DFM may pay Financial Intermediaries a shareholder services fee of up
to 0.25% of the amount invested in Fund shares by employees
participating in qualified or non-qualified employee benefit plans or
other programs where (i) the employers or affiliated employers
maintaining such plans or programs have a minimum of 250 employees
eligible for participation in such plans or programs, or (ii) such
plan's or program's aggregate investment in the series of the
Corporation (the "Deutsche Funds") or certain other products made
available by the Distributor to such plans or programs is $1,000,000
or more ("Eligible Benefit Plans"). Shares in the Deutsche Funds then
held by Eligible Benefit Plans will be aggregated to determine the fee
payable. DFM reserves the right to cease paying these fees at any
time. DFM may pay such fees from its own funds in addition to amounts
received from the Funds under the Service Plan, including past profits
or any other source available to it. Such payments are subject to a
reclaim from the Financial Intermediary should the assets leave the
plan or program within 12 months after purchase.
Furthermore, with respect to Class A shares and Class B shares, the
Distributor may offer to pay a fee from its own assets to Financial
Intermediaries as financial assistance for providing substantial sales
services, distribution related support services, or shareholder
services. The support may include sponsoring sales, educational and
training seminars for their employees, providing sales literature, and
engineering computer software programs that emphasize the attributes
of a Fund. Such assistance may be predicated upon the amount of shares
the Financial Intermediary sells or may sell, and/or upon the type and
nature of sales or marketing support furnished by the Financial
Intermediary.
TRANSFER AGENT, CUSTODIAN AND FUND ACCOUNTANT
Federated Shareholder Services Company, Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779, serves as the transfer agent and
dividend disbursing agent for each Fund. IBT, 200 Clarendon Street,
Boston, MA 02116 acts as the custodian of each Fund's and each
Portfolio's assets. Securities held for a Portfolio may be held by a
sub-custodian bank approved by the Trustees or the Custodian of the
Portfolio Trust. IBT (Canada) provides fund accounting services to the
Funds and the Portfolios, including (i) calculation of the daily net
asset value for the Funds and the Portfolios; (ii) monitoring
compliance with investment portfolio restrictions, including all
applicable federal securities and other regulatory requirements; and
(iii) monitoring each Fund's and Portfolio's compliance with the
requirements applicable to a regulated investment company under the
Code.
EXPENSES
In addition to the fees payable under the various agreements discussed
above, each Fund and each Portfolio is responsible for usual and
customary expenses associated with its respective operations. Such
expenses may include organization expenses, legal fees, audit fees and
expenses, insurance costs, the compensation and expenses of the
Directors or Trustees, as the case may be, registration fees under
applicable securities laws, fund accounting fees, custodian fees and
extraordinary expenses. For each Fund, such expenses also include
transfer, registrar and dividend disbursing costs, and the expenses of
printing and mailing reports and notices and proxy statements to Fund
shareholders. For each Portfolio, such expenses also include brokerage
expenses.
DFM has agreed that it will reimburse each Fund through at least
August 31, 1998, to the extent necessary to maintain each Fund's total
operating expenses (which includes expenses of the Fund and its
corresponding Portfolio but does not cover extraordinary expenses
during the period) at not more than 1.60%, 2.35%, 1.30% and 2.05% of
the average annual net assets of Class A shares of the Equity Funds,
the Class B shares of the Equity Funds, the Class A shares of the Bond
Funds and the Class B shares of the Bond Funds, respectively. There is
no assurance that DFM will continue this reimbursement beyond the
specified period.
EXPENSES OF CLASS A SHARES AND CLASS B SHARES
Holders of Class A shares and Class B shares bear their allocable
portion of a Fund's expenses along with their allocable share of the
corresponding portfolio's operating expenses. At present, the only
expenses which are allocated specifically to Class A shares and Class
B shares as classes are expenses under the Distribution Plan and
expenses under the Service Plan. However, the Directors reserve the
right to allocate certain other expenses to holders of Class A shares
and Class B shares ("Class Expenses"). In any case, Class Expenses
would be limited to: distribution fees; shareholder services fees;
transfer agent fees as identified by the Transfer Agent as
attributable to holders of Class A shares and Class B shares; printing
and postage expenses related to preparing and distributing materials
such as shareholder reports, prospectuses and proxies to current
shareholders as attributable to holders of Class A shares and Class B
shares; registration fees paid to the Securities and Exchange
Commission and to state securities commissions as attributable to
holders of Class A shares and Class B shares; expenses related to
administrative personnel and services as required to support holders
of Class A shares and Class B shares; legal fees relating solely to
Class A shares or Class B shares; and Directors' fees incurred as a
result of issues related solely to Class A shares or Class B shares.
PORTFOLIO BROKERAGE
The estimated annual portfolio turnover rate for the Provesta
Portfolio, Investa Portfolio, Japanese Equity Portfolio, Global Bond
Portfolio and European Bond Portfolio is generally not expected to
exceed 180%, 80%, 150%, 350% and 350%, respectively. A 100% annual
turnover rate would occur, for example, if all portfolio securities
(excluding short-term obligations) were replaced once in a period of
one year, or if 10% of the portfolio securities were replaced ten
times in one year. The amount of brokerage commissions and taxes on
realized capital gains to be borne by the shareholders of a Fund tend
to increase as the level of portfolio activity increases.
In effecting securities transactions, the Adviser seeks to obtain the
best price and execution of orders. In selecting a broker, the Adviser
considers a number of factors including: the broker's ability to
execute orders without disturbing the market price; the broker's
reliability for prompt, accurate confirmations and on-time delivery of
securities; the broker's financial condition and responsibility; the
research and other investment information provided to the Adviser by
the broker; and the commissions charged. Accordingly, the commissions
charged by any such broker may be greater than the amount another firm
might charge if the Adviser determines in good faith that the amount
of such commissions is reasonable in relation to the value of the
brokerage services and research information provided by such broker.
The Adviser may direct a portion of a Portfolio's securities
transactions to certain unaffiliated brokers which in turn use a
portion of the commissions they receive from a Portfolio to pay other
unaffiliated service providers on behalf of that Portfolio for
services provided for which the Portfolio would otherwise be obligated
to pay. Such commissions paid by a Portfolio are at the same rate paid
to other brokers for effecting similar transactions in listed equity
securities.
Deutsche Bank AG or one of its subsidiaries or affiliates may act as
one of the agents of the Portfolios in the purchase and sale of
portfolio securities when, in the judgment of the Adviser, that firm
will be able to obtain a price and execution at least as favorable as
other qualified brokers. As one of the principal brokers for the
Portfolios, Deutsche Bank AG receives brokerage commissions from each
Portfolio.
On those occasions when the Adviser deems the purchase or sale of a
security to be in the best interests of a Portfolio as well as other
customers, the Adviser, to the extent permitted by applicable laws and
regulations, may, but is not obligated to, aggregate the securities to
be sold or purchased for a Portfolio with those to be sold or
purchased for other customers in order to obtain best execution,
including lower brokerage commissions, if appropriate. In such event,
allocation of the securities so purchased or sold as well as any
expenses incurred in the transaction are made by the Adviser in the
manner it considers to be most equitable and consistent with its
fiduciary obligations to its customers, including the Portfolio. In
some instances, this procedure might adversely affect a Portfolio.
INVESTING IN THE FUNDS
Each Fund offers investors two classes of shares that carry sales
charges and contingent deferred sales charges in different forms and
amounts and which bear different levels of expenses.
Class A Shares
An investor who purchases Class A shares of a Fund pays a maximum
sales charge of 5.50% for the Equity Funds and 4.50% for the Bond
Funds at the time of purchase. Certain purchases of Class A shares are
not subject to a sales charge. See "Purchase of SharesNInvesting in
Class A Shares." As a result, Class A shares are not subject to any
charges when they are redeemed (except for special programs offered
under "Purchase of SharesNPurchases with Proceeds From Redemptions of
Unaffiliated Investment Companies"). Certain purchases of Class A
shares qualify for reduced sales charges. See "Purchase of
SharesNReducing or Eliminating the Sales Charge." Class A shares have
no conversion feature.
Class B Shares
Class B shares of each Fund are sold without an initial sales charge,
but are subject to a contingent deferred sales charge in accordance
with the following schedule:
<TABLE>
<CAPTION>
Contingent
Year of Redemption Deferred
After Purchase Sales Charge
- ------------------ ------------
<S> <C>
First 5.00%
Second 4.00%
Third 3.00%
Fourth 3.00%
Fifth 2.00%
Sixth 1.00%
Seventh and thereafter 0.00%
</TABLE>
Class B shares also bear a fee pursuant to a Distribution Plan,
adopted in accordance with Rule 12b-1 of the 1940 Act, while Class A
shares do not bear such a fee. Both Class A shares and Class B shares
will bear shareholder services fees. Class B shares will automatically
convert into Class A shares, based on relative net asset value, on or
about the fifteenth of the month eight full years after the purchase
date. Class B shares provide an investor the benefit of putting all of
the investor's dollars to work from the time the investment is made,
but (until conversion) will have a higher expense ratio and pay lower
dividends than Class A shares due to the higher 12b-1 fees.
PURCHASE OF SHARES
Shares of each Fund are sold on days on which the New York Stock
Exchange is open. Shares of a Fund may be purchased as described
below, either through a Financial Intermediary (such as a bank or
broker/dealer which has a sales agreement with the Distributor) or by
sending a wire or a check directly to the Fund, with a minimum initial
investment of $5,000 for Class A shares and Class B shares. Additional
investments can be made for as little as $500. The minimum initial
investment for retirement plan participants is $1,000. The minimum
subsequent investment for retirement plan participants is $100.
(Financial Intermediaries may impose different minimum investment
requirements on their customers.)
In connection with any sale, the Distributor may from time to time
offer certain items of nominal value to any shareholder or investor.
The Funds reserve the right to reject any purchase request. An account
must be established through a Financial Intermediary or by completing,
signing, and returning the new account form available from the Funds
before shares can be purchased.
Investing in Class A Shares
Class A shares of each Fund are sold at their net asset value next
determined after an order is received, plus a sales charge as follows:
Equity Funds
<TABLE>
<CAPTION>
Sales Charge
as a Percentage of Dealer
---------------------- Concession as
Net a Percentage of
Offering Amount Public Offering
Amount of Transaction Price Invested Price
- --------------------- -------- -------- ---------------
<S> <C> <C> <C>
Less than $50,000 5.50% 5.82% 5.00%
$50,000 but less
than $100,000 4.50% 4.71% 3.75%
$100,000 but less
than $250,000 3.50% 3.63% 2.75%
$250,000 but less
than $500,000 2.50% 2.56% 2.00%
$500,000 but less
than $1 million 2.00% 2.04% 1.75%
$1 million or greater None None Up to 1.00%*
</TABLE>
* See "Dealer Concession" below.
Bond Funds
<TABLE>
<CAPTION>
Sales Charge
as a Percentage of Dealer
---------------------- Concession as
Net a Percentage of
Offering Amount Public Offering
Amount of Transaction Price Invested Price
- --------------------- -------- -------- ---------------
<S> <C> <C> <C>
Less than $50,000 4.50% 4.71% 4.00%
$50,000 but less
than $100,000 4.00% 4.17% 3.50%
$100,000 but less
than $250,000 3.50% 3.63% 2.75%
$250,000 but less
than $500,000 2.50% 2.56% 2.00%
$500,000 but less
than $1 million 2.00% 2.04% 1.75%
$1 million or greater None None Up to 1.00%*
</TABLE>
* See "Dealer Concession" below.
DEALER CONCESSION
The dealer concession may be changed from time to time but will remain
the same for all dealers. Dealer concession will be paid to dealers
who initiate and are responsible for purchases of $1 million or more.
Any portion of the sales charge which is not paid to a dealer will be
retained by the Distributor. The Distributor, at its expense, may
provide additional promotional incentives to dealers. In some
instances, these incentives may be offered only to certain dealers who
have sold or may sell significant numbers of shares of the Fund or
other Deutsche Funds.
The sales charge for shares sold other than through registered
broker/dealers will be retained by the Distributor. The Distributor
may pay fees to banks out of the sales charge in exchange for sales
and/or administrative services performed on behalf of the bank's
customers in connection with the initiation of customer accounts and
purchases of shares.
REDUCING OR ELIMINATING THE SALES CHARGE
The sales charge can be reduced or eliminated on the purchase of Class
A shares through:
. sales charge waiver;
. quantity discounts and accumulated purchases;
. concurrent purchases;
. signing a 13-month letter of intent;
. using the reinvestment privilege; or
. purchases with proceeds from redemptions of unaffiliated investment company
shares.
SALES CHARGE WAIVER
Sales charges may be waived on Class A shares of the Fund (subject to
appropriate documentation furnished to the Distributor as it may
request from time to time in order to verify eligibility for this
privilege) if purchased by:
1. Full-time employees of National Association of Securities Dealers,
Inc. ("NASD") member firms and full-time employees of other Financial
Institutions which have entered into a supplemental agreement with the
Distributor pertaining to the sale of Fund shares, either for
themselves directly or pursuant to an employee benefit plan or other
program, or for their spouses or minor children. This privilege also
applies to full-time employees of Financial Institutions affiliated
with NASD member firms whose full-time employees are eligible to
purchase Class A shares at net asset value;
2. Current full-time, part-time or retired employees of Deutsche Bank
AG and its affiliates or subsidiaries, current or former directors or
trustees of Deutsche Bank AG and its affiliates or subsidiaries,
current or former Board members of a fund advised by Deutsche Bank AG
or any of its affiliates or subsidiaries, including the Directors of
the Corporation, or the spouse or minor child of the foregoing,
including an employee of Deutsche Bank AG or any of its affiliates or
subsidiaries who act as custodian for a minor child;
3. Registered representatives, bank trust officers, certified
financial planners and other employees (and their immediate families)
of investment professionals who have entered into a supplemental
agreement with the Distributor;
4. IRA Rollover accounts sponsored by Deutsche Morgan Grenfell, Inc.,
Deutsche Bank Trust Company, Deutsche Bank AG, or any of its
affiliates as administrator, trustee or custodian, provided that the
distribution proceeds are made from a qualified retirement plan or
from a 403(b)(7) plan that is sponsored, administered or custodied by
Deutsche Bank Trust Company or any of its affiliates, and provided
that, at the time of such distribution, such qualified retirement plan
or 403(b)(7) plan met the requirements of an Eligible Benefit Plan and
all or a portion of such plan's assets were invested in the Deutsche
Funds or certain other products made available by the Distributor to
such plans;
5. As part of an Eligible Benefit Plan having a minimum of 250
eligible employees or a minimum of $1,000,000, or such lesser amount
as may be determined by the Distributor, invested in Deutsche Funds;
6. Investor accounts through certain broker-dealers and other
Financial Intermediaries that have entered into supplemental
agreements with the Distributor, which include a requirement that such
shares be sold for the benefit of clients participating in a "wrap
account" or similar program under which such clients pay a fee to the
broker-dealer or other Financial Intermediary, or such other accounts
to which the broker-dealer or other Financial Intermediary charges an
asset management fee;
7. Qualified separate accounts maintained by an insurance company
pursuant to the laws of any State or territory of the United States;
8. Trust companies and bank trust departments, including Deutsche Bank
Trust Company and its affiliates, initially investing at least
$100,000 of assets held in a fiduciary, agency, advisory, custodial or
similar capacity on behalf of any one of their investor clients;
9. Accounts investing $100,000 or more of (1) a State or territory of
the United States, county, city or instrumentality thereof, (2)
charitable organizations as defined under Section 501(C)(3) of the
Code, and (3) charitable remainder trusts or life income pools as
defined under Section 501(C)(3) of the Code.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES
Larger purchases reduce the sales charge paid. A Fund will combine
purchases of Class A shares made on the same day by the investor, the
investor's spouse, and the investor's children under age 21 when it
calculates the sales charge. In addition, the sales charge, if
applicable, is reduced for purchases made at one time by a trustee or
fiduciary for a single trust estate or a single fiduciary account.
If an additional purchase of Class A shares is made in a Fund, the
Fund will consider the previous purchases still invested in the Fund.
For example, if a shareholder already owns Class A shares of an Equity
Fund having a current value at the public offering price of $30,000
and he purchases $20,000 more at the current public offering price,
the sales charge on the additional purchase according to the schedule
now in effect would be 4.50%, not 5.50%.
To receive the sales charge reduction, the Distributor must be
notified by the shareholder in writing or by his Financial
Intermediary at the time the purchase is made that Class A shares are
already owned or that purchases are being combined. A Fund will reduce
the sales charge after it confirms the purchases.
CONCURRENT PURCHASES
For purposes of qualifying for a sales charge reduction, a shareholder
has the privilege of combining concurrent purchases of Class A shares
of two or more of the Deutsche Funds, the purchase price of which
includes a sales charge. For example, if a shareholder concurrently
invested $30,000 in Class A shares of one of the Deutsche Funds with a
sales charge, and $20,000 in another Fund, the sales charge would be
reduced to reflect a $50,000 purchase.
To receive this sales charge reduction, the Distributor must be
notified by the shareholder in writing or by his Financial
Intermediary at the time the concurrent purchases are made. A Fund
will reduce the sales charge after the purchases are confirmed.
LETTER OF INTENT
If a shareholder intends to purchase at least $50,000 of Class A
shares of the Deutsche Funds (excluding the Deutsche U.S. Money Market
Fund) over the next 13 months, the sales charge may be reduced by
signing a letter of intent to that effect. This letter of intent
includes a provision for a sales charge adjustment depending on the
amount actually purchased within the 13-month period and a provision
for the Custodian to hold up to the maximum sales charge of the total
amount intended to be purchased in escrow (in shares) until such
purchase is completed.
The shares held in escrow in the shareholder's account will be
released upon fulfillment of the letter of intent or the end of the
13-month period, whichever comes first. If the amount specified in the
letter of intent is not purchased, an appropriate number of escrowed
shares may be redeemed in order to realize the difference in the sales
charge.
While this letter of intent will not obligate the shareholder to
purchase shares, each purchase during the period will be at the sales
charge applicable to the total amount intended to be purchased. At the
time a letter of intent is established, current balances in accounts
in any shares of any Deutsche Fund, excluding the Deutsche U.S. Money
Market Fund, will be aggregated to provide a purchase credit towards
fulfillment of the letter of intent. Prior trade prices will not be
adjusted.
REINVESTMENT PRIVILEGE
If Class A shares in a Fund have been redeemed, the shareholder has
the privilege, within 120 days, to reinvest the redemption proceeds at
the next- determined net asset value without any sales charge. The
Distributor must be notified by the shareholder in writing or by his
Financial Intermediary of the reinvestment in order to eliminate a
sales charge. If the shareholder redeems his Class A shares in a Fund,
there may be tax consequences. See "Tax Treatment of Reinvestments"
below.
PURCHASES WITH PROCEEDS FROM REDEMPTIONS OF UNAFFILIATED INVESTMENT COMPANIES
Investors may purchase Class A shares at net asset value, without a
sales charge, with the proceeds from the redemption of shares of an
unaffiliated investment company that were purchased or sold with a
sales charge or commission and were not distributed by the
Distributor. The purchase must be made within 60 days of the
redemption, and the Distributor must be notified by the investor in
writing, or by his Financial Intermediary, at the time the purchase is
made. From time to time, the Distributor may offer dealers
compensation for shares purchased under this program. If shares are
purchased in this manner, redemptions of these shares will be subject
to a contingent deferred sales charge for one year from the date of
purchase. Shareholders will be notified prior to the implementation of
any special offering as described above.
TAX TREATMENT OF REINVESTMENTS
Generally, a reinvestment of the proceeds of a redemption of shares in
a Fund or an unaffiliated investment company will not alter the
federal income tax status of any capital gain realized on the
redemption of the shares. However, any loss on the disposition of the
shares in a Fund will be disallowed to the extent shares of the same
Fund are purchased within a 61-day period beginning 30 days before and
ending 30 days after the disposition of shares. Further, if the
proceeds are reinvested within 90 days after the redeemed shares were
acquired, the sales charge imposed on the original acquisition, to the
extent of the reduction in the sales charge on the reinvestment, will
not be taken into account in determining gain or loss on the
disposition of the original shares, but will be treated instead as
incurred in connection with the acquisition of the replacement shares.
INVESTING IN CLASS B SHARES
Class B shares are sold at their net asset value next determined after
an order is received. While Class B shares are sold without an initial
sales charge, under certain circumstances described under "Contingent
Deferred Sales ChargeNClass B Shares," a contingent deferred sales
charge may be applied by the Distributor at the time Class B shares
are redeemed.
CONVERSION OF CLASS B SHARES
Class B shares will automatically convert into Class A shares on or
about the fifteenth of the month eight full years after the purchase
date, except as noted below. Such conversion will be on the basis of
the relative net asset values per share, without the imposition of any
sales charge, fee, or other charge. Class B shares acquired by
exchange from Class B shares of another Deutsche Fund will convert
into Class A shares based on the time of the initial purchase. For
purposes of conversion to Class A shares, shares purchased through the
reinvestment of dividends and distributions paid on Class B shares
will be considered to be held in a separate sub-account. Each time any
Class B shares in the shareholder's account (other than those in the
sub-account) convert to Class A shares, an equal pro rata portion of
the Class B shares in the sub-account will also convert to Class A
shares. The conversion of Class B shares to Class A shares is subject
to the continuing availability of a ruling from the Internal Revenue
Service or an opinion of counsel that such conversions will not
constitute taxable events for federal tax purposes. There can be no
assurance that such ruling or opinion will be available, and the
conversion of Class B shares to Class A shares will not occur if such
ruling or opinion is not available. In such event, Class B shares
would continue to be subject to higher expenses than Class A shares
for an indefinite period.
PURCHASING SHARES THROUGH A FINANCIAL INTERMEDIARY
An investor may call his Financial Intermediary (such as a bank or an
investment dealer) to place an order to purchase shares. Orders placed
through a Financial Intermediary are considered received when the Fund
is notified of the purchase order. Shares will not be issued in
respect of such orders until payment is converted into federal funds.
Purchase orders through a registered broker/dealer must be received by
the broker before 4:00 p.m. (U.S. Eastern time) and must be
transmitted by the broker to the Fund before 5:00 p.m. (U.S. Eastern
time) in order for shares to be purchased at that day's price.
Purchase orders through other Financial Intermediaries must be
received by the Financial Intermediary and transmitted to the Fund
before 4:00 p.m. (U.S. Eastern time) in order for shares to be
purchased at that day's price. It is the Financial Intermediary's
responsibility to transmit orders promptly. Financial Intermediaries
may charge additional fees for their services.
The Financial Intermediary which maintains investor accounts in Class
B shares with a Fund must do so on a fully disclosed basis unless it
accounts for share ownership periods used in calculating the
contingent deferred sales charge (see "Contingent Deferred Sales
Charge"). In addition, advance payments made to Financial
Intermediaries may be subject to reclaim by the Distributor for
accounts transferred to Financial Intermediaries which do not maintain
investor accounts on a fully disclosed basis and do not account for
share ownership periods.
PURCHASING SHARES BY WIRE
Once an account has been established, shares may be purchased by
Federal Reserve wire by calling the Transfer Agent. All information
needed will be taken over the telephone, and the order is considered
received when IBT receives payment by wire. Federal funds should be
wired as follows: Investors Bank & Trust, Boston, MA; ABA Number
0110-0143-8; BNF Account Number 570000307. For Credit to: (Fund Name)
(Fund Class); (Fund Number, this number can be found on the account
statement or by contacting the Fund); Account Number; Trade Date and
Order Number; Group Number or Dealer Number; Nominee or Institution
Name. Shares cannot be purchased by wire on holidays when wire
transfers are restricted.
PURCHASING SHARES BY CHECK
Once a Fund account has been established, shares may be purchased by
sending a check made payable to the name of the specific Fund
(designate class of shares and account number) to: Deutsche Funds,
Inc., P.O. Box 8612, Boston, MA 02266- 8612. Please include an account
number on the check. Orders by mail are considered received when
payment by check is converted into federal funds (normally the
business day after the check is received).
SPECIAL PURCHASE FEATURES
Systematic Investment Program
Once a Fund account has been opened with the minimum initial
investment, shareholders may add to their investment on a regular
basis in a minimum amount of $100. Under this program, funds may be
automatically withdrawn periodically from the shareholder's checking
account at an Automated Clearing House ("ACH") member and invested in
a Fund at the net asset value next determined after an order is
received by the Fund, plus the sales charge, if applicable.
Shareholders should contact their Financial Intermediary or the Funds
directly to participate in this program.
Retirement Plans
Fund shares can be purchased as an investment for retirement plans or
IRA accounts. For further details, contact the Funds and consult a tax
adviser.
EXCHANGE PRIVILEGE
Class A Shares
Class A shareholders may exchange all or some of their shares for
Class A shares of other Deutsche Funds at relative net asset value.
None of the Deutsche Funds imposes any additional fees on exchanges.
Shareholders in certain other Deutsche Funds may exchange all or some
of their shares for Class A shares.
Class B Shares
Class B shareholders may exchange all or some of their shares for
Class B shares of the Deutsche Funds. Contact your Financial
Intermediary regarding the availability of other Class B shares in the
Deutsche Funds. Exchanges are made at net asset value without being
assessed a contingent deferred sales charge on the exchanged shares.
To the extent that a shareholder exchanges shares for Class B shares
of other Deutsche Funds, the time for which exchanged-from shares were
held will be credited against the time for which the exchanged-for
shares are required to be held for purposes of satisfying the
applicable holding period in respect of the contingent deferred sales
charge. For more information, see "Contingent Deferred Sales Charge."
Please contact your Financial Intermediary directly or the Distributor
for information on and prospectuses for the Deutsche Funds into which
your shares may be exchanged free of charge.
Requirements for Exchange
Shareholders using this privilege must exchange shares having a net
asset value equal to the minimum investment requirements of the
Deutsche Fund into which the exchange is being made. The shareholder
must receive a Prospectus of the Deutsche Fund for which the exchange
is being made.
This privilege is available to shareholders resident in any state in
which the shares being acquired may be sold. Upon receipt of proper
instructions and required supporting documents, shares submitted for
exchange are redeemed and proceeds invested in the same class of
shares of the other Fund. The exchange privilege may be modified or
terminated at any time. Shareholders will be notified in advance of
the modification or termination of the exchange privilege.
Tax Consequences
An exchange will be treated as a taxable sale for federal income tax purposes
and any gain or loss realized will be subject to the rules applicable to
reinvestments (described above under "Tax Treatment of Reinvestments"). See
"Taxes" below for additional information.
Making an Exchange
Instructions for exchanging may be given in writing or by telephone.
Written instructions may require a signature guarantee. Shareholders
of a Fund may have difficulty in making exchanges by telephone through
brokers and other Financial Intermediaries during times of drastic
economic or market changes. If a shareholder cannot contact his broker
or Financial Intermediary by telephone, it is recommended that an
exchange request be made in writing and sent by overnight mail to:
Deutsche Funds, Inc., c/o Federated Shareholder Services Company, 1099
Hingham Street, Rockland, MA 02370-3317.
Telephone Instructions
Telephone instructions made by the investor may be carried out only if
a telephone authorization form completed by the investor is on file
with a Fund. If the instructions are given by a broker, a telephone
authorization form completed by the broker must be on file with the
Fund. If reasonable procedures are not followed, the responsible party
may be liable for losses due to unauthorized or fraudulent telephone
instructions. Shares may be exchanged between two Funds by telephone
only if the two Deutsche Funds have identical shareholder
registrations.
Any shares held in certificated form cannot be exchanged by telephone
but must be forwarded to Federated Shareholder Services Company and
deposited to the shareholder's account before being exchanged.
Telephone exchange instructions are recorded and will be binding upon
the shareholder. Such instructions will be processed as of 4:00 p.m.
(U.S. Eastern time) and must be received by the Fund before that time
for shares to be exchanged the same day. This privilege may be
modified or terminated at any time.
REDEMPTION OF SHARES
Shares are redeemed at their net asset value, next determined after a
Fund receives the redemption request, less any applicable contingent
deferred sales charge. Redemptions will be made on days on which the
Funds compute their net asset value. Investors who redeem shares
through a Financial Intermediary may be charged a service fee by that
Financial Intermediary. Redemption requests must be received in proper
form and can be made as described below.
Redeeming Shares Through a Financial Intermediary
Shares of a Fund may be redeemed by calling your Financial
Intermediary to request the redemption. Shares will be redeemed at the
net asset value next determined after a Fund receives the redemption
request from the Financial Intermediary, less any applicable
contingent deferred sales charge. Redemption requests made through a
registered broker/dealer must be received by the broker before 4:00
p.m. (U.S. Eastern time) and must be transmitted by the broker to a
Fund before 5:00 p.m. (U.S. Eastern time) in order for shares to be
redeemed at that day's net asset value. Redemption requests through
other Financial Intermediaries (such as banks) must be received by the
Financial Intermediary and transmitted to a Fund before 4:00 p.m.
(U.S. Eastern time) in order for shares to be redeemed at that day's
net asset value. The Financial Intermediary is responsible for
promptly submitting redemption requests and providing proper written
redemption instructions. Customary fees and commissions may be charged
by the Financial Intermediary for this service.
Redeeming Shares by Telephone
Shares may be redeemed in any amount by calling a Fund provided that
Fund has received a properly completed authorization form. These forms
can be obtained from the Distributor. Proceeds will be mailed in the
form of a check, to the shareholder's address of record or by wire
transfer to the shareholder's account at a domestic commercial bank
that is a member of the Federal Reserve System. The minimum amount for
a wire transfer is $1,000. Proceeds from redeemed shares purchased by
check or through ACH will not be wired until the payment has cleared.
Proceeds from redemption requests received on holidays when wire
transfers are restricted will be wired the following business day.
Telephone instructions will be recorded. If reasonable procedures are
not followed by a Fund, it may be liable for losses due to
unauthorized or fraudulent telephone instructions. In the event of
drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If this occurs, redemption by
mail (see "Redeeming Shares by Mail") should be considered. If at any
time a Fund shall determine it necessary to terminate or modify the
telephone redemption privilege, shareholders would be promptly
notified.
Redeeming Shares by Mail
Shares may be redeemed in any amount by mailing a written request to:
Deutsche Funds, Inc., Federated Shareholder Services Company, P.O. Box
8612, Boston, MA 02266-8612. If share certificates have been issued,
they should be sent unendorsed with the written request by registered
or certified mail to the address noted above.
The written request should state: Fund Name and the share Class name;
the account name as registered with the Fund; the account number; and
the number of shares to be redeemed or the dollar amount requested.
All owners of the account must sign the request exactly as the shares
are registered. Normally, a check for the proceeds is mailed within
one business day, but in no event more than seven days after receipt
of a proper written redemption request. Dividends are paid up to and
including the day that a redemption request is processed.
Shareholders requesting a redemption of any amount to be sent to an
address other than that on record with the Fund, or a redemption
payable other than to the shareholder of record, must have their
signatures guaranteed by a commercial or savings bank, trust company
or savings association whose deposits are insured by an organization
which is administered by the Federal Deposit Insurance Corporation; a
member firm of a domestic stock exchange; or any other "eligible
guarantor institution," as defined by the Securities and Exchange Act
of 1934, as amended. The Funds do not accept signatures guaranteed by
a notary public.
Each Fund and the Transfer Agent have adopted standards for accepting
signature guarantees from the above institutions. A Fund may elect in
the future to limit eligible signature guarantors to institutions that
are members of a signature guarantee program. Each Fund and the
Transfer Agent reserve the right to amend these standards at any time
without notice.
SPECIAL REDEMPTION FEATURES
Systematic Withdrawal Program
The Systematic Withdrawal Program permits the shareholder to request
withdrawal of a specified dollar amount (minimum $100) on either a
monthly or quarterly basis from accounts with a $10,000 minimum at the
time the shareholder elects to participate in the Systematic
Withdrawal Program. Under this program, shares are redeemed to provide
for periodic withdrawal payments in an amount directed by the
shareholder.
Depending upon the amount of the withdrawal payments, the amount of
dividends paid and capital gains distributions with respect to shares,
and the fluctuation of the net asset value of shares redeemed under
this program, redemptions may reduce, and eventually deplete, the
shareholder's investment in a Fund. In addition, shareholder accounts
are subject to minimum balances. See "Account and Share Information."
For this reason, payments under this program should not be considered
as yield or income on the shareholder's investment in a Fund. To be
eligible to participate in this program, a shareholder must have an
account value of at least $10,000. A shareholder may apply for
participation in this program through his Financial Intermediary. Due
to the fact that Class A shares are sold with a sales charge, it is
not advisable for shareholders to continue to purchase Class A shares
while participating in this program. A contingent deferred sales
charge may be imposed on Class B shares.
CONTINGENT DEFERRED SALES CHARGE
Shareholders may be subject to a contingent deferred sales charge upon
redemption of their shares under the following circumstances:
Class A Shares
No initial sales charge applies on investments of $1 million or more,
but a contingent deferred sales charge of 1% is imposed on certain
redemptions within one year of purchase. Any applicable contingent
deferred sales charge will be imposed on the lesser of the net asset
value of the redeemed shares at the time of purchase or the net asset
value of the redeemed shares at the time of redemption.
Class B Shares
Shareholders redeeming Class B shares from their Fund accounts within
six full years of the purchase date of those shares will be charged a
contingent deferred sales charge by the Distributor. Any applicable
contingent deferred sales charge will be imposed on the lesser of (i)
the net asset value of the redeemed shares at the time of purchase
(or, if such redeemed shares were acquired in an exchange of Class B
shares of another Fund, at the time of purchase of the Class B shares
of the exchanged-from Fund) or (ii) the net asset value of the
redeemed shares at the time of redemption.
Class A Shares and Class B Shares
The contingent deferred sales charge will be deducted from the
redemption proceeds otherwise payable to the shareholder and will be
retained by the Distributor. The contingent deferred sales charge will
not be imposed with respect to: (1) shares acquired through the
reinvestment of dividends or distributions of long-term capital gains;
and (2) shares held for more than six full years from the date of
purchase with respect to Class B shares and one full year from the
date of purchase with respect to applicable Class A shares.
Redemptions will be processed in a manner intended to maximize the
amount of redemption which will not be subject to a contingent
deferred sales charge. In computing the amount of the applicable
contingent deferred sales charge, redemptions are deemed to have
occurred in the following order: (1) shares acquired through the
reinvestment of dividends and long-term capital gains; (2) shares held
for more than six full years from the date of purchase with respect to
Class B shares and one full year from the date of purchase with
respect to applicable Class A shares; (3) shares held for fewer than
six years with respect to Class B shares and one full year from the
date of purchase with respect to applicable Class A shares on a
first-in, first-out basis. A contingent deferred sales charge is not
assessed in connection with an exchange of Fund shares for shares of
other funds in the Deutsche Funds in the same class (see "Exchange
Privilege"). Any contingent deferred sales charge imposed at the time
the Fund shares issued in an exchange from another Deutsche Fund are
redeemed is calculated as if the shareholder had held the shares from
the date on which he became a shareholder of the exchanged-from Fund.
Moreover, the contingent deferred sales charge will be eliminated with
respect to certain redemptions (see "Contingent Deferred Sales
ChargeNElimination of Contingent Deferred Sales Charge").
Elimination of Contingent Deferred Sales Charge
The contingent deferred sales charge will be eliminated with respect
to the following redemptions: (1) redemptions following the death or
disability, as defined in Section 72(m)(7) of the Code of a
shareholder; (2) redemptions representing minimum required
distributions from an Individual Retirement Account or other
retirement plan to a shareholder who has attained the age of 701U2;
and (3) involuntary redemptions by a Fund of shares in shareholder
accounts that do not comply with the minimum balance requirements. No
contingent deferred sales charge will be imposed on redemptions of
shares held by Trustees, employees and sales representatives of the
Funds, the distributor, or affiliates of the Funds or distributor;
employees of any Financial Intermediary that sells shares of the Funds
pursuant to a sales agreement with the Distributor; and spouses and
children under the age of 21 of the aforementioned persons. Finally,
no contingent deferred sales charge will be imposed on the redemption
of shares originally purchased through a bank trust department, an
investment adviser registered under the Investment Advisers Act of
1940, or retirement plans where the third party administrator has
entered into certain arrangements with the Distributor or its
affiliates, or any other Financial Intermediary, to the extent that no
payments were advanced for purchases made through such entities. The
Trustees reserve the right to discontinue elimination of the
contingent deferred sales charge. Shareholders will be notified of
such elimination. Any shares purchased prior to the termination of
such waiver would have the contingent deferred sales charge eliminated
as provided in the Fund's Prospectus at the time of the purchase of
the shares. If a shareholder making a redemption qualifies for an
elimination of the contingent deferred sales charge, the shareholder
must notify the Distributor or the transfer agent in writing that he
is entitled to such elimination.
ACCOUNT AND SHARE INFORMATION
Certificates and Confirmations
As transfer agent for the Funds, Federated Shareholder Services
Company maintains a Share account for each shareholder. Share
certificates are not issued unless requested in writing to Federated
Shareholder Services Company. No certificates will be issued for
fractional shares.
Detailed confirmations of each purchase and redemption are sent to
each shareholder. Annual statements are sent to report dividends paid
during the year for the Equity Funds and monthly confirmations are
sent to report dividends paid during that month for the Bond Funds.
Accounts with Low Balances
Due to the high cost of maintaining accounts with low balances, a Fund
may redeem shares in any account, except retirement plans, and pay the
proceeds to the shareholder if the account balance falls below the
required minimum value of $5,000. This requirement does not apply,
however, if the balance falls below the required minimum value because
of changes in the net asset value of the respective share Class.
Before shares are redeemed to close an account, the shareholder is
notified in writing and allowed 30 days to purchase additional shares
to meet the minimum requirement.
DIVIDENDS AND DISTRIBUTIONS
Dividends consisting of substantially all of a Fund's net investment
income, if any, are declared and paid annually with respect to the
Equity Funds and monthly with respect to the Bond Funds. A Fund may
also declare an additional dividend of net investment income in a
given year to the extent necessary to avoid the imposition of federal
excise tax on the Fund.
Substantially all the realized net capital gains, if any, of each Fund
are declared and paid on an annual basis, except that an additional
capital gains distribution may be made in a given year to the extent
necessary to avoid the imposition of federal excise tax on the Fund.
All shareholders on the record date are entitled to dividends and
capital gains distributions.
Dividends and distributions paid by a Fund are automatically
reinvested in additional shares of that Fund at net asset value with
no sales charge unless the shareholder has elected to have them paid
in cash. Dividends and distributions to be paid in cash are mailed by
check in accordance with the customer's instructions. Each Fund
reserves the right to discontinue, alter or limit the automatic
reinvestment privilege at any time.
U.S. federal Regulations require that a shareholder provide a
certified taxpayer identification number ("TIN") upon opening an
account. A TIN is either the Social Security number or employer
identification number of the record owner of the account. Failure to
furnish a certified TIN to a Fund could subject a shareholder to a $50
penalty which will be imposed by the Internal Revenue Service ("IRS")
on the Fund and passed on by the Fund to the shareholder. With respect
to individual investors and certain non-qualified retirement plans,
U.S. federal Regulations generally require the Funds to withhold
("backup withholding") and remit to the U.S. Treasury 31% of any
dividends and distributions (including the proceeds of any redemption)
payable to a shareholder if such shareholder fails to certify either
that the TIN furnished in connection with opening an account is
correct, or that such shareholder has not received notice from the IRS
of being subject to backup withholding as a result of a failure to
properly report taxable dividend or interest income on a federal
income tax return. Furthermore, the IRS may notify the Funds to
institute backup withholding if the IRS determines a shareholder's TIN
is incorrect.
NET ASSET VALUE
A Fund's net asset value per share fluctuates. The net asset value for
shares of each class is determined by adding the interest of such
class of shares in the market value of a Fund's total assets (i.e.,
the value of its investment in the Portfolio and other assets),
subtracting the interest of such class of shares in the liabilities of
such Fund and those attributable to such class of shares, and dividing
the remainder by the total number of such class of shares outstanding.
The net asset value for each class of shares may differ due to the
variance in daily net income realized by each class. Such variance
will reflect only accrued net income to which the shareholders of a
particular class are entitled. Values of assets in each Portfolio are
determined on the basis of their market value or where market
quotations are not determinable, at fair value as determined by the
Trustees of the Portfolio Trust. See "Net Asset Value" in the
Statement of Additional Information for information on valuation of
portfolio securities.
Each Fund computes its net asset value once daily at 4:00 p.m. (U.S.
Eastern time) on Monday through Friday, except on the holidays listed
under "Net Asset Value" in the Statement of Additional Information.
ORGANIZATION
The Corporation is an open-end management investment company organized
on May 22, 1997, as a corporation under the laws of the State of
Maryland. Its offices are located at Federated Investors Tower,
Pittsburgh, PA 15222-3779; its toll-free telephone number is
888-4-DEUTSCHE.
The Articles of Incorporation currently permit the Corporation to
issue 2,500,000,000 shares of common stock, par value $0.001 per
share, of which 10,000,000 shares have been classified as shares of
each Fund. The Board of Directors of the Corporation may increase the
number of shares the Corporation is authorized to issue without the
approval of shareholders. The Board of Directors of the Corporation
also has the power to designate one or more additional series of
shares of common stock and to classify and reclassify any unissued
shares with respect to such series. Currently there are 11 such series
and two classes of shares for 10 of the Funds known as Class A shares
and Class B shares.
Each share of a Fund or Class shall have equal rights with each other
share of that Fund or Class with respect to the assets of the
Corporation pertaining to that Fund or Class. Upon liquidation of a
Fund, shareholders of each Class are entitled to share pro rata in the
net assets of the Fund available for distribution to their Class.
Shareholders of a Fund are entitled to one vote for each full share
held and to a fractional vote for fractional shares. The voting rights
of shareholders are not cumulative. Shares have no preemptive or
conversion rights (other than the automatic conversion of Class B
shares into Class A shares as described under "Purchase of
SharesNConversion of Class B Shares"). The rights of redemption are
described elsewhere herein. Shares are fully paid and nonassessable by
the Corporation. It is the intention of the Corporation not to hold
meetings of shareholders annually. The Directors of the Corporation
may call meetings of shareholders for action by shareholder vote as
may be required by the 1940 Act or as may be permitted by the Articles
of Incorporation or By-laws.
The Corporation's Articles of Incorporation provide that the presence
in person or by proxy of the holders of record of one third of the
shares outstanding and entitled to vote thereat shall constitute a
quorum at all meetings of shareholders of a Fund, except as otherwise
required by applicable law. The Articles of Incorporation further
provide that all questions shall be decided by a majority of the votes
cast at any such meeting at which a quorum is present, except as
otherwise required by applicable law.
The Corporation's Articles of Incorporation provide that, at any
meeting of shareholders of a Fund or Class, a Financial Intermediary
may vote any shares as to which that Financial Intermediary is the
agent of record and which are otherwise not represented in person or
by proxy at the meeting, proportionately in accordance with the votes
cast by holders of all shares otherwise represented at the meeting in
person or by proxy as to which that Financial Intermediary is the
agent of record. Any shares so voted by a Financial Intermediary are
deemed represented at the meeting for purposes of quorum requirements.
Each Portfolio is a series of the Deutsche Portfolios, a trust
organized under the law of the State of New York. The Deutsche
Portfolios' Declaration of Trust provides that a Fund and other
entities investing in a Portfolio (e.g., other investment companies,
insurance company separate accounts and common and commingled trust
funds) are each liable for all obligations of the Portfolio. However,
the risk of a Fund incurring financial loss on account of such
liability is limited to circumstances in which both inadequate
insurance existed and the Portfolio itself was unable to meet its
obligations. Accordingly, the Directors of the Corporation believe
that neither the Funds nor their shareholders will be adversely
affected by reason of the investment of all of the assets of a Fund in
its corresponding Portfolio.
Each investor in a Portfolio, including its corresponding Fund, may
add to or reduce its investment in the Portfolio on each day the New
York Stock Exchange is open for regular trading. At 4:00 p.m. (U.S.
Eastern time) on each such business day, the value of each investor's
beneficial interest in a Portfolio is determined by multiplying the
net asset value of the Portfolio by the percentage, effective for that
day that represents that investor's share of the aggregate beneficial
interests in the Portfolio. Any additions or withdrawals, which are to
be effected on that day, are then effected. The investor's percentage
of the aggregate beneficial interests in the Portfolio is then
recomputed as the percentage equal to the fraction (i) the numerator
of which is the value of such investor's investment in the Portfolio
as of 4:00 p.m. (U.S. Eastern time) on such day plus or minus, as the
case may be, the amount of any additions to or withdrawals from the
investor's investment in the Portfolio effected on such day, and (ii)
the denominator of which is the aggregate net asset value of the
Portfolio as of 4:00 p.m. (U.S. Eastern time) on such day plus or
minus, as the case may be, the amount of the net additions to or
withdrawals from the aggregate investments in the Portfolio by all
investors in the Portfolio. The percentage so determined is then
applied to determine the value of the investor's interest in the
Portfolio as of 4:00 p.m. (U.S. Eastern time) on the following
business day of the Portfolio.
Whenever the Corporation is requested to vote on a matter pertaining
to a Portfolio, the Corporation will vote its shares without a meeting
of shareholders of its corresponding Fund if the proposal is one that,
if made with respect to the Fund, would not require the vote of
shareholders of the Fund, as long as such action is permissible under
applicable statutory and regulatory requirements. For all other
matters requiring a vote, the Corporation will hold a meeting of
shareholders of the Fund and, at the meeting of investors in its
corresponding Portfolio, the Corporation will cast all of its votes in
the same proportion as the votes of the Fund's shareholders even if
all Fund shareholders did not vote. Even if the Corporation votes all
its shares at the Portfolio Trust meeting, other investors with a
greater pro rata ownership in the Portfolio could have effective
voting control of the operations of the Portfolio.
TAXES
The Corporation intends that each Fund will qualify as a separate
"regulated investment company" under Subchapter M of the Code. As a
regulated investment company, a Fund will not be subject to U.S.
federal income tax on its income and gains that it distributes to
stockholders, provided that it distributes annually at least 90% of
its net investment income (which includes income, other than capital
gains, net of operating expenses, and the Fund's net short-term
capital gains in excess of its net long-term capital losses) and
capital loss carry forward, if any. Each Fund intends to distribute at
least annually to its shareholders substantially all of its net
investment income and realized net capital gains. Each Portfolio
intends to elect to be treated as a partnership for U.S. federal
income tax purposes. As such, each Portfolio generally should not be
subject to U.S. taxes.
Dividends of net investment income are taxable to a U.S. shareholder
as ordinary income whether such distributions are taken in cash or are
reinvested in additional shares. Distributions of net capital gains,
if any, are taxable to a U.S. shareholder as long-term capital gains,
regardless of how long the shareholder has held the Fund's shares and
regardless of whether taken in cash or reinvested in additional
shares. Dividends and distributions paid by a Fund will not qualify
for the deduction for dividends received by corporations.
While each Fund intends to distribute all of its net capital gains
annually, each Fund reserves the right to elect to retain some or all
of its net capital gains and treat such undistributed gains as having
been paid to shareholders. If a Fund makes this election, a
shareholder would include the amount of undistributed gains in income
as long-term capital gain and would be treated as having paid the tax
on such undistributed gains (which tax will instead be paid by the
Fund) and the shareholder's basis in the shares of the Fund will be
increased by 65% of the amount of undistributed gains included in
income.
If the net asset value of shares in any Fund is reduced below a
shareholder's cost as a result of a distribution by the Fund, such
distribution will be taxable even though it represents a return of
invested capital. Investors should consider the tax implications of
buying shares just prior to a distribution when the price of the
shares may reflect the amount of the forthcoming distribution. Annual
statements as to the current federal tax status of distributions will
be mailed to shareholders at the end of each taxable year.
Any gain or loss realized on the redemption or exchange of a Fund's
shares by a shareholder who is not a dealer in securities generally
will be treated as long-term capital gain or loss if the shares have
been held for more than one year, and otherwise as short-term capital
gain or loss. However, any loss realized by a shareholder upon the
redemption or exchange of shares in a Fund held for six months or less
will be treated as a long-term capital loss to the extent of any
long-term capital gain distributions received by the shareholder with
respect to such shares. In addition, no loss will be allowed on the
sale or other disposition of shares of a Fund if, within a period
beginning 30 days before the date of such sale or disposition and
ending 30 days after such date, the holder acquires (such as through
dividend reinvestment) securities that are substantially identical to
the shares of such Fund. For additional information regarding the tax
consequences of the reinvestment of the proceeds of a redemption see
"Tax Treatment of Reinvestments" above.
It is anticipated that certain income of the Funds will be subject to
foreign withholding or other taxes and that each Fund will be eligible
to elect to "pass through" to its shareholders the amount of foreign
income taxes (including withholding taxes) paid by such Fund. If a
Fund makes this election, a shareholder would include in gross income
his pro rata share of the foreign income taxes passed through and
would be entitled either to deduct such taxes in computing his taxable
income (if the shareholder itemizes deductions) or to claim a credit
(which would be subject to certain limitations) for such taxes against
his U.S. federal income tax liability. A Fund will make such an
election only if it deems it to be in the best interests of its
shareholders and will notify each shareholder in writing each year
that it makes the election of the amount of foreign taxes, if any, to
be treated as paid by the shareholder.
A Fund may be required to backup withhold for U.S. federal income tax
purposes 31% of any dividends and distributions (including the
proceeds of any redemption) payable to a shareholder who fails to
provide the Fund with his correct TIN or to make required
certifications, or who has been notified by the IRS that he is subject
to backup withholding. Backup withholding is not an additional tax;
amounts withheld may be credited against the shareholder's U.S.
federal income tax liability.
For further information on taxes, see "Taxes" in the Statement of
Additional Information.
ADDITIONAL INFORMATION
Each Fund sends to its shareholders annual and semiannual reports. The
financial statements appearing in annual reports are audited by
independent accountants. Shareholders also will be sent confirmations
of each purchase and redemption and monthly statements, reflecting all
other account activity, including dividends and any distributions
reinvested in additional shares or credited as cash.
In addition to selling beneficial interests to its corresponding Fund,
a Portfolio may sell beneficial interests to other mutual funds or
institutional investors. Such investors will invest in a Portfolio on
the same terms and conditions and will pay a proportionate share of
the Portfolio's expenses. However, the other investors investing in
the Portfolio may sell shares of their own fund using a different
pricing structure than the corresponding Fund. Such different pricing
structures may result in differences in returns experienced by
investors in other funds that invest in the Portfolio. Such
differences in returns are not uncommon and are present in other
mutual fund structures. Information concerning other holders of
interests in the Portfolio is available from the Administrator at
888-4-DEUTSCHE.
A Fund may withdraw its investment from its corresponding Portfolio at
any time if the Board of Directors of the Corporation determines that
it is in the best interests of the Fund to do so. Upon any such
withdrawal, the Board of Directors would consider what action might be
taken, including the investment of all the assets of the Fund in
another pooled investment entity having the same investment objective
and restrictions as the Fund or the retaining of an investment adviser
to manage the Fund's assets in accordance with its investment
objective and policies.
Certain changes in a Portfolio's investment objective, policies or
restrictions, or a failure by a Fund's shareholders to approve a
change in its corresponding Portfolio's investment objective or
restrictions, may require withdrawal of the Fund's interest in the
Portfolio. Any such withdrawal could result in a distribution in kind
of portfolio securities (as opposed to a cash distribution) from the
Portfolio which may or may not be readily marketable. The distribution
in kind may result in the Fund having a less diversified portfolio of
investments or adversely affect the Fund's liquidity, and the Fund
could incur brokerage, tax or other charges in converting the
securities to cash.
APPENDIX A
MEMBER STATES OF THE EUROPEAN UNION
Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Ireland,
Luxembourg, Netherlands, Portugal, Sweden, Spain, United Kingdom
ORGANISATION FOR ECONOMIC COOPERATION AND DEVELOPMENT MEMBERS
Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland,
France, Greece, Germany, Hungary, Iceland, Ireland, Italy, Japan,
Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland,
Portugal, South Korea, Spain, Sweden, Switzerland, Turkey, United
Kingdom, United States
STATES PARTY TO THE CONVENTION ON THE EUROPEAN ECONOMIC AREA
Austria, Belgium, Denmark, Finland, France, Greece, Germany, Iceland, Ireland,
Italy, Liechtenstein, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden,
United Kingdom
EXCHANGES IN EUROPEAN COUNTRIES WHICH ARE NOT MEMBER STATES OF THE
EUROPEAN UNION AND NOT STATES PARTY TO THE CONVENTION ON THE EUROPEAN
ECONOMIC AREA.
CZECH REPUBLIC
Prague
HUNGARY
Budapest
SLOVAKIA
Bratislavia
SWITZERLAND
Basel, Geneva, Zurich
EXCHANGES IN NON-EUROPEAN COUNTRIES**
ARGENTINA
Buenos Aires
AUSTRALIA
ASX (Sydney, Hobart, Melbourne, Perth)
BRAZIL
Sao Paulo, Rio de Janiero
CANADA
Toronto, Vancouver, Montreal
CHILE
Santiago
HONG KONG
Hong Kong Stock Exchange
INDIA***
Mumbai, Calcutta, Delhi, Madras
INDONESIA
Jakarta Stock Exchange
JAPAN
Tokyo, Osaka, Nagoya, Kyoto, Fukuoto, Niigata, Sapporo, Hiroshima
MALAYSIA
Kuala Lumpur
MEXICO
Mexico City
NEW ZEALAND
Wellington Christchurch/Invercargill, Auckland
PERU
Lima
PHILIPPINES
Manila
SINGAPORE
Singapore Stock Exchange
SOUTH AFRICA
Johannesburg
SOUTH KOREA
Seoul
TAIWAN***
Taipei
THAILAND
Bangkok
USA
American Stock Exchange (AMEX), Boston, Chicago, Cincinnati, New York, New York
Stock Exchange (NYSE), Philadelphia, San Francisco Pacific Stock Exchange, Los
Angeles Pacific Stock Exchange
REGULATED MARKETS IN COUNTRIES WHICH ARE NOT MEMBERS ON THE EUROPEAN UNION AND
NOT CONTRACTING STATES OF THE TREATY ON THE EUROPEAN ECONOMIC AREA
JAPAN**
Over-the-Counter Market
** Not applicable to the Deutsche European Mid-Cap Fund.
*** Not applicable to the Deutsche German Equity Fund.
CANADA**
Over-the-Counter Market
SOUTH KOREA**
Over-the Counter Market
SWITZERLAND
Free Trading Zurich, Free Trading Geneva, Exchange Bern
Over the Counter Market of the members of the International Securities Market
Association (ISMA), Zurich
UNITED STATES**
NASDAQ-System
Over-the-Counter Market (organized markets by the National Association of
Securities Dealers, Inc.)
** Not applicable to the Deutsche European Mid-Cap Fund.
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER CONTAINED
IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY
THE CORPORATION OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER BY THE CORPORATION OR BY THE DISTRIBUTOR TO SELL
OR A SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURITIES OFFERED
HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL FOR
THE CORPORATION OR THE DISTRIBUTOR TO MAKE SUCH OFFER IN SUCH
JURISDICTION.
INVESTMENT MANAGER
Deutsche Fund Management, Inc.
31 West 52nd Street
New York, NY 10019
DISTRIBUTOR
Edgewood Services, Inc.
Federated Investors Tower
Pittsburgh, PA 15222-3779
TRANSFER AGENT
Federated Shareholder
Services Company
P.O. Box 8600
Boston, MA 02266-8600
CUSTODIAN
Investors Bank & Trust Co.
200 Claredon Street
Boston, MA 02116
- --------------------------------------------------------------------------------
Edgewood Services, Inc., Distributor
G02179-02 (10/97) [LOGO OF RECYCLED PAPER]
DEUTSCHE TOP 50 WORLD
DEUTSCHE TOP 50 EUROPE
DEUTSCHE TOP 50 ASIA
DEUTSCHE TOP 50 US
DEUTSCHE EUROPEAN MID-CAP FUND
DEUTSCHE GERMAN EQUITY FUND
DEUTSCHE JAPANESE EQUITY FUND
DEUTSCHE GLOBAL BOND FUND
DEUTSCHE EUROPEAN BOND FUND
STATEMENT OF ADDITIONAL INFORMATION
The Deutsche Top 50 World (the "Top 50 World"), Deutsche Top 50 Europe
(the "Top 50 Europe"), Deutsche Top 50 Asia (the "Top 50 Asia"),
Deutsche Top 50 US (the "Top 50 US"), Deutsche European Mid-Cap Fund
(the "European Mid-Cap Fund"), Deutsche German Equity Fund (the
"German Equity Fund"), Deutsche Japanese Equity Fund (the "Japanese
Equity Fund"), Deutsche Global Bond Fund (the "Global Bond Fund") and
Deutsche European Bond Fund (the "European Bond Fund") (each a "Fund"
and, collectively, the "Funds") are each a series of the Deutsche
Funds, Inc. (the "Corporation"), a management investment company
registered under the Investment Company Act of 1940, as amended (the
"1940 Act"). Each Fund has its own investment objective.
The Corporation seeks to achieve the investment objective of each Fund
by investing all of the Fund's investable assets in a corresponding
non-diversified, open-end management investment company (each, a
"Portfolio" and, collectively, the "Portfolios") listed in Appendix A.
Each Portfolio is a series of the Deutsche Portfolios (the "Portfolio
Trust"), an open-end investment company organized as a trust under the
laws of the State of New York. Each Portfolio has the same investment
objective as its corresponding Fund. There can be no assurance that
any Fund or any Portfolio will achieve its investment objective.
Shares of each Fund are offered in two classes known as Class A Shares
and Class B Shares (individually and collectively referred to as
"Shares" as the context may require). This Statement of Additional
Information relates to both classes of the above-mentioned Shares.
Deutsche Fund Management, Inc. ("DFM"), a registered investment
adviser and an indirect subsidiary of Deutsche Bank AG, a major global
financial institution, is the investment manager (the "Manager") of
each Portfolio. DWS International Portfolio Management GmbH is the
investment adviser (the "DWS Adviser") of each Portfolio except Top 50
US Portfolio. Deutsche Morgan Grenfell Investment Management Inc. is
the investment adviser of the Top 50 US Portfolio (the "DMGIM Adviser"
and together with the DWS Adviser or severally as the context may
require, the "Adviser"). This Statement of Additional Information is
not a prospectus and should be read in conjunction with the relevant
Fund's Prospectus dated October 10, 1997, a copy of which may be
obtained from the Corporation at the address noted below.
Federated Investors Tower Pittsburgh, PA 15222-3779
The date of this Statement of Additional Information is October 10,
1997.
Edgewood Services, Inc., Distributor
G02179-03
Table of Contents
- -------------------------------------------------------------------------------
Investment Objective and Policies 1
Equity Investments 1
Investment Companies 1
Participation Certificates 1
Short-Term Instruments 1
Zero Coupon Obligations 2
Options 2
Foreign Currency Exchange Transactions 3
Futures Contracts and Options
on Futures Contracts 3
Risk Management 5
The German Securities Markets 6
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Equity Markets 6
Stock Indices 7
Primary Markets 8
Role of Banks in German Capital Markets 8
Japanese Equity Securities Markets 9
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Investment Restrictions 12
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Non-Fundamental Investment Restrictions 13
Directors, Trustees, and Officers 14
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Directors of the Corporation and
Trustees of the Portfolio Trust 14
Officers of the Corporation 15
Compensation Table--
Directors of the Corporation 16
Compensation Table--
Trustees of the Portfolio Trust 16
Manager 17
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Adviser 18
- -------------------------------------------------------------------------------
Administrator 18
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Operations Agent 19
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Administrative Agent 19
Distributor 20
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Transfer Agent, Custodian, and Fund Accountant 20
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Independent Accountants 21
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Purchase of Shares 21
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Conversion to Federal Funds 21
Redemption of Shares 21
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Redemption in Kind 21
Elimination of the Contingent
Deferred Sales Charge 21
Exchange of Shares 22
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Net Asset Value 22
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Fixed Income Securities 22
Other Securities 22
Performance Data 23
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Total Return Quotations 23
Yield 23
General 23
Information and Comparisons
Relating to the Funds, Secondary
Market Trading, Net Asset Size,
Performance and Tax Treatment 24
Portfolio Transactions 25
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Taxes 26
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United States Taxation 26
Description of Shares 29
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Additional Information 29
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Appendix A 31
- -------------------------------------------------------------------------------
Funds and Corresponding Portfolios 31
Appendix B--Description of
Security Ratings 31
- -------------------------------------------------------------------------------
Standard & Poor's Corporate and
Municipal Bonds 31
Moody's Corporate and Municipal Bonds 31
Financial Statements 32
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INVESTMENT OBJECTIVE AND POLICIES
- -------------------------------------------------------------------------------
The following supplements the information contained in each Fund's
Prospectus concerning the investment objectives, policies and
techniques of the Portfolios. The descriptions are general and may not
be applicable in certain countries in which the Portfolios invest.
EQUITY INVESTMENTS
As discussed in each Fund's Prospectus, each Portfolio may invest in
the equity securities of domestic and foreign issuers to the extent
consistent with its investment objectives and policies. Equity
investments may or may not pay dividends and may or may not carry
voting rights. Common stock occupies the most junior position in a
company's capital structure. Preferred stock generally carries
preferential rights to dividends and amounts payable upon liquidation
of the issuer, but may have no voting rights. Convertible securities
entitle the holder to exchange the securities for a specified number
of shares of common stock, usually of the same company, at specified
prices within a certain period of time and to receive interest or
dividends until the holder elects to convert. The provisions of any
convertible security determine its ranking in a company's capital
structure. In the case of subordinated convertible securities, the
holder's claims on assets and earnings are subordinated to the claims
of other creditors, and are senior to the claims of common
shareholders.
INVESTMENT COMPANIES
Up to 5% of the total assets of each Portfolio except the Top 50 US
Portfolio may be invested in shares of investment companies, provided
these shares are offered to the public without limitation on the
number of shares, the shareholders have the right to redeem their
shares, and have investment policies consistent with those of the
Portfolio. The Top 50 US Portfolio may invest up to 5% of its total
assets in the securities of any one investment company and invest in
the aggregate up to 10% of its total assets in the securities of
investment companies as a group. However, the Top 50 US Portfolio
intends that less than 5% of the Portfolio's total assets will be
invested in investment company securities during its first year of
operations. Each Portfolio may not own more than 3% of the total
outstanding voting stock of any other investment company. As a
shareholder of another investment company, a Portfolio would bear,
along with other shareholders, its pro rata portion of the other
investment company's expenses, including advisory fees.
Subject to the foregoing limitations, shares of another securities
investment fund managed by the Manager or the Adviser or by another
investment adviser affiliated with the Manager or the Adviser through
a substantial direct or indirect interest may be purchased, subject to
certain limitations, if the other investment fund according to its
investment policies is specialized in a specific geographic area or
economic sector. A Portfolio would not, however, pay a sales charge
when investing in an investment company managed by the Manager, the
Adviser or their affiliates. In addition, no management or advisory
fees would be paid by a Portfolio with respect to its assets which are
invested in investment companies managed by the Manager, the Adviser
or their affiliates.
PARTICIPATION CERTIFICATES
Certain companies have issued participation certificates which entitle
the holder to participate only in dividend distributions, generally at
rates above those declared on the issuers' common stock, but not to
vote, nor usually to any claim for assets in liquidation.
Participation certificates trade like common stock on their respective
stock exchanges. Such securities may have higher yields; however, they
may be less liquid than common stock. The Adviser believes that
certain participation certificates have potential for long-term
appreciation, depending on their price relative to that of the
issuer's equity securities, if publicly traded, and other criteria.
SHORT-TERM INSTRUMENTS
Although it is intended that the assets of each Portfolio stay
invested in the securities described above and in each Fund's
Prospectus to the extent practical in light of each Portfolio's
investment objective and long-term investment perspective, assets of
each Portfolio may be invested in bank deposits and money market
instruments maturing in less than 12 months to meet anticipated
expenses or for day-to-day operating purposes and when, in the
Adviser's opinion, it is advisable to adopt a temporary defensive
position because of unusual and adverse conditions affecting the
equity or fixed income markets. In addition, when a Portfolio
experiences large cash inflows through additional investments by its
investors or the sale of portfolio securities, and desirable
securities that are consistent with its investment objective are
unavailable in sufficient quantities, assets may be held in short-term
investments for a limited time pending availability of such
securities. Bank deposits and money market instruments include credit
balances and bank certificates of deposit, discounted treasury notes
and bills issued by the Federal Republic of Germany ("FRG"), the
states of the FRG, the European Union, other member states of the OECD
or quasi-government entities of any of the foregoing.
ZERO COUPON OBLIGATIONS
Each Portfolio may also invest in zero coupon obligations, such as
zero coupon bonds. Zero coupon obligations pay no current interest,
and as a result their prices tend to be more volatile than those of
securities that offer regular payments of interest. In order to pay
cash distributions representing income on zero coupon obligations, a
Portfolio may have to sell other securities on unfavorable terms, and
these sales may generate taxable gains for investors in the
corresponding Fund.
OPTIONS
Each Portfolio may write call and put options and purchase call and
put options on securities. A Portfolio will write options on
securities for the purpose of increasing its return on such securities
and/or to protect the values of its portfolio.
The buyer of a typical put option can expect to realize a gain if the
price of the underlying instrument falls substantially. However, if
the price of the instrument underlying the option does not fall enough
to offset the cost of purchasing the option, a put buyer can expect to
suffer a loss (limited to the amount of the premium paid, plus related
transaction costs). A call buyer typically attempts to participate in
potential price increases of the instrument underlying the option with
risk limited to the cost of the option if security prices fall. At the
same time, the buyer can expect to suffer a loss if security prices do
not rise sufficiently to offset the cost of the option (limited to the
amount of the premium paid, plus related transaction costs). A
Portfolio may seek to terminate its position in a put option it writes
before exercise by purchasing an offsetting option in the market at
its current price. If the market is not liquid for a put option the
Portfolio has written, however, the Portfolio must continue to be
prepared to pay the strike price while the option is outstanding,
regardless of price changes, and must continue to post margin as
discussed below.
If the price of the underlying instrument rises, a put writer would
generally expect to profit, although its gain would be limited to the
amount of the premium it received. If security prices remain the same
over time, it is likely that the writer will also profit, because it
should be able to close out the option at a lower price. If security
prices fall, the put writer would expect to suffer a loss. This loss
should be less than the loss from purchasing and holding the
underlying instrument directly, however, because the premium received
for writing the option should offset a portion of the decline. The
characteristics of writing call options are similar to those of
writing put options, except that writing calls generally is a
profitable strategy if prices remain the same or fall. Through receipt
of the option premium a call writer offsets part of the effect of a
price decline. At the same time, because a call writer must be
prepared to deliver the underlying instrument in return for the strike
price, even if its current value is greater, a call writer gives up
some ability to participate in security price increases.
Transactions in options, futures contracts, options on futures
contracts and forward contracts entered into for non-hedging purposes
involve greater risk and could result in losses which are not offset
by gains on other portfolio assets.
All options purchased or sold by a Portfolio will be traded on a
securities exchange or, in the case of Top 50 US Portfolio, will be
purchased or sold by securities dealers (in the case of
over-the-counter, or "OTC," options) that meet creditworthiness
standards approved by the Portfolio Trust's Board of Trustees. In the
case of OTC options, the Top 50 US Portfolio relies on the dealer from
which it purchased the option to perform if the option is exercised.
Thus, when the Portfolio purchases an OTC option, it relies on the
dealer from which it purchased the option to make or take delivery of
the underlying securities. Failure by the dealer to do so would result
in the loss of the premium paid by the Portfolio as well as loss of
the expected benefit of the transaction.
The staff of the Securities and Exchange Commission ("SEC") has taken
the position that, in general, purchased OTC options and the
underlying securities used to cover written OTC options are illiquid
securities. However, the Top 50 US Portfolio may treat as liquid the
underlying securities used to cover written OTC options, provided it
has arrangements with certain qualified dealers who agree that such
Portfolio may repurchase any option it writes for a maximum price to
be calculated by a predetermined formula. In these cases, the OTC
option itself would only be considered illiquid to the extent that the
maximum repurchase price under the formula exceeds the intrinsic value
of the option.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS
Each Portfolio (except the Top 50 US Portfolio) may enter into foreign
currency exchange transactions in an attempt to protect against
changes in foreign currency exchange rates between the trade and
settlement dates of specific securities transactions or anticipated
securities transactions. Each Portfolio may also enter into foreign
currency transactions to hedge against a change in foreign currency
exchange rates that would affect the value of existing investments
denominated or principally traded in a foreign currency. Each
Portfolio other than the Provesta Portfolio and the Investa Portfolio
may also, in circumstances where the Adviser considers it appropriate,
enter into foreign currency exchange transactions for the purpose of
hedging the value of such Portfolios against currencies other than the
U.S. dollar. To conduct the hedging discussed above, a Portfolio would
generally enter into a forward contract to sell the foreign currency
in which the investment is denominated in exchange for U.S. dollars or
other currency in which the Adviser desires to protect the value of
the Portfolio.
Although these transactions are intended to minimize the risk of loss
due to a decline in the value of the hedged currency, at the same time
they 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 difficult, and the successful execution of a
hedging strategy is highly uncertain.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
Each Portfolio may purchase or sell futures contracts and purchase put
and call options, including put and call options on futures contracts.
In addition, each Portfolio may purchase put and call options on
futures. Futures contracts obligate the buyer to take and the seller
to make delivery at a future date of a specified quantity of a
financial instrument or an amount of cash based on the value of a
securities index.
Futures contracts and options on futures contracts may be entered into
on foreign exchanges. Investors should recognize that transactions
involving foreign securities or foreign currencies, and transactions
entered into in foreign countries may involve considerations and risks
not typically associated with investing in U.S. markets.
FUTURES CONTRACTS
When a Portfolio purchases a futures contract, it agrees to
purchase a specified quantity of an underlying instrument at a
specified future date and price or to make or receive a cash
payment based on the value of a securities index or a financial
instrument. When a Portfolio sells a futures contract, it agrees
to sell a specified quantity of the underlying instrument at a
specified future date and price or to receive or make a cash
payment based on the value of a securities index or a financial
instrument. When a Portfolio purchases or sells a futures
contract, the value of the futures contract tends to increase
and decrease in tandem with the value of its underlying
instrument or index. The price at which the purchase and sale
will take place is fixed when a Portfolio enters into the
contract. Futures can be held until their delivery dates or the
positions can be (and normally are) closed out, by entering into
an opposing contract, before then.
When a Portfolio purchases or sells a futures contract, it is
required to make an initial margin deposit. Although the amount
may vary, initial margin can be as low as 1% or less of the
notional amount of the contract. Additional margin may be
required as the contract fluctuates in value. Since the amount
of margin is relatively small compared to the value of the
securities covered by a futures contract, the potential for gain
or loss on a futures contract is much greater than the amount of
the Portfolio's initial margin deposit.
OPTIONS ON FUTURES
Put and call options on futures contracts may be purchased by each
Portfolio in order to protect against declines in values of
portfolio securities or against increases in the cost of securities
to be acquired. Unlike a futures contract, which requires parties
to buy or sell the underlying financial instrument or make a cash
settlement payment based on changes in the price of the financial
instrument on an agreed date, an option on a futures contract
entitles its holder to decide on or before a future date whether to
enter into such a contract. If the holder decides not to exercise
its option, the holder may close out the option position by
entering into an offsetting transaction or may decide to let the
option expire and forfeit the premium thereon. The purchaser of an
option on a futures contract pays a premium for the option but
makes no initial margin payments or daily payments of cash in the
nature of "variation" margin payments to reflect the change in the
value of the underlying contract as does a purchaser or seller of a
futures contract. The seller of an option on a futures contract
receives the premium paid by the purchaser and may be required to
pay initial margin. Amounts equal to the initial margin and any
additional collateral required on any options on futures contracts
sold by a Portfolio are paid by that Portfolio into a segregated
account as required by the 1940 Act and the SEC's interpretations
thereunder.
Purchase of options on futures contracts may present less risk in
hedging a Portfolio than the purchase or sale of the underlying
futures contracts since the potential loss is limited to the amount
of the premium plus related transaction costs.
COMBINED POSITIONS
Each Portfolio may purchase and write options in combination with
each other, or in combination with futures or forward contracts, to
adjust the risk and return characteristics of the overall position.
For example, a Portfolio may purchase a put option and write a call
option on the same underlying instrument, in order to construct a
combined position whose risk and return characteristics are similar
to selling a futures contract. Another possible combined position
would involve writing a call option at one strike price and buying
a call option at a lower price, in order to reduce the risk of the
written call option in the event of a substantial price increase.
Because combined options positions involve multiple trades, they
result in higher transaction costs and may be more difficult to
open and close out.
OPTIONS ON SECURITIES INDICES
Each Portfolio is also permitted to purchase call and put options
on any securities index based on securities in which the Portfolio
may invest. Options on securities indices are similar to options on
securities, except that the exercise of securities index options is
settled by cash payment and does not involve the actual purchase or
sale of securities. In addition, these options are designed to
reflect price fluctuations in a group of securities or segment of
the securities market rather than price fluctuations in a single
security. A Portfolio, in purchasing index options for hedging
purposes, is subject to the risk that the value of its portfolio
securities may not change as much as that of an index because the
Portfolio's investments generally will not match the composition of
an index.
WARRANTS
Each Portfolio may purchase warrants which, like options on futures
contracts and options on securities indices, entitle the holder to
purchase or sell a futures contract or to a cash payment reflecting
the price fluctuation in an index of securities. A Portfolio may
also purchase warrants that entitle the holder to a cash payment
reflecting the fluctuation in the value of certain financial
futures contracts. Warrants on futures contracts and warrants on
securities indices differ from the equivalent options in that: (1)
they are securities issued by a financial institution/special
purpose issuer rather than contracts entered into with a futures
exchange and (2) they are traded on a securities exchange rather
than on a futures exchange. The use of warrants will generally
entail the same risks that are associated with a Portfolio's
positions in options on futures and options on securities indices.
OTHER LIMITATIONS
The Commodity Exchange Act prohibits U.S. persons, such as a
Portfolio, from buying or selling certain foreign futures contracts
or options on such contracts. Accordingly, each Portfolio will not
engage in foreign futures or options transactions unless the
contracts in question may lawfully be purchased and sold by U.S.
persons in accordance with applicable Commodity Futures Trading
Commission ("CFTC") regulations or CFTC staff advisories,
interpretations and no action letters. In addition, in order to
assure that a Portfolio will not be considered a "commodity pool"
for purposes of CFTC rules, the Portfolio will enter into
transactions in futures contracts or options on futures contracts
only if (1) such transactions constitute bona fide hedging
transactions, as defined under CFTC rules or (2) no more than 5% of
the Portfolio's net assets are committed as initial margin or
premiums to positions that do not constitute bona fide hedging
transactions.
CORRELATION OF PRICE CHANGES
Because there are a limited number of types of exchange-traded
options and futures contracts, it is likely that the standardized
options and futures contracts available will not match a
Portfolio's current or anticipated investments exactly. Each
Portfolio may invest in options and futures contracts based on
securities with different issuers, maturities, or other
characteristics from the securities in which it typically invests,
which involves a risk that the options or futures position will not
track the performance of a Portfolio's other investments.
Options and futures contracts prices can also diverge from the
prices of their underlying instruments, even if the underlying
instruments match a Portfolio's investments well. Options and
futures contracts prices are affected by such factors as current
and anticipated short term interest rates, changes in volatility of
the underlying instrument, and the time remaining until expiration
of the contract, which may not affect security prices the same way.
Imperfect correlation may also result from differing levels of
demand in the options and futures markets and the securities
markets, from structural differences in how options and futures and
securities are traded, or from imposition of daily price
fluctuation limits or trading halts. A Portfolio may purchase or
sell options and futures contracts with a greater or lesser value
than the securities it wishes to hedge or intends to purchase in
order to attempt to compensate for differences in volatility
between the contract and the securities, although this may not be
successful in all cases. If price changes in a Portfolio's options
or futures positions are poorly correlated with its other
investments, the positions may fail to produce anticipated gains or
result in losses that are not offset by gains in other investments.
LIQUIDITY OF OPTIONS AND FUTURES CONTRACTS
There is no assurance a liquid market will exist for any particular
option or futures contract at any particular time even if the
contract is traded on an exchange. In addition, exchanges may
establish daily price fluctuation limits for options and futures
contracts and may halt trading if a contract's price moves up or
down more than the limit in a given day. On volatile trading days
when the price fluctuation limit is reached or a trading halt is
imposed, it may be impossible for a Portfolio to enter into new
positions or close out existing positions. If the market for a
contract is not liquid because of price fluctuation limits or
otherwise, it could prevent prompt liquidation of unfavorable
positions, and could potentially require a Portfolio to continue to
hold a position until delivery or expiration regardless of changes
in its value. As a result, a Portfolio's access to other assets
held to cover its options or futures positions could also be
impaired. (See "Exchange Traded and Over-the-Counter Options" above
for a discussion of the liquidity of options not traded on an
exchange.)
POSITION LIMITS
Futures exchanges can limit the number of futures and options on
futures contracts that can be held or controlled by an entity. If
an adequate exemption cannot be obtained, a Portfolio or its
Adviser may be required to reduce the size of its futures and
options positions or may not be able to trade a certain futures or
options contract in order to avoid exceeding such limits.
ASSET COVERAGE FOR FUTURES CONTRACTS AND OPTIONS POSITIONS
Each Portfolio intends to comply with Section 4.5 of the
regulations under the Commodity Exchange Act, which limits the
extent to which a Portfolio can commit assets to initial margin
deposits and option premiums. In addition, each Portfolio will
comply with guidelines established by the SEC with respect to
coverage of options and futures contracts by mutual funds, and if
the guidelines so require, will set aside appropriate liquid assets
in a segregated custodial account in the amount prescribed.
Securities held in a segregated account cannot be sold while the
futures contract or option is outstanding, unless they are replaced
with other suitable assets. As a result, there is a possibility
that segregation of a large percentage of a Portfolio's assets
could impede portfolio management or a Portfolio's ability to meet
redemption requests or other current obligations.
RISK MANAGEMENT
Each Portfolio may employ non-hedging risk management techniques.
Examples of such strategies include synthetically altering the
duration of a portfolio or the mix of securities in a portfolio. For
example, if the Adviser wishes to extend maturities in a fixed income
portfolio in order to take advantage of an anticipated decline in
interest rates, but does not wish to purchase the underlying long term
securities, it might cause the Portfolio to purchase futures contracts
on long-term debt securities. Similarly, if the Adviser wishes to
decrease fixed income securities or purchase equities, it could cause
a Portfolio to sell futures contracts on debt securities and purchase
futures contracts on a stock index. Because these risk management
techniques involve leverage, they include, as do all leveraged
transactions, the possibility of losses as well as gains that are
greater than if these techniques involved the purchase and sale of the
securities themselves rather than their synthetic derivatives.
THE GERMAN SECURITIES MARKETS
- -------------------------------------------------------------------------------
EQUITY MARKETS
Equity securities trade on the country's eight regional stock
exchanges (Frankfurt, Dusseldorf, Munich, Hamburg, Berlin, Stuttgart,
Hanover and Bremen), of which Frankfurt accounted for approximately
79.5% of the total volume in 1996. While trading in listed securities
is not legally or otherwise confined to the exchanges, they are
believed to handle the largest part of trading volume in equity
transactions.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Market Capitalization and Trading Volume
of Equity Securities on German Stock Exchanges(1)
(in billions)
- -------------------------------------------------------------------------------
Market Trading Volume for
Capitalization as the year ended
of December 31(2) December 31(2)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1992 $348.14 DM561.89 $ 876.8 DM1,415.2
1993 463.48 800.10 1,150.3 1,985.8
1994 499.25 773.88 1,302.9 2,017.9
1995 544.89 781.10 1,146.8 1,643.9
1996 635.95 988.77 1,487.6 2,312.9
- -------------------------------------------------------------------------------
</TABLE>
(1) Excluding stocks of foreign-domiciled companies and investment
companies.
(2) U.S. dollar equivalents calculated at year-end exchange rates. The
figures for 1992 through 1994 include warrants. Sources: Deutsche Borse AG
and the Deutsche Bundesbank.
German stock exchanges offer three different market segments within
which stocks are traded:
(i) The official market (Amtlicher Handel) comprises trading in
shares which have been formally admitted to official listing by
the admissions committee of the stock exchange concerned, based
upon disclosure in the listing application or "prospectus."
(ii) The regulated, unlisted market (Geregelter Market) comprises
trading in shares not admitted to official listing. Companies
admitted to this market segment are exempt from publishing a
full listing prospectus, but are required to submit an offering
memorandum. Admission is granted by a special committee which is
also responsible for the supervision of the establishment of
prices.
(iii) The unofficial unregulated telephone or over-the-counter market
(Freiverkehr) comprises trading in securities that have not
followed any special listing procedure. It includes trading in
securities by telephone or on the stock exchange premises,
between banks or through floor brokers prior to or after
official trading hours.
For an official listing, the German stock exchanges and pertinent
legislation require public disclosure of all information about an
issuer considered material to an evaluation of the securities to be
listed. Applications must further provide the latest annual financial
statements of the issuer with explanatory notes, including disclosure
of any liabilities not shown therein. They must also furnish details
of the issuer to be listed. Generally, DM 0.5 million par value (i.e.,
10,000 shares of DM 50 par value) is considered to be the minimum
amount suitable for full listing. Applications for admission to
regulated unlisted trading must contain essentially similar
information as that required for full listing, but in a condensed form
that may be submitted as a memorandum. However, the document, in lieu
of being published, may be deposited with paying agents so long as
reference is made in one of the official stock exchange publications.
Markets in listed securities are generally of the auction type, but a
substantial amount of listed securities also changes hands in
inter-bank dealer markets both on and off the stock exchanges. Prices
for active stocks, including those of larger companies, are quoted
continuously during stock exchange hours. Less active listed and
stocks admitted to trading in the regulated unlisted market are quoted
only once a day.
Options on both domestic and foreign stocks have been traded since
1970 although trading activity is relatively low. There is also active
trading in share warrants, generally issued in conjunction with bonds.
As set forth below under "Role of Banks in German Capital Markets,"
German banks, brokers and selected domestic investment trusts are
regular members of the stock exchanges. Banks may deal on a net basis
for their own account, as well as for accounts of domestic and foreign
institutional customers during or after regular stock exchange hours.
STOCK INDICES
Two principal stock indices in Germany are the DAX Index (Deutscher
Aktienindex; i.e., German Stock Index) and the CDAX German Composite
Index (Composite Deutscher Aktienindex). The DAX Index is composed of
the 30 most actively traded German blue-chip stocks. It represents
over 69% of the total equity capital of German exchange-listed
companies. Trading in these shares accounts for approximately 75% of
the stock volume traded on the German exchanges. The CDAX German
Composite Index comprises all German stocks listed in the official
market at the Frankfurt Stock Exchange.
Set forth in the table below is information concerning the total
return of the DAX Index and CDAX Index for each of the periods
indicated.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Annual Total Return(1)
- -------------------------------------------------------------------------------
First
Half
1992 1993 1994 1995 1996 1997(2)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
DAX (2.09)% 46.71% (7.06)% 6.99% 28.17% 31.05%
CDAX (6.39)% 44.56% (5.83)% 4.75% 22.14% 29.96%
Dollar-adjusted DAX (8.33)% 36.85% 4.12% 15.60% 18.17% 16.83%
Dollar-adjusted CDAX (12.36)% 34.85% 5.50% 13.17% 12.61% 15.85%
- -------------------------------------------------------------------------------
</TABLE>
(1) Based on U.S. dollar returns.
(2) Return as of June 30, 1997 (not annualized).
Trading volume tends to concentrate on the relatively few companies
having both large market capitalization and a broad distribution of
their stock with few or no large holders. The five companies having
the largest annual trading volume of their stock in 1996 represented
46.8% of total trading volume on the German stock exchanges:
Daimler-Benz AG with DM 261.9 billion, Siemens AG with DM 256.1
billion, Deutsche Bank AG with DM 216.8 billion, Bayer AG with DM
186.4 billion and Volkswagen AG with DM 162.2 billion.
The actual float available for public trading is significantly smaller
than the aggregate market value cited above because of the large
extent of long-term holdings by non-financial corporations, family
groups and banks. However, the number of publicly traded shares has
been increasing in recent years due to a reduction in such holdings on
the part of certain insurance companies and public authorities. In
addition, the continuing public offerings of equity securities
previously controlled by the federal government have contributed to
the growing size of the float.
Domestic institutional ownership of German equities, while large
relative to that by individuals, is less than that in certain other
industrial countries. The German Government is encouraging the
expansion of private participation in the equity markets, and has
contributed to this process both directly, through public sale of
government-owned enterprises, as well as indirectly through fiscal
measures.
Set forth in the table below is information concerning the industry
composition of the DAX Index and CDAX Index.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Industry Composition of DAX(1) and CDAX(2)
Index as of December 31, 1996
- -------------------------------------------------------------------------------
DAX CDAX
- -------------------------------------------------------------------------------
<S> <C> <C>
Banks and Insurance 28.0% 28.0%
Chemical Concerns/Pharmaceutical 20.9% 20.1%
Auto Industry and Supply 13.7% 10.2%
Utilities and Energy -- --
Electronics Industry -- --
Mechanical Engineering 5.3% 5.7%
Steel and Raw Materials 4.0% 2.7%
Consumer Goods 3.5% 4.1%
Other 4.5% 6.0%
- -------------------------------------------------------------------------------
Total 100.0% 100.0%
- -------------------------------------------------------------------------------
</TABLE>
(1) The DAX Index is comprised of 30 stocks representing approximately
69% of the market capitalization of the German stock exchange.
(2) The CDAX Index is comprised of 374 stocks (subject to
adjustments).
Primary Markets
The amount of funds raised in equity financings in 1996 increased by
DM 17,862 to DM 24,807 while the number of financings decreased by 6
to 14. The total value of primary offerings for each of the previous
five years of listed equity issues is shown in the table below.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Primary Offerings of Listed Equity Securities
by Domestic Issuers
(millions of DM)
- -------------------------------------------------------------------------------
1992 1993 1994 1995 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Value 804 833 1,246 6,495 24,807
- -------------------------------------------------------------------------------
</TABLE>
Source: Deutsche Borse AG.
ROLE OF BANKS IN GERMAN CAPITAL MARKETS
As is the case in other continental European developed countries,
German commercial and banking laws permit commercial banks to act,
either directly or indirectly, as investment bankers/underwriters,
managers of mutual and other investment funds and investment advisers,
as well as securities broker/dealers. Many German banks, including
Deutsche Bank AG ("Deutsche Bank"), are members of stock exchanges in
their respective countries. Moreover, they may, directly or
indirectly, also provide other financial services such as life
insurance, mortgage lending and installment financing. Lastly, they
may, and frequently do, maintain long-term equity participations in
industrial, commercial or financial enterprises, including enterprises
whose voting and other equity securities may be publicly traded and/or
listed on national securities exchanges. Recent legislation requires
notification of the newly established Securities Trading Supervisory
Office and publication if certain thresholds of participating in the
voting capital of a stock exchange listed corporation are passed.
Deutsche Bank, the parent of the Manager and the Investment Adviser,
holds significant participation in five listed German companies. The
term "significant" denotes direct ownership of over 25% of the voting
equity which, under German law, provides the holder with veto power in
policy decisions, such as a change of business objectives or major
acquisitions. Deutsche Bank owns equity interests ranging from 25% to
50% in holding companies that own participations of 25% or more in an
additional five listed German companies, most of which are publicly
owned. In addition, Deutsche Bank may maintain trading positions in
the securities of these and other (domestic and foreign) companies,
and may make trading markets in some of them, subject to limitations
imposed by applicable law, including the limitations of the German
Stock Exchange Law (Borsengesetz) of 1896, as amended. Deutsche Bank
directors or officers may, by virtue of such ownership or otherwise,
be elected to the Supervisory Boards of these and other companies.
Deutsche Bank and its affiliates may also have commercial lending
relationships with companies whose securities a Portfolio may acquire.
In their capacity as underwriters, German banks originate and manage
new issues of domestic and international fixed income and equity
securities both in their respective domestic primary market and in the
Euromarket. Deutsche Bank frequently acts as lead manager for domestic
underwritten offerings of both debt and equity securities. Under an
SEC securities in offerings in which Deutsche Bank or one of its
affiliates is the principal underwriter. Directly and through its
various wholly-owned affiliates abroad, Deutsche Bank is a major
factor in the Eurobond market. Although the Portfolio will not
purchase securities from or sell securities to Deutsche Bank, the
trading activities of Deutsche Bank as well as the investment
positions and underwriting activities in such securities could have
either an adverse or beneficial effect on the price of those
securities already held in the Portfolio or contemplated for purchase
and, depending on the size of Deutsche Bank's position, may or may not
affect the availability of the securities for investment of the
Portfolio.
JAPANESE EQUITY SECURITIES MARKETS
Listed securities in Japan trade on three Main Japanese Exchanges (the
Nagoya Stock Exchange, the Osaka Securities Exchange and the Tokyo
Stock Exchange (the "TSE")) and five regional stock exchanges (the
Fukuoka Stock Exchange, the Hiroshima Stock Exchange, the Kyoto Stock
Exchange, the Niigata Stock Exchange and the Sapporo Stock Exchange).
The TSE is the largest and most prestigious of the exchanges and is
widely regarded as the central marketplace for all of Japan.
There are two widely followed price indices in Japan for listed
securities. The Nikkei Stock Average ("NSA") is the arithmetic average
of 225 selected stocks computed by a private corporation. The Tokyo
Stock Price Index ("TOPIX"), published by the TSE, is the composite
index of all common stock listed on the First Section of the TSE.
TOPIX reflects the change in the aggregate market value of the common
stocks as compared to the aggregate market value of those stocks as of
the close on January 4, 1968.
The following table sets forth the year-end NSA and TOPIX for 1987
through 1996 and yen and dollar-adjusted total return information for
those years.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
NSA TOPIX
- -------------------------------------------------------------------------------
Total Return(1) Total Return(1)
- -------------------------------------------------------------------------------
Dollar Dollar
Index (Yen) Adjusted Index (Yen) Adjusted
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1987 21,564.00 15.31% 50.54% 1,725.83 10.89% 44.77%
1988 30,159.00 39.86% 35.61% 2,357.03 36.57% 32.42%
1989 38,915.87 29.04% 12.21% 2,881.37 22.25% 6.31%
1990 23,848.71 -38.72% -35.08% 1,733.83 -39.83% -36.26%
1991 22,983.77 -3.63% 4.75% 1,714.68 -1.10% 7.49%
1992 16,924.95 -26.36% -26.33% 1,307.66 -23.74% -23.71%
1993 17,417.24 2.91% 15.02% 1,439.31 10.07% 23.03%
1994 19,723.06 13.24% 27.00% 1,559.09 8.32% 21.48%
1995 19,868.15 0.74% -2.85% 1,577.70 1.19% -2.41%
1996 19,361.35 -2.55% -13.06% 1,470.94 -6.77% -16.83%
- -------------------------------------------------------------------------------
</TABLE>
(1) Total return is the percent change in the index from the start of
the year to the end.
Sources: Tokyo Stock Exchange, Annual Securities Statistics (1996); Monthly
Statistics Report (Dec. 1987, 1988, 1989, 1990, 1991,
1992, 1993, 1994, 1995).
The Japanese stock and real estate markets of the late 1980s have been
dubbed "bubble" markets because they were characterized by dramatic
increases in the volume of trading and transactions as well as in
prices of stock and land. Such increases were driven by investors'
expectations that stock and land prices would rise even further for
the foreseeable future, thereby justifying (in their minds) their
over-priced investments in Japanese stock and real estate. Many of
such investments were financed with secured loans from Japan's banks
and so-called "non-bank banks" (i.e., companies that are not licensed
by the Minister of Finance to engage in the business of commercial
banking but that are primarily engaged in the business of commercial
lending).
The collapse of the "bubble" stock market in 1990 had a material
adverse impact on the financial situation of various participants
therein. Such collapse also led to various problems involving
irregular practices in the securities business, such as compensation
to favored customers by securities companies for trading and other
losses. The decline in stock prices has raised the cost of capital for
industry and has reduced the value of stock holdings by banks and
corporations. These effects have, in turn, contributed to the recent
weakness in Japan's economy and could continue to have an adverse
impact in the future.
The following table sets forth the aggregate trading volume and the
value of Japanese stocks on the eight Japanese stock exchanges for the
years 1989 through 1996. Trading on the TSE represented over 76% of
trading volume in each year.
<TABLE>
<CAPTION>
- -----------------------------------------------
Volume Value
Year (millions of shares) ((Yen) bils.)
- -----------------------------------------------
<S> <C> <C>
1989 256,296 386,395
1990 145,837 231,837
1991 107,844 134,160
1992 82,563 80,456
1993 101,172 106,123
1994 105,936 114,622
1995 120,148 115,840
1996 126,496 136,170
- -----------------------------------------------
</TABLE>
Source: Tokyo Stock Exchange, Fact Book 1997.
The Main Japanese Exchanges divide listed companies into First and
Second Sections. Generally, larger, established companies are assigned
to the First Section. Such companies meet more stringent listing
criteria relating to the size and business condition of the issuing
company, the liquidity of its securities and other factors pertinent
to investor protection. At the end of 1996, 1,293 Japanese companies
were listed on the First Section of the TSE. Newly listed and smaller
companies are assigned to the Second Section. At the end of 1996, 473
Japanese companies were listed on the Second Section of the TSE. In an
effort to increase the number of companies listed on the Second
Section, the Second Section listing requirements prescribed by each of
the Main Japanese Exchanges were lowered in 1996.
The 20 leading Japanese companies on the TSE, by market value,
represented 25.6% of the total market value of the TSE at year-end
1996. In 1996, three industrial groups accounted for approximately 40%
of the total market value of the TSE: banks, 19.3%; electric
appliances, 12.4%; and transportation equipment, 9.4%. The following
table sets forth the number of companies listed on the TSE and market
value by industrial group for year-end 1996.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Number of Market Values
Companies ((Yen) bils.)
- -------------------------------------------------------------------------------
<S> <C> <C>
Fishery, Agriculture & Forestry 7 497
Mining 9 670
Construction 145 12,981
Foods 91 9,837
Textiles & Apparels 64 5,198
Pulp & Paper 22 2,272
Chemicals 131 15,983
Pharmaceutical 39 10,516
Oil & Coal Products 13 3,484
Rubber Products 15 2,680
Glass & Ceramics Products 40 4,693
Iron & Steel 51 9,038
Nonferrous Metals 34 4,837
Metal Products 45 2,906
Machinery 149 12,196
Electric Appliances 181 43,190
Transportation Equipment 85 32,599
Precision Instruments 26 2,462
Other Products 48 7,725
Electric Power & Gas 17 14,282
Land Transportation 37 12,376
Marine Transportation 22 1,506
Air Transportation 5 2,460
Warehousing & Harbor
Transportation Services 24 1,028
Communication 4 8,086
Wholesale Trade 120 12,565
Retail Trade 88 15,571
Banks 100 67,109
Securities 25 8,255
Insurance 14 4,885
Other Financing Businesses 20 4,043
Real Estate 26 4,126
Services 68 7,505
- -------------------------------------------------------------------------------
Total 1,765 347,578
- -------------------------------------------------------------------------------
Manufacturing 1,034 169,525
Non-Manufacturing 732 177,952
- -------------------------------------------------------------------------------
Total 1,765 347,578
- -------------------------------------------------------------------------------
</TABLE>
Source: Tokyo Stock Exchange, Fact Book 1997.
The amount of funds raised in equity financings by all the companies
listed on the TSE in 1996 increased by 946 billion yen to 1,534
billion yen while the number of financings increased by 96 to 253. The
following table sets forth the number of equity financings by
companies listed on the TSE and the amount raised for each of 1992
through 1996.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Rights Public Private Exercise
Offerings Offerings Placements of Warrants Total
- -----------------------------------------------------------------------------------------------------------------------------
Number Amount Number Amount Number Amount Number Amount Amount
of Raised of Raised of Raised of Raised Raised
Financings ((Y)bils.) Financings ((Y)bils.) Financings ((Y)bils.) Financings ((Y)bils.) ((Y)bils.)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1992 20 111 3 4 22 102 127 203 419
1993 9 48 4 7 14 150 184 617 822
1994 2 10 18 237 8 239 180 451 935
1995 12 96 8 33 19 160 118 299 588
1996 9 337 36 305 20 218 187 673 1,533
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Source: Tokyo Stock Exchange, Fact Book 1997.
INVESTMENT RESTRICTIONS
The investment restrictions of each Fund and its corresponding
Portfolio are identical, unless otherwise specified. Accordingly,
references below to a Fund also include its corresponding Portfolio
unless the context requires otherwise; similarly, references to a
Portfolio also include its corresponding Fund unless the context
requires otherwise. The investment restrictions below have been
adopted by the Corporation with respect to each Fund as indicated and
by the Portfolio Trust with respect to each Portfolio as indicated.
Except where otherwise noted, these investment restrictions are
"fundamental" policies which, under the 1940 Act, may not be changed
without the vote of a "majority of the outstanding voting securities"
(as defined in the 1940 Act) of a Fund or a Portfolio, as the case may
be. The percentage limitations contained in the restrictions below
apply at the time of the purchase of securities except as otherwise
noted. Whenever a Fund is requested to vote on a change in the
fundamental investment restrictions of its corresponding Portfolio,
the Corporation will hold a meeting of Fund shareholders and will cast
its votes as instructed by such Fund's shareholders.
Unless Sections 8(b)(1) and 13(a) of the 1940 Act or any SEC or SEC
staff interpretations thereof are amended or modified and except that
the Corporation may invest all of each Fund's assets in its
corresponding Portfolio, each of the Funds and its corresponding
Portfolio may not:
1. Purchase any security if, as a result, 25% or more of its total
assets would be invested in securities of issuers in any single
industry. This limitation shall not apply to securities issued or
guaranteed as to principal or interest by the U.S. Government or
instrumentalities.
2. Issue senior securities. For purposes of this restriction,
borrowing money in accordance with paragraph 3 below, making loans
in accordance with paragraph 7 below, the issuance of shares in
multiple classes or series, the purchase or sale of options,
futures contracts, forward commitments, swaps and transactions in
repurchase agreements are not deemed to be senior securities.
3. Borrow money, except in amounts not to exceed one-third of the
Fund's total assets (including the amount borrowed) (i) from banks
for temporary or short-term purposes or for the clearance of
transactions, (ii) in connection with the redemption of interests
in the Portfolio or Fund shares or to finance failed settlements of
portfolio trades without immediately liquidating portfolio
securities or other assets, (iii) in order to fulfill commitments
or plans to purchase additional securities pending the anticipated
sale of other portfolio securities or assets and (iv) pursuant to
reverse repurchase agreements entered into by the Portfolio.
4. Underwrite the securities of other issuers, except to the extent
that, in connection with the disposition of portfolio securities,
the Portfolio may be deemed to be an underwriter under the
Securities Act of 1933, as amended (the "1933 Act").
5. Purchase or sell real estate except that a Portfolio may (i)
acquire or lease office space for its own use, (ii) invest in
securities of issuers that invest in real estate or interests
therein, (iii) invest in securities that are secured by real estate
or interests therein, (iv) purchase and sell mortgage-related
securities and (v) hold and sell real estate acquired by the
Portfolio as a result of the ownership of securities.
6. Purchase or sell commodities or commodity contracts, except the
Portfolio may purchase and sell financial futures contracts,
options on financial futures contracts and warrants and may enter
into swap and forward commitment transactions.
7. Make loans, except that the Portfolio (1) may lend portfolio
securities with a value not exceeding one-third of the Portfolio's
total assets, (2) enter into repurchase agreements, and (3)
purchase all or a portion of an issue of debt securities (including
privately issued debt securities), bank loan participation
interests, bank certificates of deposit, bankers' acceptances,
debentures or other securities, whether or not the purchase is made
upon the original issuance of the securities.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
The investment restrictions described below are not fundamental
policies of the Funds and their corresponding Portfolios and may be
changed by their respective Directors or Trustees. These
non-fundamental investment policies require that each Fund and its
corresponding Portfolio may not (except that the Corporation may
invest all of each Fund's assets in its corresponding Portfolio):
(i) Acquire securities of other investment companies, except as
permitted by the 1940 Act or any rule, order or interpretation
thereunder, or in connection with a merger, consolidation,
reorganization, acquisition of assets or an offer of exchange,
provided that Provesta Portfolio and Investa Portfolio shall
each be limited to 5% in the amount of its total assets that may
be invested in the aggregate in securities of investment
companies as a group. Currently the 1940 Act prohibits a
Portfolio from acquiring securities of other investment
companies if as a result (i) more than 5% of the value of a
Portfolio's total assets will be invested in the securities of
any one investment company, (ii) more than 10% of the value of
its total assets will be invested in the aggregate in securities
of investment companies as a group, or (iii) more than 3% of the
outstanding voting stock of any one investment company will be
owned by a Portfolio;
(ii) Acquire any illiquid investments, such as repurchase agreements
with more than seven days to maturity, if as a result thereof,
more than 15% of the market value of the Fund's net assets would
be in investments that are illiquid;
(iii) Invest more than 10% of its net assets in unlisted securities
and Notes (as defined in the Fund's prospectus); (iv) Sell any
security short, except to the extent permitted by the 1940 Act.
Transactions in futures contracts and options shall not
constitute selling securities short; or
(v) Purchase securities on margin, but a Portfolio may obtain such
short term credits as may be necessary for the clearance of
transactions.
The DWS Funds are subject to regulation under the German Investment
Companies Act. Therefore, in addition to the investment policies
discussed herein and in the Prospectus, each Fund, except Top 50 US
and its corresponding Portfolio, has adopted additional
non-fundamental investment policies. These non-fundamental investment
policies require that each such Fund and its corresponding Portfolio
may not (except that the Corporation may invest all of each Fund's
assets in its corresponding Portfolio):
(i) Invest more than 10% of its net assets in the securities of any one
issuer or invest more than 40% of its net assets in the aggregate in the
securities of those issuers in which the Portfolio has invested in excess
of 5% but not more than 10% of its net assets. For purposes of this
restriction, mortgage bonds and municipal bonds as well as bonds and
Notes issued by the FRG, the states of the FRG, a member state of the
European Union ("EU"), a state party to the Convention on the European
Economic Area ("CEEA"), a member state of the Organization for Economic
Cooperation and Development ("OECD") or the EU shall be valued at half of
their value. Bonds of credit institutions situated in a member state of
the EU or state party to the CEEA shall be valued at half their value
provided that the credit institutions are by law subject to a special
public supervision to protect the holders of such bonds and provided the
funds raised through the issue of such bonds are invested in accordance
with the legal provisions in assets, which provide sufficient coverage
for the ensuing liabilities throughout the entire life of the bonds and
which in case of deficiency of the issuer are earmarked for prior
redemption of principal and payment of interest. Securities and Notes
issued by companies in the same affiliated group shall be considered
securities of the same issuer (borrower);
(ii) Purchase bonds of the same issuer to the extent that their total value
exceeds 10% of the total value of the bonds outstanding of the same
issuer. This restriction does not apply to bonds issued by a national
government, a local authority of a member state of the EU, a state party
to the CEEA or by the EU, or if one of these bodies guarantees the
payment of interest or the repayment of principal. For purchases, the
above limit need not be complied with if the total value of the
outstanding bonds of the same issuer cannot be determined;
(iii) Purchase non-voting shares of the same issuer to the extent
that the total value exceeds 10% of the total value of
non-voting shares of the issuer; and
(iv) Borrow money, except in amounts not to exceed 10% of the Fund's
total assets (including the amount borrowed).
The European Bond Fund is subject
to an additional non-fundamental investment restriction: no more than 10%
of the value of its total assets will be invested in equity securities
(including warrants).
ALL FUNDS
There will be no violation of any investment restriction if that
restriction is complied with at the time the relevant action is
taken notwithstanding a later change in market value of an
investment, in net or total assets, in the securities rating of the
investment, or any other later change.
For purposes of fundamental investment restrictions regarding
industry concentration, the Adviser may classify issuers by
industry based on classifications used by Micropal, a leading
company offering a comprehensive and accurate performance
measurement service specializing in collective investment vehicles.
Micropal monitors all the world's major fund markets and has a
range of clients from financial institutions to individual
investors. In the absence of such classification or if the Adviser
determines in good faith based on its own information that the
economic characteristics affecting a particular issuer make it more
appropriately considered to be engaged in a different industry, the
Adviser may classify an issuer accordingly. For instance, personal
credit finance companies and business credit finance companies are
deemed to be separate industries and wholly owned finance companies
are considered to be in the industry of their parents if their
activities are primarily related to financing the activities of
their parents.
DIRECTORS, TRUSTEES, AND OFFICERS
- ------------------------------------------------------------------------------
The Directors of the Corporation, Trustees of the Portfolio Trust and
executive officers of the Corporation, and principal occupations
during the past five years (although their titles may have varied
during the period) and business addresses are:
Directors of the Corporation and Trustees of the Portfolio Trust
- ------------------------------------------------------------------------------
Edward C. Schmults
Member of the Board of Directors of Green Point Financial Corp. Chairman of the
Board of Trustees of The Edna McConnell Clark Foundation. Director of The
Germany Fund, Inc. and The Central European Equity Fund, Inc. Senior Vice
President - External Affairs and General Counsel of GTE Corporation (prior to
1994). Mr. Schmults' address is Rural Route One, Box 788, Cuttingsville, VT
05738.
- ------------------------------------------------------------------------------
Robert H. Wadsworth
President of The Wadsworth Group, First Fund Distributors, Inc. and Guinness
Flight Investment Funds, Inc. Director of The Germany Fund, Inc., The New
Germany Fund, Inc. and The Central European Equity Fund, Inc. Vice President of
Professionally Managed Portfolios and Advisors Series Trust. Mr. Wadsworth's
address is Investment Company Administration Corp., 479 West 22nd Street, New
York, NY 10011.
- ------------------------------------------------------------------------------
Werner Walbroel
President and Chief Executive of the German American Chamber of Commerce, Inc.
Member of the United States German Youth Exchange Council. Director of TUV
Rheinland of North America, Inc. President and Director of German American
Partnership Program. Director of The Germany Fund, Inc., DB New World Fund,
Limited and LDC, and The Central European Equity Fund, Inc. Mr Walbroel's
address is German American Chamber of Commerce, Inc., 40 West 57th Street, New
York, NY 10019.
- ------------------------------------------------------------------------------
G. Richard Stamberger*+
Managing Director of Deutsche Morgan Grenfell Inc. President, Deutsche Morgan
Grenfell Investment Management Inc. Director of The Germany Fund, Inc. and The
Central European Equity Fund, Inc. Managing Director of C.J. Lawrence, Inc.
(prior to 1993). Mr Stamberger's address is Deutsche Morgan Grenfell Investment
Management Inc., 31 West 52nd Street, New York, NY 10019.
- ------------------------------------------------------------------------------
Christian Strenger*+
Managing Director of DWS Deutsche Gesellschaft fuer Wertpapiersparen mbH (since
1991). Director of The Germany Fund, Inc., The New Germany Fund, Inc. and The
Central European Equity Fund, Inc. Managing Director of Deutsche Bank Securities
Corp. (prior to 1991). Mr. Strenger's address is DWS Deutsche Gesellschaft fuer
Wertpapiersparen mbH, Gruneburgweg 113-115, 60323 Frankfurt am Main, Germany.
- ------------------------------------------------------------------------------
OFFICERS OF THE CORPORATION
- ------------------------------------------------------------------------------
Brian A. Lee*+
President. President and Managing Director of DFM (since January 1997). Director
of Deutsche Bank Trust Company (since 1994). President and Chief Operating
Officer of Deutsche Bank Trust Company (1994-1997). Director of Deutsche Bank
Securities Corp. (1993-1994). Director of Value Line Securities, Inc.
(1992-1993). National Director and Head of Retail Sales and Service Division,
The Dreyfus Corporation (prior to 1992). Director, Boggy Creek Hole in the Wall
Gang Camp for Children. Trustee, Valley Hospital. Director, Capital Sources
Board, State of New Jersey.
- ------------------------------------------------------------------------------
Joseph Cheung*
Treasurer. Vice President (since 1996), Assistant Vice President (1994-1996) and
Associate (1991-1994) of Deutsche Morgan Grenfell Inc. Treasurer of the
CountryBasketsSM Index Fund, Inc. (1996-1997). Assistant Secretary and Assistant
Treasurer of The Germany Fund, Inc., The Central European Equity Fund, Inc. and
the New Germany Fund, Inc. (since 1993).
- ------------------------------------------------------------------------------
Robert R. Gambee*
Secretary. Director of Deutsche Morgan Grenfell, Inc. (since 1992). First Vice
President of Deutsche Morgan Grenfell, Inc. (1987-1991). Treasurer and Secretary
of The Germany Fund, Inc., The Central European Equity Fund, Inc., and the New
Germany Fund, Inc.
- ------------------------------------------------------------------------------
Laura Weber*
Assistant Secretary and Assistant Treasurer. Associate of Deutsche Morgan
Grenfell Inc. (since June 1997). Manager of Raymond James Financial (1996-1997).
Portfolio Accountant of Oppenheimer Capital (1995-1996). Supervisor (1994-1995)
and Mutual Fund Accountant (1993-1994) of Alliance Capital Management.
- ------------------------------------------------------------------------------
* Is an "interested person" of the Corporation or the Portfolio
Trust as that term is defined in the 1940 Act.
+ Mr. Lee, Mr. Strenger and Mr. Stamberger own less than 1% of the shares of
Deutsche Bank AG, of which the Manager and Adviser are indirect subsidiaries.
The address of each officer of the Corporation is 31 West 52nd Street,
New York, NY 10019.
The Portfolio Trust does not have officers, but instead acts
exclusively through its Trustees and agents of the Portfolio Trust
authorized by the Trustees.
<TABLE>
<CAPTION>
COMPENSATION TABLE--DIRECTORS OF THE CORPORATION
- ----------------------------------------------------------------------------------------------------------------
Aggregate Pension or Estimated Total
Compensation Retirement Benefits Estimated Annual Compensation
from the Accrued as Part Benefits Upon from the Corporation
Corporation of Fund Expenses Retirement and Fund Complex*
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Edward C. Schmults,
Director $7,000 None None $44,750
Robert H. Wadsworth,
Director $7,000 None None $62,000
Werner Walbroel,
Director $7,000 None None $46,250
G. Richard Stamberger,*
Director None None None None
Christian Strenger,
Director None None None None
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
* The Fund Complex consists of the Corporation, the Portfolio Trust, The New
Germany Fund, Inc., The Central European Equity Fund, Inc. and The Germany
Fund, Inc.
<TABLE>
<CAPTION>
COMPENSATION TABLE--TRUSTEES OF THE PORTFOLIO TRUST
- ----------------------------------------------------------------------------------------------------------------
Aggregate Pension or Estimated Total
Compensation Retirement Benefits Estimated Annual Compensation from
from the Accrued as Part Benefits Upon the Portfolio Trust
Portfolio Trust of Fund Expenses Retirement and Fund Complex*
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Edward C. Schmults,
Trustee $7,000 None None $44,750
Robert H. Wadsworth,
Trustee $7,000 None None $62,000
Werner Walbroel,
Trustee $7,000 None None $46,250
G. Richard Stamberger,*
Trustee None None None None
Christian Strenger,
Trustee None None None None
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
* The Fund Complex consists of the Corporation, the Portfolio Trust, The New
Germany Fund, Inc., The Central European Equity Fund, Inc. and The Germany
Fund, Inc.
The non-interested Directors of the Corporation receive a base annual
fee of $5,000 and $500 per meeting attended, plus expenses, which are
paid jointly by all series of the Corporation and allocated among the
series based upon their respective net assets.
The non-interested Trustees of the Portfolio Trust receive a base
annual fee of $5,000 and $500 per meeting attended, plus expenses,
which are paid jointly by all series of the Portfolio Trust and
allocated among the series based upon their respective net assets.
Neither the Corporation nor the Portfolio Trust requires employees,
and none of the Corporation's officers devotes full time to the
affairs of the Corporation or receive any compensation from a Fund or
a Portfolio.
FUND OWNERSHIP
As of September 24, 1997, the Directors of the Corporation, Trustees
of the Portfolio Trust and officers of the Corporation as a group
beneficially owned no outstanding shares of the Corporation and none
of the beneficial interests in any Portfolio of the Portfolio Trust.
As of the same date, no person owned 5% or more of the outstanding
voting stock of any series of the Corporation or any Portfolio except
the Corporation owned 100% of the outstanding beneficial interests in
each Portfolio and Edgewood Services, Inc. owned 100% of the
outstanding voting shares of each Fund.
MANAGER
- ------------------------------------------------------------------------------
The investment manager to each Portfolio is DFM, an indirect
subsidiary of Deutsche Bank AG, a major global banking institution
headquartered in Germany. DFM, with principal offices at 31 West 52nd
Street, New York, New York 10019, is a Delaware corporation and
registered investment adviser under the Investment Advisers Act of
1940.
Pursuant to an investment management agreement with the Portfolio
Trust with respect to each Portfolio (the "Management Agreement"), DFM
acts as investment manager to each Portfolio and, subject to the
supervision of the Board of Trustees of the Portfolio Trust, is
responsible for, but may and has delegated as described below, under
"Adviser," the management of the investment operations of each
Portfolio's investments in accordance with its investment objective,
policies and restrictions. DFM also provides each Portfolio with
overall supervisory services over the other service providers and
certain other services. The investment management services DFM
provides to each Portfolio are not exclusive under the terms of the
Management Agreement. DFM is free to render similar investment
management services to others.
The Management Agreement is dated July 28, 1997, and will remain in
effect until July 28, 1999, and from year to year thereafter, but only
so long as the agreement is specifically approved at least annually
(i) by a vote of the holders of a "majority of the outstanding voting
securities" (as defined in the 1940 Act) of the related Portfolio, or
by the Portfolio Trust's Trustees, and (ii) by a vote of a majority of
the Trustees of the Portfolio Trust who are not parties to such
Management Agreement or "interested persons" (as defined in the 1940
Act) of the Portfolio Trust, cast in person at a meeting called for
the purpose of voting on such approval. The Management Agreement was
initially approved at a meeting held on July 28, 1997. The Management
Agreement will terminate automatically if assigned and is terminable
at any time without penalty by a vote of a majority of the Portfolio
Trust's Trustees, or by a vote of the holders of a majority of the
related Portfolio's outstanding voting securities, on 60 days' written
notice to the Manager and by the Manager on 90 days' written notice to
the Portfolio Trust. The Management Agreement provides that neither
DFM nor its personnel shall be liable for any error of judgment or
mistake of law or for any loss or expense in connection with the
matters in which the agreement relates, except a loss resulting from
wilful misfeasance, bad faith or gross negligence on its part in the
performance of its obligations and duties under the agreement. See
"Additional Information."
As compensation for the services rendered and related expenses borne
by DFM under the Management Agreement with the Portfolio Trust with
respect to each Portfolio, DFM receives a fee from each of Top 50
World, Top 50 Europe and Top 50 Asia Portfolio, each Equity Portfolio
(except the foregoing three Top 50 Portfolios) and each Bond
Portfolio, which is computed daily and may be paid monthly, equal to
1.00%, 0.85% and 0.75%, respectively, of the average daily net assets
of such Portfolio on an annualized basis for the Portfolio's
then-current fiscal year.
The Glass-Steagall Act and other applicable laws generally prohibit
banks (including foreign banks having U.S. operations, such as
Deutsche Bank AG) from engaging in the business of underwriting or
distributing securities in the United States, and the Board of
Governors of the Federal Reserve System has issued an interpretation
to the effect that under these laws a bank holding company registered
under the Federal Bank Holding Company Act (or a foreign bank subject
to such Act's provisions) or certain subsidiaries thereof may not
sponsor, organize, or control a registered open-end investment company
continuously engaged in the issuance of its shares, such as the
Corporation. The interpretation does not prohibit a holding company
(or such a foreign bank) or a subsidiary thereof from acting as
investment manager and custodian to such an investment company.
Deutsche Bank AG believes that DFM may perform the services for the
Portfolio Trust and the Corporation contemplated by the Management
Agreement without violation of the Glass-Steagall Act or other
applicable banking laws or regulations. It is possible that future
changes in federal statutes and regulations concerning the permissible
activities of banks or trust companies, as well as further judicial or
administrative decisions and interpretations of present and future
statutes and regulations, might prevent DFM from continuing to perform
such services for each Portfolio.
ADVISER
- ------------------------------------------------------------------------------
DFM has entered into an investment advisory agreement (the "Advisory
Agreement") dated July 28, 1997, on behalf of the Portfolio Trust with
respect to each Portfolio except Top 50 US Portfolio with DWS
International Portfolio Management GmbH and with respect to Top 50 US
Portfolio with Deutsche Morgan Grenfell Investment Management Inc.
("DMGIM"). It is the Adviser's responsibility, under the overall
supervision of DFM, to conduct the day-to-day investment decisions of
its respective Portfolio(s), arrange for the execution of portfolio
transactions and generally manage each Portfolio's investments in
accordance with its investment objective, policies and restrictions.
The DWS Adviser and DMGIM Adviser are each an indirect subsidiary of
Deutsche Bank AG. For these services, the respective Adviser receives
from DFM a fee, which is computed daily and may be paid monthly, equal
to 0.75%, 0.60% and 0.50% of the average daily net assets of each of
Top 50 World, Top 50 Europe and Top 50 Asia Portfolio, each Equity
Portfolio (except the foregoing Top 50 Portfolios) and each Bond
Portfolio, respectively, on an annualized basis for the Portfolio's
then-current fiscal year.
The Advisory Agreement is dated July 28, 1997, and will remain in
effect until July 28, 1999, and from year to year thereafter, but only
so long as the agreement is specifically approved at least annually
(i) by a vote of the holders of a "majority of the outstanding voting
securities" (as defined in the 1940 Act) of the related Portfolio, or
by the Portfolio Trust's Trustees, and (ii) by a vote of a majority of
the Trustees of the Portfolio Trust who are not parties to such
Advisory Agreement or "interested persons" (as defined in the 1940
Act) of the Portfolio Trust, cast in person at a meeting called for
the purpose of voting on such approval. The Advisory Agreement was
initially approved at a meeting held on July 28, 1997. The Advisory
Agreement will terminate with respect to a Portfolio automatically if
assigned or if the Management Agreement is terminated with respect to
that Portfolio and is terminable at any time without penalty by a vote
of a majority of the Portfolio Trust's Trustees, or by a vote of the
holders of a majority of the related Portfolio's outstanding voting
securities, on 60 days' written notice to the relevant Adviser and by
each Adviser on 90 days' written notice to the Manager and the
Portfolio Trust. The Advisory Agreement provides that neither the
Adviser nor its personnel shall be liable for any error of judgment or
mistake of law or for any loss or expense in connection with the
matters in which the agreement relates, except a loss resulting from
willful misfeasance, bad faith or gross negligence on its part in the
performance of its obligations and duties under the agreement. See
"Additional Information."
For each Portfolio advised by the DWS Adviser there is a corresponding
DWS Fund, as follows (having launch dates and net assets as of July
31, 1997, as indicated): Provesta Portfolio--Provesta (November 1985,
$1.04 billion), Investa Portfolio--Investa (December 1956, $2.14
billion), Japanese Equity Portfolio--DWS-Japan Fonds (April 1992, $757
million), Global Bond Portfolio--Inter Renta (July 1969, $11.38
billion), European Bond Portfolio--Eurorenta (November 1987, $2.21
billion), Top 50 Word Portfolio--Top 50 Welt (January 1997, $3.56
billion), Top 50 Europe Portfolio--Europa (October 1995, $1.33
billion), and Top 50 Asia Portfolio--Top 50 Asien (April 1996, $850
million).
ADMINISTRATOR
- ------------------------------------------------------------------------------
Under the master agreement for administration services with the
Corporation ("Administration Agreement"), Federated Services Company
serves as administrator to the Funds ("Administrator"). In connection
with its responsibilities as Administrator of the Funds, Federated
Services Company, among other things (i) prepares, files and maintains
the Funds' governing documents, registration statements and regulatory
filings; (ii) prepares and coordinates the printing of publicly
disseminated documents; (iii) monitors declaration and payment of
dividends and distributions; (iv) projects and reviews the Funds'
expenses; (v) performs internal audit examinations; (vi) prepares and
distributes materials to the Directors of the Corporation; (vii)
coordinates the activities of all service providers; (viii) monitors
and supervises collection of tax reclaims; and (ix) prepares
shareholder meeting materials.
The Administration Agreement between the Corporation and Federated
Services Company (dated July 28, 1997) with respect to each Fund has
an initial term of three years. Thereafter, the Administration
Agreement will remain in effect until terminated by either party
thereto. The agreement is terminable by the Corporation at any time
after the initial term without penalty by a vote of a majority of the
Directors of the Corporation, or by a vote of the holders of a
"majority of the outstanding voting securities" (as defined in the
1940 Act) of the Corporation (see "Additional Information"). The
Administration Agreement is terminable by the Directors of the
Corporation or shareholders of the Fund on 60 days' written notice to
Federated Services Company. The agreement is terminable by the
Administrator on 90 days' written notice to the Corporation. The
Administration Agreement provides that neither Federated Services
Company nor its personnel shall be liable for any error of judgment or
mistake of law or for any loss arising out of any investment or for
any act or omission in its services, except for wilful misfeasance,
bad faith or gross negligence or reckless disregard of its obligations
and duties under the Agreement. See "Additional Information."
As Administrator of the Funds, Federated Services Company receives a
fee from each Fund, which is computed daily and may be paid monthly,
at the annual rate of 0.065% of the average daily net assets of each
Fund up to $200 million and 0.0525% of the average daily net assets of
each Fund greater than $200 million for the Fund's then-current fiscal
year. The Administrator of the Funds will receive a minimum fee of
$75,000 per Fund annually.
OPERATIONS AGENT
- ------------------------------------------------------------------------------
Under an operations agency agreement with the Portfolio Trust
("Operations Agency Agreement"), Federated Services Company serves as
operations agent to the Portfolios ("Operations Agent"). In connection
with its responsibilities as Operations Agent of the Portfolios,
Federated Services Company, among other things, (i) prepares governing
documents, registration statements and regulatory filings; (ii)
performs internal audit examinations (iii) prepares expense
projections; (iv) prepares materials for the Trustees of the Portfolio
Trust; (v) coordinates the activities of all service providers; (vi)
conducts compliance training for the Adviser; (vii) prepares investor
meeting materials and (viii) monitors and supervises collection of tax
reclaims.
The Operations Agency Agreement between the Portfolio Trust and
Federated Services Company (dated July 28, 1997) with respect to each
Portfolio has an initial term of three years. Thereafter, the
Operations Agency Agreement will remain in effect until terminated by
either party thereto. The agreement is terminable by the Portfolio
Trust at any time after the initial term without penalty by a vote of
a majority of the Trustees of the Portfolio Trust, or by a vote of the
holders of a "majority of the outstanding voting securities" (as
defined in the 1940 Act) of the Portfolio Trust (see "Additional
Information"). The Operations Agency Agreement is terminable by the
Trustees of the Portfolio Trust or investors of the Portfolio on 60
days' written notice to Federated Services Company. The agreement is
terminable by Federated Services Company on 90 days' written notice to
the Portfolio Trust. The Operations Agency Agreement provides that
neither Federated Services Company nor its personnel shall be liable
for any error of judgment or mistake of law or for any loss arising
out of any investment or for any act or omission in its services,
except for wilful misfeasance, bad faith or gross negligence or
reckless disregard of its obligations and duties under the Agreement.
As Operations Agent of the Portfolios, Federated Services Company
receives a fee from each Portfolio, which is computed daily and paid
monthly, at the annual rate of 0.035% of the average daily net assets
of each Portfolio for the Portfolio's then-current fiscal year. The
Operations Agent of the Portfolios will receive a minimum fee of
$60,000 per Portfolio annually and a minimum aggregate fee for each
Portfolio, corresponding Fund and any other fund investing in the
Portfolio, taken together, of $75,000 for the first year of the
Portfolio's operation and $125,000 for the second year, in each case
payable to the Operations Agent.
ADMINISTRATIVE AGENT
- ------------------------------------------------------------------------------
Under an administration agreement with the Portfolio Trust
("Administration Agreement"), IBT Trust Company (Cayman) Ltd. ("IBT
(Cayman)") serves as administrative agent to the Portfolios
("Administrative Agent"). In connection with its responsibilities as
Administrative Agent of the Portfolios, IBT (Cayman) (i) files and
maintains governing documents, registration statements and regulatory
filings; (ii) maintains a telephone line; (iii) approves annual
expense budget; (iv) authorizes expenses; (v) distributes materials to
the Trustees of the Portfolio Trust; (vi) authorizes dividend
distributions; (vii) maintains books and records; (viii) files tax
returns and (ix) maintains an investor register.
The Administration Agreement between the Portfolio Trust and IBT
(Cayman) (dated July 28, 1997) with respect to each Portfolio has an
initial term of three years. Thereafter, the Administration Agreement
will remain in effect until terminated by either party thereto. The
agreement is terminable by the Portfolio Trust at any time after the
initial term without penalty by a vote of a majority of the Trustees
of the Portfolio Trust, or by a vote of the holders of a "majority of
the outstanding voting securities" (as defined in the 1940 Act) of the
Portfolio Trust (see "Additional Information"). The Administration
Agreement is terminable by the Trustees of the Portfolio Trust or
investors of the Portfolio on 60 days' written notice to IBT (Cayman).
The agreement is terminable by IBT (Cayman) on 90 days' written notice
to the Portfolio. The Administration Agreement provides that neither
IBT (Cayman) nor its personnel shall be liable for any error of
judgment or mistake of law or for any loss arising out of any
investment or for any act or omission in its services, except for
wilful misfeasance, bad faith or gross negligence or reckless
disregard of its obligations and duties under the Agreement.
As Administrative Agent of the Portfolios, IBT (Cayman) receives a fee
from each Portfolio, which may be paid monthly, at the annual rate of
$5,000.
DISTRIBUTOR
- -------------------------------------------------------------------------------
The distribution agreement (the "Distribution Agreement") (dated July
28, 1997) between the Corporation and Edgewood Services, Inc. (the
"Distributor") remains in effect indefinitely, but only so long as
such agreement is specifically approved at least annually (i) by a
vote of the holders of a "majority of the outstanding voting
securities" (as defined in the 1940 Act) of the related Fund, or by
the Corporation's Directors, and (ii) by a vote of a majority of the
Directors of the Corporation who are not parties to such Distribution
Agreement or "interested persons" (as defined in the 1940 Act) of the
Corporation, cast in person at a meeting called for the purpose of
voting on such approval. The Distribution Agreement terminates
automatically if assigned by either party thereto and is terminable
with respect to each Fund at any time without penalty by a vote of a
majority of the Directors of the Corporation or by a vote of the
holders of a "majority of the outstanding voting securities" (as
defined in the 1940 Act) of the Fund (see "Additional Information").
The Distribution Agreement is terminable with respect to each Fund by
the Corporation's Directors or shareholders of a Fund on 60 days'
written notice to Edgewood. The Agreement is terminable by the
Distributor on 90 days' written notice to the Corporation.
The Distributor is not obligated to sell any specific number of
shares. Under a plan adopted in accordance with Rule 12b-1 of the 1940
Act on July 28, 1997, Class B Shares are subject to a distribution
plan (the "Distribution Plan") and Class A Shares and Class B Shares
are subject to a service plan (the "Service Plan").
Under the Distribution Plan, Class B Shares of each Fund will pay a
fee to the Distributor in an amount computed at an annual rate of
0.75% of the average daily net assets of the Fund represented by Class
B Shares to finance any activity which is principally intended to
result in the sale of Class B Shares of the Fund subject to the
Distribution Plan. A report of the amounts expended pursuant to the
Distribution Plan, and the purposes for which such expenditures were
incurred, must be made to the Directors of the Corporation for review
at least quarterly.
The Distribution Plan provides that it may not be amended to increase
materially the costs which a Fund may bear pursuant to the
Distribution Plan without shareholder approval and that other material
amendments of the Distribution Plan must be approved by the Directors
of the Corporation, and by the Directors who have no direct or
indirect financial interest in the operation of the Distribution Plan
or any related agreement and are not "interested persons" (as defined
in the 1940 Act) of the Corporation ("Qualifying Directors"), by vote
cast in person at a meeting called for the purpose of considering such
amendments. While the Distribution Plan is in effect, the selection
and nomination of the Directors of the Corporation have been committed
to the discretion of the Qualifying Directors. The Distribution Plan
has been approved, and is subject to annual approval, by the Directors
of the Corporation and the Qualifying Directors, by vote cast in
person at a meeting called for the purpose of voting on the
Distribution Plan. The Qualifying Directors voted to approve the
Distribution Plan at a meeting held on July 28, 1997. The Distribution
Plan is terminable with respect to the Class B Shares of a Fund at any
time by a vote of a majority of the Qualifying Directors or by vote of
the holders of a majority of the Class B Shares of that Fund.
TRANSFER AGENT, CUSTODIAN, AND FUND ACCOUNTANT
- -------------------------------------------------------------------------------
Federated Shareholder Services Company, Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779, serves as the transfer agent and
dividend disbursing agent for each Fund. As Transfer Agent and
Dividend Disbursing Agent, Federated Shareholder Services Company is
responsible for maintaining account records detailing the ownership of
Fund shares and for crediting income, capital gains and other changes
in share ownership to shareholder accounts. Investors Bank & Trust
Company, 200 Clarendon Street, Boston, MA 02116 acts as the custodian
of each Fund's and each Portfolio's assets. Pursuant to the Custodian
Contract with the Portfolio Trust, IBT is responsible for maintaining
the books and records of portfolio transactions and holding portfolio
securities and cash. In the case of foreign assets held outside the
United States, IBT employs various subcustodians who were approved in
accordance with the regulations of the SEC. The Custodian maintains
portfolio transaction records. IBT Fund Services (Canada) Inc., One
First Canadian Place, King Street West, Suite 2800, P.O. Box 231,
Toronto, Ontario M5X1C8, provides fund accounting services to the
Funds and the Portfolios including (i) calculation of the daily net
asset value for the Funds and the Portfolios; (ii) monitoring
compliance with investment portfolio restrictions, including all
applicable federal and state securities and other regulatory
requirements; and (iii) monitoring each Fund's and Portfolio's
compliance with the requirements applicable to a regulated investment
company under the Code.
INDEPENDENT ACCOUNTANTS
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The independent accountants of the Corporation are Price Waterhouse
LLP, 1177 Avenue of the Americas, New York, NY 10036. The independent
accountants of the Portfolio Trust are Price Waterhouse LLP, Kaya
W.F.G. (Jombi), Mensing #18, P.O. Box 46, Curacao, Netherlands
Antilles. The independent accountants conduct annual audits of
financial statements, assist in the preparation and/or review of
federal and state income tax returns and provide consulting as to
matters of accounting and federal and state income taxation for each
Fund or Portfolio, as the case may be.
PURCHASE OF SHARES
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Except under certain circumstances described in a Fund's Prospectus,
Shares are sold at their net asset value (plus a sales charge on Class
A shares only) on days the New York Stock Exchange is open for
business. The procedure for purchasing shares is explained in each
Prospectus under "Purchase of Shares."
CONVERSION TO FEDERAL FUNDS
It is each Fund's policy to be as fully invested as possible so that
maximum interest may be earned. To this end, all payments from
shareholders must be in federal funds or be converted into federal
funds before shareholders begin to earn dividends. Federated
Shareholder Services Company acts as the shareholder's agent in
depositing checks and converting them to federal funds.
REDEMPTION OF SHARES
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Each Fund redeems Shares at the next computed net asset value, less
any applicable contingent deferred sales charge, after a Fund receives
the redemption request. Redemption procedures are explained in each
Fund's Prospectus under "Redemption of Shares." Although the transfer
agent does not charge for telephone redemptions, it reserves the right
to charge a fee for the cost of wire-transferred redemptions of less
than $5,000.
Class B Shares redeemed within six years of purchase and applicable
Class A Shares redeemed within one year of purchase may be subject to
a contingent deferred sales charge. The amount of the contingent
deferred sales charge is based upon the amount of the administrative
fee paid at the time of purchase by the Distributor to the financial
institution for services rendered, and the length of time the investor
remains a shareholder in a Fund. Should Financial Intermediaries elect
to receive an amount less than the fee that is stated in a Fund's
Prospectus for servicing a particular shareholder, the contingent
deferred sales charge and/or holding period for that particular
shareholder will be reduced accordingly.
Since portfolio securities of each Portfolio may be traded on foreign
exchanges which trade on Saturdays or on holidays on which a Fund will
not make redemptions, the net asset value of each class of Shares of a
Fund may be significantly affected on days when shareholders do not
have an opportunity to redeem their Shares.
REDEMPTION IN KIND
Although the Corporation intends to redeem Shares in cash, it reserves
the right under certain circumstances to pay the redemption price in
whole or in part by a distribution of securities from the respective
Fund's portfolio. In such a case, the portfolio instruments to be
distributed as redemption proceeds would be valued in the same way as
the Portfolio determines net asset value. The portfolio instruments
will be selected in a manner that the Directors of the Corporation and
Trustees of the Portfolio deem fair and equitable. To the extent
available, such securities will be readily marketable.
Redemption in kind is not as liquid as a cash redemption. If
redemption is made in kind, shareholders receiving their securities
and selling them before their maturity could receive less than the
redemption value of their securities and could incur certain
transaction costs.
ELIMINATION OF THE CONTINGENT DEFERRED SALES CHARGE
The Systematic Withdrawal Program permits the shareholder to request
withdrawal of a specified dollar amount (minimum $100) on either a
monthly or quarterly basis from accounts with $10,000 minimum at the
time the shareholder elects to participate in the Systematic
Withdrawal Program. The amounts that a shareholder may withdraw under
a Systematic Withdrawal Program that qualify for elimination of the
contingent deferred sales charge may not exceed 12% annually with
reference initially to the value of the Class B Shares upon
establishment of the Systematic Withdrawal Program and then as
calculated at the fiscal year end. Amounts that exceed the 12% annual
limit for redemption, as described, will be subject to the contingent
deferred sales charge. In determining the applicability of the
contingent deferred sales charge, the 12 month holding requirement for
any new Class B Shares received through an exchange will include the
period for which the exchanged Class B Shares were held. However, for
purposes of meeting the $10,000 minimum account value requirement,
Class B Share account values will not be aggregated.
EXCHANGE OF SHARES
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An investor may exchange shares from any series of the Deutsche Funds,
Inc. (a "Deutsche Fund") into any other Deutsche Fund, as described
under "Exchange of Shares" in each Fund's Prospectus. For complete
information, the prospectus as it relates to each Fund into which a
transfer is being made should be read prior to the transfer. Requests
for exchange are made in the same manner as requests for redemptions.
See "Redemption of Shares." Shares of a Fund to be acquired are
purchased for settlement when the proceeds from redemption become
available. The Corporation reserves the right to discontinue, alter or
limit the exchange privilege at any time.
NET ASSET VALUE
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Each Fund computes its net asset value once daily on Monday through
Friday as described under "Net Asset Value" in the Prospectus. The net
asset value will not be computed on the day the following legal
holidays are observed: New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day, and Christmas Day. On days when U.S. trading
markets close early in observance of these holidays, each Fund and its
corresponding Portfolio would expect to close for purchases and
redemptions at the same time. The days on which net asset value is
determined are the Fund's business days.
The net asset value of a Fund is equal to the value of such Fund's
investment in its corresponding Portfolio (which is equal to that
Fund's pro rata share of the total investment of the Fund and of any
other investors in the Portfolio less the Fund's pro rata share of the
Portfolio's liabilities) less the Fund's liabilities.
FIXED INCOME SECURITIES
The fixed income portion of the Portfolios and portfolio securities
with a maturity of 60 days or more, including securities that are
listed on an exchange or traded over the counter, are valued using
prices supplied daily by an independent pricing service or services
that (i) are based on the last sale price on a national securities
exchange or, in the absence of recorded sales, at the average of
readily available closing bid and asked prices on such exchange or at
the average of readily available closing bid and asked prices in the
over-the-counter market, if such exchange or market constitutes the
broadest and most representative market for the security and (ii) in
other cases, take into account various factors affecting market value,
including yields and prices of comparable securities, indication as to
value from dealers and general market conditions. If such prices are
not supplied by a Portfolio's independent pricing service, such
securities are priced in accordance with procedures adopted by the
Trustees of the Portfolio Trust. All portfolio securities with a
remaining maturity of less than 60 days are valued by the amortized
cost method.
OTHER SECURITIES
The value of investments listed on a U.S. securities exchange, other
than options on stock indexes, is based on the last sale prices on the
New York Stock Exchange at 4:00 p.m. (U.S. Eastern time) or, in the
absence of recorded sales, at the average of readily available closing
bid-and-asked prices on such exchange. Securities listed on a foreign
exchange considered by the Adviser to be a primary market for the
securities are valued at the last quoted sale price available before
the time when net assets are valued. Unlisted securities, and
securities for which the Adviser determines the listing exchange is
not a primary market, are valued at the average of the quoted
bid-and-asked prices in the over-the-counter market. The value of each
security for which readily available market quotations exist is based
on a decision as to the broadest and most representative market for
such security. For purposes of calculating net asset value, all assets
and liabilities initially expressed in foreign currencies will be
converted into U.S. dollars at the prevailing market rates available
at the time of valuation.
Options on stock indexes traded on U.S. national securities exchanges
are valued at the close of options trading on such exchanges which is
currently 4:10 p.m. (U.S. Eastern time). Stock index futures and
related options, which are traded on U.S. futures exchanges, are
valued at their last sales price as of the close of such futures
exchanges which is currently 4:15 p.m. (U.S. Eastern time). Options,
futures contracts and warrants traded on a foreign stock exchange or
on a foreign futures exchange are valued at the last price available
before the time when the net assets are valued. Securities or other
assets for which market quotations are not readily available
(including certain restricted and illiquid securities) are valued at
fair value in accordance with procedures established by and under the
general supervision and responsibility of the Trustees of the
Portfolio Trust. Such procedures include the use of independent
pricing services that use prices based upon yields or prices of
securities of comparable quality, coupon, maturity and type;
indications as to values from dealers; and general market conditions.
Trading in securities on most foreign exchanges and over-the-counter
markets is normally completed before the close of the New York Stock
Exchange and may also take place on days on which the New York Stock
Exchange is closed. If events materially affecting the value of
securities occur between the time when the exchange on which they are
traded closes and the time when a Portfolio's net asset value is
calculated, such securities will be valued at fair value in accordance
with procedures established by and under the general supervision of
the Trustees.
PERFORMANCE DATA
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From time to time, a Fund may quote performance in reports, sales
literature and advertisements published by the Corporation. Current
performance information for a Fund may be obtained by calling the
number provided on the cover page of this Statement of Additional
Information. See also "Management of the Corporation and the Portfolio
Trust - Performance Information" in the Prospectus.
TOTAL RETURN QUOTATIONS
As required by regulations of the SEC, the annualized total return of
a Fund for a period is computed by assuming a hypothetical initial
payment of $1,000. It is then assumed that all of the dividends and
distributions by a Fund over the period are reinvested. It is then
assumed that at the end of the period, the entire amount is redeemed.
The annualized total return is then calculated by determining the
annual rate required for the initial payment to grow to the amount
which would have been received upon redemption.
Average annual total return for each class of Shares of the Funds is
the average compounded rate of return for a given period that would
equate a $1,000 initial investment to the ending redeemable value of
that investment. The ending redeemable value is computed by
multiplying the number of Shares owned at the end of the period by the
net asset value per share at the end of the period. The number of
Shares owned at the end of the period is based on the number of Shares
purchased at the beginning of the period with $1,000, less any
applicable sales charge, adjusted over the period by any additional
Shares, assuming the annual reinvestment of all dividends and
distributions.
Any applicable contingent deferred sales charge is deducted from the
ending value of the investment based on the lesser of the original
purchase price or the net asset value of Shares redeemed.
Aggregate total returns, reflecting the cumulative percentage change
over a measuring period, may also be calculated.
YIELD
The yield for each class of Shares of the Funds is determined by
dividing the net investment income per share (as defined by the SEC)
earned by any class of Shares over a 30-day period by the maximum
offering price per share of the respective class on the last day of
the period. This value is annualized using semi-annual compounding.
This means that the amount of income generated during the 30-day
period is assumed to be generated each month over a 12-month period
and is reinvested every six months. The yield does not necessarily
reflect income actually earned by a Fund because of certain
adjustments required by the SEC and, therefore, may not correlate to
the dividends or other distributions paid to the shareholders.
To the extent that Financial Intermediaries and broker-dealers charge
fees in connection with services provided in conjunction with an
investment in any class of Shares, the performance will be reduced for
those shareholders paying those fees.
GENERAL
The performance of each of the classes of Shares will vary from time
to time depending upon market conditions, the composition of a
Portfolio, and its operating expenses. Consequently, any given
performance quotation should not be considered representative of a
Fund's performance for any specified period in the future. In
addition, because performance will fluctuate, it may not provide a
basis for comparing an investment in a Fund with certain bank deposits
or other investments that pay a fixed yield or return for a stated
period of time.
Comparative performance information may be used from time to time in
advertising a Fund's shares, including appropriate market indices or
data from Lipper Analytical Services, Inc., Micropal, Inc., Ibbotson
Associates, Morningstar Inc., the Dow Jones Industrial Average and
other industry publications.
INFORMATION AND COMPARISONS RELATING TO THE FUNDS, SECONDARY MARKET TRADING, NET
ASSET SIZE, PERFORMANCE AND TAX TREATMENT
Information regarding various aspects of each Fund, including the net
asset size thereof, as well as the performance and the tax treatment
of Fund shares, may be included from time to time in advertisements,
sales literature and other communications as well as in reports to
current or prospective investors.
Information may be provided to prospective investors to help such
investors assess their specific investment goals and to aid in their
understanding of various financial strategies. Such information may
present current economic and political trends and conditions and may
describe general principles of investing such as asset allocation,
diversification and risk tolerance, as well as specific investment
techniques.
Information regarding the net asset size of a Fund may be stated in
communications to prospective or current investors for one or more
time periods, including annual, year-to-date or daily periods. Such
information may also be expressed in terms of the total number of Fund
Shares outstanding as of one or more time periods. Factors integral to
the size of a Fund's net assets, such as the volume and activity of
purchases and redemptions of Fund Shares, may also be discussed, and
may be specified from time to time or with respect to various periods
of time. Comparisons of such information during various periods may
also be made and may be expressed by means of percentages.
Information may be provided to investors regarding capital gains
distributions by the Funds, including historical information relating
to such distributions. Comparisons between the Funds and other
investment vehicles such as mutual funds may be made regarding such
capital gains distributions, including the expected effects of
differing levels of portfolio adjustments on such distributions and
the potential tax consequences thereof.
Information may also be provided in communications to prospective or
current investors comparing and contrasting the relative advantages of
investing in Fund Shares as compared to other investment vehicles,
such as mutual funds, both on an individual and a group basis (e.g.,
stock index mutual funds). Such information may include comparisons of
costs, expense ratios, expressed either in dollars or basis points,
stock lending activities, permitted investments and hedging activities
(e.g., engaging in options or futures transactions), price volatility
and portfolio turnover data and analyses. In addition, such
information may quote, reprint or include portions of financial,
scholarly or business publications or periodicals, including model
allocation schedules or portfolios as the foregoing relate to the
comparison of Fund Shares to other investment vehicles, current
economic financial and political conditions, investment philosophy or
techniques or the desirability of owning Fund Shares. Such information
may be provided both before and after deduction of sales charges.
Information on the performance of a Fund on the basis of changes in
net asset value per fund share, with or without reinvesting all
dividends and/or any distributions of capital in additional Fund
Shares, may be included from time to time in a Fund's performance
reporting. The performance of a Fund may also be compared to the
performance of money managers as reported in market surveys such as
SEI Fund Evaluation Survey (a leading data base of tax-exempt fund) or
mutual funds such as those reported by Lipper Analytical Services,
Morningstar, Micropal, Money Magazine's Fund Watch or Wiesenberger
Investment Companies Service, each of which measures performance
following their own specific and well-defined calculation measures, or
of the NYSE Composite Index, the American Stock Exchange Index
(indices of stocks traded on the New York and American Stock
Exchanges, respectively), the Dow Jones Industrial Average (an index
of 30 widely traded industrial common stocks), any widely recognized
foreign stock and bond index or similar measurement standards during
the same period of time.
Information relating to the relative net asset value performance of
Fund Shares may be compared against a wide variety of investment
categories and asset classes, including common stocks, small
capitalization stocks, ADRs, long and intermediate term corporate and
government bonds, Treasury bills, futures contracts, the rate of
inflation in the United States (based on the Consumer Price Index
("CPI") or other recognized indices) and other capital markets and
combinations thereof. Historical returns of the capital markets
relating to a Fund may be provided by independent statistical studies
and sources, such as those provided to Ibbotson Associates. The
performance of these capital markets is based on the returns of
different indices. Information may be presented using the performance
of these and other capital markets to demonstrate general investment
strategies. So, for example, performance of Fund Shares may be
compared to the performance of selected asset classes such as
short-term U.S. Treasury bills, long-term U.S. Treasury bonds,
long-term corporate bonds, mid-capitalization stocks, small
capitalization stocks and various classes of foreign stocks and may
also be measured against the rate of inflation as set forth in
well-known indices (such as the CPI). Performance comparisons may also
include the value of a hypothetical investment in any of these capital
markets. Performance of Fund Shares may also be compared to that of
other indices or compilations that may be developed and made available
to the investing public in the future. Of course, such comparisons
will only reflect past performance of Fund Shares and the investment
categories, indices or compilations chosen and no guarantees can be
made of future results regarding the performance of either Fund Shares
or the asset classes chosen for such comparisons.
Comparative performance information may be used from time to time in
advertising each Fund's shares. The performance of the:
o European Mid-Cap Fund may be compared to the DAX Composite Index
("CDAX"), Financial Times ("FT")/Standard & Poor's Medium-Small Cap
Europe Index, Deutscher Aktien Index ("DAX"), DSX Mid-Cap, and
Morgan Stanley Capital Index
("MSCI") - Europe Index;
o German Equity Fund may be compared to DAX, CDAX, MSCI-Europe Index,
and FT-Europe Index;
o Japanese Equity Fund may be compared to Tokyo Price Index ("TOPIX"),
Nikkei-225 Index, and MSCI Japan Index;
o Global Bond Fund may be compared to JPM Global Government Bond Index, and
Salomon Brothers World Government Bond Index;
o European Bond Fund may be compared to JPM European Government Bond Index,
Salomon Brothers European World Government Bond Index, and EFFAS Government
Bond Index;
o Top 50 World may be compared to MSCI-World Index;
o Top 50 Europe may be compared to MSCI-Europe Index;
o Top 50 Asia may be compared to MSCI Combined Far East Index and MSCI Combined
Far East ex Japan Index;
o Top 50 US may be compared to Standard & Poor's 500 Index.
Each index is an unmanaged index of common security prices, converted
into U.S. dollars where appropriate. Any index selected by a Fund for
information purposes may not compute total return in the same manner
as the Funds and may exclude, for example, dividends paid, brokerage
and other fees.
Information comparing the portfolio holdings relating to a particular
Fund, with those of relevant stock indices or other investment
vehicles, such as mutual funds or futures contracts, may be advertised
or reported by the Fund. Equity analytic measures, such as
price/earnings ratio, price/book value and price/cash flow and market
capitalizations, may be calculated for the portfolio holdings and may
be reported on an historical basis or on the basis of independent
forecasts.
Information may be provided by a Fund on the total return for various
composites of the different Funds. These composite returns might be
compared to other securities or indices utilizing any of the
comparative measures that might be used for the individual Fund,
including correlations, standard deviation, and tracking error
analysis.
Past results may not be indicative of future performance. The
investment return and net asset value of shares of each Fund will
fluctuate so that the shares, when redeemed, may be worth more or less
than their original cost.
PORTFOLIO TRANSACTIONS
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The Portfolio Trust trades securities for a Portfolio if it believes
that a transaction net of costs (including custodian charges) will
help achieve the Portfolio's investment objective. Changes in a
Portfolio's investments are made without regard to the length of time
a security has been held, or whether a sale would result in the
recognition of a profit or loss. Therefore, the rate of turnover is
not a limiting factor when changes are appropriate. Specific decisions
to purchase or sell securities for a Portfolio are made by its
portfolio manager who is an employee of the Adviser. The portfolio
manager may serve other clients of the Adviser in a similar capacity.
The primary consideration in placing portfolio securities transactions
with broker-dealers for execution is to obtain and maintain the
availability of execution at the most favorable prices and in the most
effective manner possible. The Adviser attempts to achieve this result
by selecting broker-dealers to execute transactions on behalf of the
Portfolios and other clients of the Adviser on the basis of their
professional capability, the value and quality of their brokerage
services, and the level of their brokerage commissions. In the case of
securities traded in the over-the-counter market (where no stated
commissions are paid but the prices include a dealer's markup or
markdown), the Adviser normally seeks to deal directly with the
primary market makers, unless in its opinion, best execution is
available elsewhere. In the case of securities purchased from
underwriters, the cost of such securities generally includes a fixed
underwriting commission or concession. From time to time, soliciting
dealer fees are available to the Adviser on the tender of a
Portfolio's securities in so-called tender or exchange offers.
In connection with the selection of such brokers or dealers and the
placing of such orders, the Adviser seeks for each Portfolio in its
best judgment, prompt execution in an effective manner at the most
favorable price. Subject to this requirement of seeking the most
favorable price, securities may be bought from or sold to
broker-dealers who have furnished statistical, research and other
information or services to the Adviser or the Portfolio, subject to
any applicable laws, rules and regulations.
The investment advisory fee that each Portfolio pays to the Adviser
will not be reduced as a consequence of the Adviser's receipt of
brokerage and research services. While such services are not expected
to reduce the expenses of the Adviser, the Adviser would, through the
use of the services, avoid the additional expenses which would be
incurred if it should attempt to develop comparable information
through its own staff or obtain such services independently.
In certain instances there may be securities that are suitable as an
investment for a Portfolio as well as for one or more of the Adviser's
other clients. Investment decisions for the Portfolios 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 the 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 adversely affect the price of or the size of
the position obtainable in a security for a Portfolio. When purchases
or sales of the same security for a Portfolio and for other portfolios
managed by the Adviser occur contemporaneously, the purchase or sale
orders may be aggregated in order to obtain any price advantages
available to large volume purchases or sales.
TAXES
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THE FOLLOWING INFORMATION SUPPLEMENTS AND SHOULD BE READ IN CONJUNCTION WITH THE
SECTIONS IN THE PROSPECTUS ENTITLED "THE FUND--DIVIDENDS AND DISTRIBUTIONS AND
"--TAXES."
UNITED STATES TAXATION
GENERAL
Each Fund intends to qualify and intends to remain qualified as a
regulated investment company (a "RIC") under Subchapter M of the
Code. As a RIC, a Fund must, among other things: (a) derive at
least 90% of its gross income from dividends, interest, payments
with respect to loans of stock and securities, gains from the sale
or other disposition of stock, securities or foreign currency and
other income (including but not limited to gains from options,
futures, and forward contracts) derived with respect to its
business of investing in such stock, securities or foreign
currency; (b) derive less than 30% of its gross income from the
sale or other disposition of stock, securities, options, futures or
forward contracts (other than options, futures or forward contracts
on foreign currencies) held less than three months; and (C)
diversify its holdings so that, at the end of each fiscal quarter,
(i) at least 50% of the value of the Fund's total assets is
represented by cash, U.S. Government securities, investments in
other RICs and other securities limited in respect of any one
issuer, to an amount not greater than 5% of the Fund's total
assets, and 10% of the outstanding voting securities of such issuer
and (ii) not more than 25% of the value of its total assets is
invested in the securities of any one issuer (other than U.S.
Government securities or the securities of other RICs). As a RIC, a
Fund (as opposed to its shareholders) will not be subject to
federal income taxes on the net investment income and capital gains
that it distributes to its shareholders, provided that at least 90%
of its net investment income and realized net short-term capital
gains in excess of net long-term capital losses for the taxable
year is distributed. Legislation recently passed by Congress would,
if enacted, eliminate the short-short rule described above in
clause (b). There can be no assurance that such legislation will be
enacted or, if enacted, what the effective date of such legislation
will be.
A 4% non-deductible excise tax is imposed on regulated investment
companies that fail to currently distribute specific percentages of
their ordinary taxable income and capital gain net income (excess
of capital gains over capital losses) for each calendar year. Each
Fund intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and any capital gain
net income prior to the end of each calendar year to avoid
liability for this excise tax.
Any dividend declared by a Fund in October, November or December of
any calendar year and payable to shareholders of record on a
specified date in such a month shall be deemed to have been
received by each shareholder on December 31 of such calendar year
and to have been paid by the Fund not later than such December 31
so long as the dividend is actually paid by the Fund during January
of the following calendar year.
If a Portfolio purchases shares in certain foreign investment
entities, referred to as "passive foreign investment companies,"
the Fund may be subject to U.S. federal income tax, and an
additional charge in the nature of interest, on a portion of any
"excess distribution" from such company or gain from the
disposition of such shares, even if the distribution or gain is
paid by the Fund as a dividend to its shareholders. If the Fund
were able and elected to treat a passive foreign investment company
as a "qualified electing fund," in lieu of the treatment described
above, the Fund would be required each year to include in income,
and distribute to shareholders in accordance with the distribution
requirement set forth above, the Fund's pro rata share of the
ordinary earnings and net capital gains of the company, whether or
not distributed to the Fund. Under proposed Regulations, if
finalized, or proposed legislation, if enacted, the Fund could
instead elect to mark-to-market the shares annually, in which case
the treatment provided in the first sentence above also would not
apply.
Gains or losses attributable to disposition of foreign currency or
to foreign currency contracts, or to fluctuations in exchange rates
between the time a Portfolio accrues income or receivables or
expenses or other liabilities denominated in a foreign currency and
the time a Portfolio actually collects such income or pays such
liabilities, are generally treated as ordinary income or ordinary
loss. Similarly, gains or losses, if any, on the disposition of
debt securities held by a Portfolio and denominated in foreign
currency are also treated as ordinary income or loss to the extent
such gains or losses are attributable to fluctuations in exchange
rates between the acquisition and disposition dates. These gains
and losses increase or decrease the amount of the Fund's net
investment income available for distribution rather than its net
capital gains.
Forward currency contracts, options and futures contracts entered
into by a Portfolio may create "straddles" for U.S. federal income
tax purposes and this may affect the character and timing of gains
or losses realized by a Portfolio on forward currency contracts,
options and futures contracts or on the underlying securities.
"Straddles" may also result in the loss of the holding period of
underlying securities for purposes of the 30% gross income test
described above, and therefore, a Portfolio's ability to enter into
forward currency contracts, options and futures contracts may be
limited.
Dividends paid from net investment income will generally be taxable
to a shareholder as ordinary income. Regardless of the length of
time a shareholder has held his shares, distributions designated as
being from a Fund's net long-term capital gains (i.e., the excess
of net long-term capital gains over net short-term capital losses)
will be taxable as such. Distributions in excess of a Fund's
current and accumulated earnings and profits will be treated as a
tax-free return of capital to the extent of the shareholder's basis
in his shares and as a capital gain thereafter.
FOREIGN TAXES
As set forth in the Prospectus under "Taxation," the Funds are
expected to be subject to foreign withholding and other taxes with
respect to income received from sources within certain foreign
countries. Each Fund (except the Top 50 US) that is liable for
foreign income taxes, including such withholding taxes, expects to
meet the requirements of the Code for "passing through" to its
shareholders the foreign taxes paid, but there can be no assurance
that it will be able to do so. Under the Code, if more than 50% of
the value of a Portfolio's total assets at the close of any taxable
year consists of stock or securities of foreign corporations, its
corresponding Fund may elect to treat the proportionate share of
foreign income taxes paid by the Fund as paid directly by the
Fund's shareholders. If the Fund elects to pass through foreign
taxes to the shareholders, no deduction for such foreign taxes may
be claimed by a shareholder who does not itemize deductions and no
deduction is available in computing an individual shareholder's
alternative minimum tax liability. A shareholder who is a
nonresident alien individual or a foreign corporation may be
subject to U.S. withholding tax on the income resulting from the
election described in this paragraph, but may not be able to claim
a credit or deduction against such U.S. tax for the foreign taxes
treated as having been paid by such shareholder. A tax-exempt
shareholder will not ordinarily benefit from this election.
Shareholders who choose to utilize a credit (rather than a
deduction) for foreign taxes will be subject to the limitation that
the credit may not exceed the shareholder's U.S. tax (determined
without regard to the availability of the credit) attributable to
his or her total foreign source taxable income. For this purpose,
the portion of dividends and distributions paid by a Fund from its
foreign source net investment income will be treated as foreign
source income. A Portfolio's gains and losses from the sale of
securities will generally be treated as derived from U.S. sources
and certain foreign currency gains and losses likewise will be
treated as derived from U.S. sources. The limitation on the foreign
tax credit is applied separately to foreign source "passive
income," such as the portion of dividends received from a Portfolio
that qualifies as foreign source income. In addition, the foreign
tax credit is allowed to offset only 90% of the alternative minimum
tax imposed on corporations and individuals. Because of these
limitations, a shareholder may be unable to claim a credit for the
full amount of his proportionate share of the foreign income taxes
paid by a Portfolio.
Additionally, Congress has passed legislation under which the
foreign tax credit for taxes withheld with respect to dividends
received by a Portfolio would be disallowed if the Portfolio has
not held the shares of the foreign corporation for a 16-day period
(or 46-day period in the case of preferred shares) overlapping the
dividend payment date and during which the Portfolio is not
protected from risk of loss. If the Fund elects to pass through
foreign taxes to the shareholders, the proposed legislation would
also deny such credit where the shareholder of the Fund does not
satisfy the above holding requirement with respect to its shares in
the Fund. There can be no assurances as to whether such legislation
will be enacted into law, and, if so, what its effective date might
be.
The foregoing is only a general description of the foreign tax
credit under current law. Because application of the credit depends
on the particular circumstances of each shareholder, shareholders
are advised to consult their own tax advisers.
STATE AND LOCAL TAXES
Each Fund may be subject to state or local taxes in jurisdictions
in which that Fund is deemed to be doing business. In addition, the
treatment of a Fund and its shareholders in those states that have
income tax laws might differ from treatment under the federal
income tax laws. For example, a portion of the dividends received
by shareholders may be subject to state income tax. Shareholders
should consult their own tax advisors with respect to any state or
local taxes.
FOREIGN SHAREHOLDERS
Distributions of net investment income and realized net short-term
capital gains in excess of net long-term capital losses to a
shareholder who, as to the United States, is a non-resident alien
individual, fiduciary of a foreign trust or estate, foreign
corporation or foreign partnership (a "foreign shareholder") will
be subject to U.S. withholding tax at the rate of 30% (or lower
treaty rate) unless the dividends are effectively connected with a
U.S. trade or business of the shareholder, in which case the
dividends will be subject to tax on a net income basis at the
graduated rates applicable to U.S. individuals or domestic
corporations. Distributions of net long-term capital gains to
foreign shareholders will not be subject to U.S. tax unless the
distributions are effectively connected with the shareholder's
trade or business in the United States or, in the case of a
shareholder who is a non-resident alien individual, the shareholder
was present in the United States for more than 182 days during the
taxable year and certain other conditions are met.
In the case of a foreign shareholder who is a nonresident alien
individual and who is not otherwise subject to withholding as
described above, a Fund may be required to withhold U.S. federal
income tax at the rate of 31% unless IRS Form W-8 is provided. See
"Taxation" in the Prospectus. Transfers by gift of shares of a Fund
by a foreign shareholder who is a nonresident alien individual will
not be subject to U.S. federal gift tax, but the value of shares of
the Fund held by such a shareholder at his or her death will be
includible in his or her gross estate for U.S. federal estate tax
purposes.
REPORTS TO SHAREHOLDERS
The Fund will make annual reports of the federal income tax status
of distributions to owners of shares. Such reports will set forth
the dollar amounts of dividends from net investment income and
long-term capital gains and, if the Fund elects to pass through
foreign taxes, the shareholder's portion of the foreign income
taxes paid to each country and the portion of the dividends that
represents income derived from sources within each country.
The foregoing discussion is based on U.S. federal tax laws in
effect on the date hereof. These laws are subject to change by
legislative or administrative action, possibly with retroactive
effect.
The foregoing discussion is a summary only and is not intended as a
substitute for careful tax planning. Prospective investors in
shares of a Fund should consult their own tax advisers as to the
tax consequences of investing in such shares, including the
consequences under state, local and other tax laws.
DESCRIPTION OF SHARES
- -------------------------------------------------------------------------------
The Corporation is an open-end management investment company organized
as a Maryland corporation on May 22, 1997. The Articles of
Incorporation currently permit the Corporation to issue 17,500,000,000
shares of common stock, par value $0.001 per share, of which
10,000,000 shares have been classified as shares of each Fund. The
Corporation currently consists of eleven such series and two classes
of shares for each Fund known as Class A Shares and Class B Shares.
Shareholders are entitled to one vote for each share held on matters
on which they are entitled to vote. Shareholders in the Corporation do
not have cumulative voting rights, and shareholders owning more than
50% of the outstanding shares of the Corporation may elect all of the
Directors of the Corporation if they choose to do so and in such event
the other shareholders in the Corporation would not be able to elect
any Director. The Corporation is not required and has no current
intention to hold meetings of shareholders annually, but the
Corporation will hold special meetings of shareholders when in the
judgment of the Corporation's Directors it is necessary or desirable
to submit matters for a shareholder vote. Shareholders have under
certain circumstances (e.g., upon application and submission of
certain specified documents to the Directors by a specified number of
shareholders) the right to communicate with other shareholders in
connection with requesting a meeting of shareholders for the purpose
of removing one or more Directors. Shareholders also have the right to
remove one or more Directors without a meeting by a declaration in
writing by a specified number of shareholders. Shares have no
preference, pre-emptive, conversion or similar rights (except the
automatic conversion of Class B Shares into Class A Shares as
discussed in the Prospectus under "Purchase of Shares"). Shares, when
issued, are fully paid and non-assessable.
Stock certificates are not issued by the Corporation except upon
written request. No certificates will be issued for fractional shares.
The Articles of Incorporation of the Corporation contain a provision
permitted under Maryland Corporation Law which under certain
circumstances eliminates the personal liability of the Corporation's
Directors to the Corporation or its shareholders.
The Articles of Incorporation and the By-Laws of the Corporation
provide that the Corporation indemnify the Directors and officers of
the Corporation to the full extent permitted by the Maryland
Corporation Law, which permits indemnification of such persons against
liabilities and expenses incurred in connection with litigation in
which they may be involved because of their offices with the
Corporation. However, nothing in the Articles of Incorporation or the
By-Laws of the Corporation protects or indemnifies a Director or
officer of the Corporation against any liability to the Corporation or
its shareholders to which he would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his office.
Interests in a Portfolio have no preference, preemptive, conversion or
similar rights and are fully paid and non-assessable. The Portfolio
Trust is not required to hold annual meetings of investors, but will
hold special meetings of investors when, in the judgment of its
Trustees, it is necessary or desirable to submit matters for an
investor vote. Each investor is entitled to a vote in proportion to
the share of its investment in a Portfolio.
ADDITIONAL INFORMATION
- -----------------------------------------------------------------------------
As used in this Statement of Additional Information and the
Prospectuses, the term "majority of the outstanding voting securities"
(as defined in the 1940 Act) currently means the vote of (i) 67% or
more of the outstanding voting securities present at a meeting, if the
holders of more than 50% of the outstanding voting securities are
present in person or represented by proxy; or (ii) more than 50% of
the outstanding voting securities, whichever is less.
Fund shareholders receive semi-annual reports containing unaudited
financial statements and annual reports containing financial
statements audited by independent auditors.
A shareholder's right to receive payment with respect to any
redemption may be suspended or the payment of the redemption proceeds
postponed: (i) during periods when the New York Stock Exchange or
foreign stock exchange is closed for other than weekends and holidays
or when regular trading on such Exchange is restricted as determined
by the Securities and Exchange Commission by rule or regulation, (ii)
during periods in which an emergency exists which causes disposal of,
or evaluation of the net asset value of, portfolio securities to be
unreasonable or impracticable, or (iii) for such other periods as the
SEC may permit.
Telephone calls to any Fund, the Transfer Agent, the Distributor, or
Financial Intermediaries with respect to shareholder servicing may be
tape recorded. With respect to the securities offered hereby, this
Statement of Additional Information and the Prospectuses do not
contain all the information included in the Corporation's Registration
Statement filed with the SEC under the 1933 Act and the Corporation's
and the Portfolio Trust's Registration Statement filed under the 1940
Act. Pursuant to the rules and regulations of the SEC, certain
portions have been omitted. The Registration Statement including the
exhibits filed therewith may be examined at the office of the SEC in
Washington, D.C.
Statements contained in this Statement of Additional Information and
the Prospectus concerning the contents of any contract or other
document are not necessarily complete, and in each instance, reference
is made to the copy of such contract or other document filed as an
exhibit to the applicable Registration Statements. Each such statement
is qualified in all respects by such reference.
APPENDIX A
- -----------------------------------------------------------------------------
FUNDS AND CORRESPONDING PORTFOLIOS
The Corporation seeks to achieve the investment objective of each Fund
by investing all of the Fund's investable assets in the corresponding
non-diversified, open-end management investment company (each, a
"Portfolio" and collectively the "Portfolios") listed below:
Top 50 World-- Top 50 World Portfolio (US Dollar), ("Top 50 World Portfolio")
Top 50 Europe-- Top 50 Europe Portfolio (US Dollar), ("Top 50 Europe Portfolio")
Top 50 Asia-- Top 50 Asia Portfolio (US Dollar), ("Top 50 Asia Portfolio")
Top 50 US-- Top 50 US Portfolio (US Dollar), ("Top 50 US Portfolio"),
(collectively, the "Top 50 Funds"), (collectively, the "Top 50
Portfolios")
European Mid-Cap Fund-- Provesta Portfolio (US Dollar), ("Provesta Portfolio")
German Equity Fund-- Investa Portfolio (US Dollar), ("Investa Portfolio")
Japanese Equity Fund-- Japanese Equity Portfolio (US Dollar),
("Japanese Equity Portfolio"), (collectively with the Top 50 Funds,
the "Equity Funds"), (collectively with the Top 50 Portfolios, the
"Equity Portfolios")
Global Bond Fund-- Global Bond Portfolio (US Dollar), ("Global Bond Portfolio")
European Bond Fund-- European Bond Portfolio (US Dollar), ("European Bond
Portfolio"), (collectively, the Bond Funds), (collectively,the Bond Portfolios)
APPENDIX B--DESCRIPTION OF SECURITY RATINGS
- -----------------------------------------------------------------------------
STANDARD & POOR'S CORPORATE AND MUNICIPAL BONDS
AAA-- Debt rated AAA has the highest ratings 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 highest rated issues only in a
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 than debt
in higher rated categories.
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 a weakened capacity to pay
interest and repay principal for debt in this category than for debt
in higher rated categories.
MOODY'S CORPORATE AND MUNICIPAL BONDS
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.
Baa-- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate for
the present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
DEUTSCHE FUNDS, INC.
STATEMENT OF ASSETS & LIABILITIES
SEPTEMBER 17, 1997
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Deutsche Deutsche Deutsche Deutsche Deutsche Deutsche
Deutsche Deutsche Deutsche Deutsche European German Japanese Global European
Top 50 Top 50 Top 50 Top 50 Mid-Cap Equity Equity Bond Bond
World Europe Asia US Fund Fund Fund Fund Fund
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investment in corresponding
Deutsche Portfolio $11,112 $11,111 $11,111 $11,111 $11,111 $11,111 $11,111 $11,111 $11,111
Deferred organization
expenses (Note 1) 10,043 10,043 10,043 10,043 10,043 10,043 10,043 10,043 10,043
- -----------------------------------------------------------------------------------------------------------------------------------
Total Assets 21,155 21,154 21,154 21,154 21,154 21,154 21,154 21,154 21,154
- -----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Organization expenses
payable 10,043 10,043 10,043 10,043 10,043 10,043 10,043 10,043 10,043
- -----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 10,043 10,043 10,043 10,043 10,043 10,043 10,043 10,043 10,043
- -----------------------------------------------------------------------------------------------------------------------------------
Net Assets $11,112 $11,111 $11,111 $11,111 $11,111 $11,111 $11,111 $11,111 $11,111
===================================================================================================================================
Shares outstanding
($.001 par value) 888.96 888.88 888.88 888.88 888.88 888.88 888.88 888.88 888.88
===================================================================================================================================
Net Asset Value per share $ 12.50 $ 12.50 $ 12.50 $ 12.50 $ 12.50 $ 12.50 $ 12.50 $ 12.50 $ 12.50
- -----------------------------------------------------------------------------------------------------------------------------------
COMPOSITION OF NET ASSETS
Capital stock $ 1 $ 1 $ 1 $ 1 $ 1 $ 1 $ 1 $ 1 $ 1
Paid in capital 11,111 11,110 11,110 11,110 11,110 11,110 11,110 11,110 11,110
- -----------------------------------------------------------------------------------------------------------------------------------
Net Assets,
September 17, 1997 $11,112 $11,111 $11,111 $11,111 $11,111 $11,111 $11,111 $11,111 $11,111
==================================================================================================================================
</TABLE>
See Notes to Financial Statement.
DEUTSCHE FUNDS, INC.
NOTES TO FINANCIAL STATEMENT
SEPTEMBER 17, 1997
- ------------------------------------------------------------------------------
NOTE 1--GENERAL
Deutsche Funds, Inc. (the "Company") was incorporated in Maryland on
May 22, 1997 and is registered under the Investment Company Act of
1940, as amended (the "1940 Act"), as an open-end management
investment company. The Company currently consists of eleven separate
investment series (each a "Fund" and collectively the "Funds"). The
accompanying financial statement and notes relate to nine of these
Funds which are: Deutsche Top 50 World; Deutsche Top 50 Europe;
Deutsche Top 50 Asia, Deutsche Top 50 US; Deutsche European Mid-Cap
Fund; Deutsche German Equity Fund and Deutsche Japanese Equity Fund
(collectively, the "Equity Funds"); and Deutsche Global Bond Fund and
Deutsche European Bond Fund (collectively, the "Bond Funds").
Each of the Funds will seek to achieve their respective investment
objective by investing substantially all of their assets in the
corresponding portfolio of Deutsche Portfolios (the "Portfolio Trust")
having substantially the same investment objective of each of the
respective Funds. The Portfolio Trust is an open-end management
investment company and comprises ten portfolios (each a "Portfolio").
The Company has not retained the services of an investment adviser
since the Funds will seek to achieve their investment objective by
investing all of their investable assets in their corresponding
Portfolio of the Portfolio Trust. Each Portfolio is managed by
Deutsche Fund Management, Inc. ("DFM"), an indirect subsidiary of
Deutsche Bank AG. Federated Services Company intends to serve as
Administrator to the Funds and Federated Shareholder Services Company
intends to serve as transfer agent and dividend disbursing agent to
the Funds. Edgewood Services, Inc. ("Edgewood") intends to serve as
distributor to the Funds (the "Distributor").
Each Fund will absorb daily a pro-rata portion of its corresponding
Portfolio's income and expenses, including fees paid to DFM and the
amortization of organization expenses. Additionally, each Fund offers
two classes of shares to investors, Class A and Class B. Both Class A
Shares and Class B Shares are subject to a Service Plan and Class B
Shares are also subject to a Distribution Plan. Each Class will bear
its respective portion of the expenses under the Service and
Distribution Plan.
The Company has had no operations through September 17, 1997, other
than those relating to organizational matters and the sale of 888.88
Class A Shares for $11,111 by each Fund, except for Deutsche Top 50
World which sold 888.96 Class A Shares for $11,112, to Edgewood.
Organization expenses incurred in connection with the organization and
initial registration of the Company will be paid initially by DFM and
reimbursed by the Funds. Such organization expenses have been deferred
and will be amortized ratably over a period of sixty months from the
commencement of operations of the Funds. The amount paid by each Fund
on any redemption by Edgewood (or any subsequent holder) of such
Fund's initial shares will be reduced by the pro-rata portion of any
unamortized organization expenses of the Funds.
NOTE 2--COMMITMENTS AND RELATED AGREEMENTS
The Company intends to retain the services of Federated Services
Company as Administrator. Under the Administration Agreement,
Federated Services Company will assist in the operations of the Funds
subject to the direction and control of the Board of Directors of the
Company. For its services, Federated Services Company will receive a
fee from each Fund, which is computed daily and paid monthly, at an
annual rate of 0.065% of the average daily net assets of each Fund up
to $200 million and 0.0525% of such assets in excess of $200 million
for the Fund's then current fiscal year. The Administrator will
receive a minimum fee of $75,000 per Fund annually after the second
full year of the Company's operations.
The Company intends to enter into a distribution agreement with
Edgewood. Edgewood will serve as principal distributor for shares of
each Fund. The Company intends to adopt a Service and Distribution
Plan in accordance with Rule 12b-1 of the 1940 Act whereby Class B
Shares are subject to the Distribution Plan and Class A Shares and
Class B Shares are subject to the Service Plan. Under the Distribution
Plan, Class B Shares of each Fund will pay a fee to the Distributor in
an amount computed at an annual rate of 0.75% of the average daily net
assets of the Fund represented by Class B Shares to finance any
activity which is principally intended to result in the sale of Class
B Shares of the Fund. Under the Service Plan, each Fund will pay to
DFM, for the provision of certain services to the holders of Class A
Shares and Class B Shares, a fee computed at an annual rate of 0.25%
of the average daily net assets of each such Class of Shares.
Federated Shareholder Services Company will serve as the transfer
agent and dividend disbursing agent for each Fund. Federated Services
Company and Federated Shareholder Services Company are both affiliated
with Edgewood Services Inc. IBT Fund Services (Canada) Inc. will
provide fund accounting services to the Funds.
DFM has voluntarily agreed that it will reimburse each Fund through at
least August 31, 1998, to the extent necessary to maintain each Fund's
total operating expenses (which includes expenses of the Fund and its
pro-rata portion of expenses of the corresponding Portfolio, but does
not cover extraordinary expenses during the period) at not more than
1.60%, 2.35%, 1.30% and 2.05% of the average daily net assets of Class
A Shares of the Equity Funds, the Class B Shares of the Equity Funds,
the Class A Shares of the Bond Funds and Class B Shares of the Bond
Funds, respectively, with the exception of Deutsche Top 50 US for
which DFM has voluntarily agreed to maintain its expenses at 1.50% and
2.25% of average daily net assets for Class A and Class B Shares,
respectively.
REPORT OF INDEPENDENT ACCOUNTANTS
- ------------------------------------------------------------------------------
To the Shareholder and Board
of Directors of Deutsche Funds, Inc.
In our opinion, the accompanying statement of assets and liabilities
presents fairly, in all material respects, the financial position of
Deutsche Top 50 World, Deutsche Top 50 Europe, Deutsche Top 50 Asia,
Deutsche Top 50 US, Deutsche European Mid-Cap Fund, Deutsche German
Equity Fund, Deutsche Japanese Equity Fund, Deutsche Global Bond Fund
and Deutsche European Bond Fund (nine of eleven separate funds
constituting Deutsche Funds, Inc., hereafter referred to as the
"Funds") at September 17, 1997, in conformity with generally accepted
accounting principles. This financial statement is the responsibility
of the Funds' management; our responsibility is to express an opinion
on this financial statement based on our audit. We conducted our audit
of this financial statement in accordance with generally accepted
auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statement is
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statement, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York
September 19, 1997
DEUTSCHE PORTFOLIOS
STATEMENT OF ASSETS & LIABILITIES
SEPTEMBER 17, 1997
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Top 50 Top 50 Top 50 Top 50 Japanese Global European
World Europe Asia US Provesta Investa Equity Bond Bond
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
(US (US (US (US (US (US (US (US (US
Dollar) Dollar) Dollar) Dollar) Dollar) Dollar) Dollar) Dollar) Dollar)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Cash $11,114 $11,112 $11,112 $11,112 $11,112 $11,112 $11,112 $11,112 $11,112
Deferred organization
expenses (Note 1) 52,957 52,957 52,957 52,957 52,957 52,957 52,957 52,957 52,957
- -----------------------------------------------------------------------------------------------------------------------------------
Total Assets 64,071 64,069 64,069 64,069 64,069 64,069 64,069 64,069 64,069
- -----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Organization expenses payable 52,957 52,957 52,957 52,957 52,957 52,957 52,957 52,957 52,957
- -----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 52,957 52,957 52,957 52,957 52,957 52,957 52,957 52,957 52,957
- -----------------------------------------------------------------------------------------------------------------------------------
Net Assets $11,114 $11,112 $11,112 $11,112 $11,112 $11,112 $11,112 $11,112 $11,112
==================================================================================================================================
</TABLE>
See Notes to Financial Statement.
DEUTSCHE PORTFOLIOS
NOTES TO FINANCIAL STATEMENT
SEPTEMBER 17, 1997
- --------------------------------------------------------------------------------
NOTE 1--GENERAL
Deutsche Portfolios ("Portfolio Trust") was organized on June 20,
1997, as a business trust under the laws of the State of New York and
is registered under the Investment Company Act of 1940, as amended
(the "1940 Act"), as an open-end management investment company. The
Portfolio Trust currently consists of ten separate investment series
(each a "Portfolio" and collectively the "Portfolios"), each of which
is, in effect, a separate mutual fund. The accompanying financial
statement and notes relate to nine of these Portfolios which are Top
50 World Portfolio (US Dollar), Top 50 Europe Portfolio (US Dollar),
Top 50 Asia Portfolio (US Dollar), Top 50 US Portfolio (US Dollar),
Provesta Portfolio (US Dollar), Investa Portfolio (US Dollar) and
Japanese Equity Portfolio (US Dollar) (collectively, the "Equity
Portfolios") and Global Bond Portfolio (US Dollar) and European Bond
Portfolio (US Dollar) (collectively, the "Bond Portfolios").
Deutsche Fund Management, Inc. ("DFM"), an indirect subsidiary of Deutsche Bank
AG, intends to serve as investment manager (the "Manager") to the Portfolio
Trust. Investors Bank & Trust Company intends to serve as the custodian to the
Portfolio Trust. IBT Fund Services (Canada) Inc. intends to serve as the fund
accounting agent to the Portfolio Trust.
The Declaration of Trust of the Portfolios permits its Trustees to
issue interests in the Portfolio Trust. The Portfolios have had no
operations through September 17, 1997, other than those relating to
organizational matters, including the issuance of the following
initial interests ("Initial Interests") to Deutsche Funds, Inc. (the
"Deutsche Funds") and Edgewood Services Inc., ("Edgewood"),
distributor of the Deutsche Funds:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Initial Interest Initial Interest
Portfolio to Deutsche Fund Amount to Edgewood Amount
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Top 50 World
Portfolio (US Dollar) Deutsche Top 50 World $11,112 Edgewood $2
Top 50 Europe
Portfolio (US Dollar) Deutsche Top 50 Europe $11,111 Edgewood $1
Top 50 Asia
Portfolio (US Dollar) Deutsche Top 50 Asia $11,111 Edgewood $1
Top 50 US
Portfolio (US Dollar) Deutsche Top 50 US $11,111 Edgewood $1
Provesta
Portfolio (US Dollar) Deutsche European Mid-Cap Fund $11,111 Edgewood $1
Investa
Portfolio (US Dollar) Deutsche German Equity Fund $11,111 Edgewood $1
Japanese Equity
Portfolio (US Dollar) Deutsche Japanese Equity Fund $11,111 Edgewood $1
Global Bond
Portfolio (US Dollar) Deutsche Global Bond Fund $11,111 Edgewood $1
European Bond
Portfolio (US Dollar) Deutsche European Bond Fund $11,111 Edgewood $1
</TABLE>
The investment objective of the Equity Portfolios is primarily to
achieve high capital appreciation, and as a secondary objective,
reasonable dividend income. The investment objective of the Bond
Portfolios is to achieve steady, high income.
Organization expenses incurred in connection with the organization and
initial registration of the Portfolio Trust will be paid initially by
DFM and reimbursed by the Portfolios. Such organization expenses have
been deferred and will be amortized ratably over a period of sixty
months from the commencement of operations of the Portfolios. Any
amount received by the Portfolio from its corresponding Fund as a
result of a redemption by Edgewood of any of its Initial Interest in
the Portfolio will be applied so as to reduce the amount of
unamortized organization expenses. The amount paid by the Portfolio
Trust on any withdrawal by the Deutsche Funds of all or part of its
Initial Interest in the Portfolios will be reduced by a portion of any
unamortized organization expenses of the Portfolios, determined by the
proportion of the amount of the Initial Interest withdrawn to the
aggregate amount of the Initial Interests in the Portfolios then
outstanding after taking into account any prior withdrawals of any
portion of the Initial Interests in the Portfolios.
NOTE 2--COMMITMENTS AND RELATED AGREEMENTS
The Portfolio Trust intends to retain the services of DFM as Manager.
DFM retains overall responsibility for supervision of the investment
management program for each Portfolio but has delegated the day-to-day
management of the investment operations of each Portfolio to an
Adviser. As compensation for the services rendered by DFM under the
investment management agreement ("Management Agreement") with the
Portfolio Trust with respect to each Portfolio, DFM receives a fee
from each Portfolio, which is computed daily and paid monthly, equal
to the following percentages of each Portfolio's average daily net
assets on an annualized basis for the Portfolio's then-current fiscal
year:
Top 50 World Portfolio (US Dollar) 1.00%
Top 50 Europe Portfolio (US Dollar) 1.00%
Top 50 Asia Portfolio (US Dollar) 1.00%
Top 50 US Portfolio (US Dollar) 0.85%
Provesta Portfolio (US Dollar) 0.85%
Investa Portfolio (US Dollar) 0.85%
Japanese Equity Portfolio (US Dollar) 0.85%
Global Bond Portfolio (US Dollar) 0.75%
European Bond Portfolio (US Dollar) 0.75%
DFM has retained the services of DWS International Portfolio
Management GmbH ("DWS") as investment adviser of the Portfolios other
than the Top 50 US Portfolio (US Dollar). Deutsche Morgan Grenfell
Investment Management, Inc. ("DMGIM") is the investment adviser of the
Top 50 US Portfolio (US Dollar). The advisers are indirect
subsidiaries of Deutsche Bank AG. As compensation for their services
DWS and DMGIM receive a fee paid from DFM which is based on the
average daily net assets of the applicable Portfolio.
The Portfolio Trust intends to retain Federated Services Company as
Operations Agent to the Portfolios. As Operations Agent of the
Portfolios, Federated Services Company will receive a fee from each
Portfolio, which is computed daily and paid monthly, at the annual
rate of 0.035% of the average daily net assets of each Portfolio for
the Portfolio's then-current fiscal year, subject to a minimum fee of
$60,000 per Portfolio annually. Additionally, Federated Services
Company will receive, in its capacity as Administrator and Transfer
Agent of the Deutsche Funds and as Operating Agent of the Portfolios,
a minimum aggregate fee from each Portfolio, its corresponding Fund
and any other fund investing in each Portfolio, taken together, of
$75,000 for the first year of each Portfolio's operations and $125,000
for the second year. Federated Services Company is affiliated with
Edgewood.
The Portfolio Trust intends to enter into an administrative agreement
with IBT Trust Company (Cayman) Ltd. ("IBT (Cayman)"). As
Administrative Agent of the Portfolios, IBT (Cayman) will receive a
fee from each Portfolio, which is computed daily and paid monthly, at
the annual rate of $5,000 per each Portfolio.
REPORT OF INDEPENDENT ACCOUNTANTS
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To the Initial Interest Holders and Board
of Trustees of Deutsche Portfolios
In our opinion, the accompanying statement of assets and liabilities
presents fairly, in all material respects, the financial position of
Top 50 World Portfolio (US Dollar), Top 50 Europe Portfolio (US
Dollar), Top 50 Asia Portfolio (US Dollar), Top 50 US Portfolio (US
Dollar), Provesta Portfolio (US Dollar), Investa Portfolio (US
Dollar), Japanese Equity Portfolio (US Dollar), Global Bond Portfolio
(US Dollar) and European Bond Portfolio (US Dollar) (nine of ten
separate portfolios constituting Deutsche Portfolios, hereafter
referred to as the "Portfolios") at September 17, 1997, in conformity
with generally accepted accounting principles. This financial
statement is the responsibility of the Portfolios' management; our
responsibility is to express an opinion on this financial statement
based on our audit. We conducted our audit of this financial statement
in accordance with generally accepted auditing standards which require
that we plan and perform the audit to obtain reasonable assurance
about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement,
assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above.
/s/ Price Waterhouse
Price Waterhouse
Curacao, Netherlands Antilles
September 19, 1997
No dealer, salesman or any other person has been authorized to give
any information or to make any representations, other than those
contained in the Prospectus and this Statement of Additional
Information, in connection with the offer contained therein and, if
given or made, such other information or representations must not be
relied upon as having been authorized by the Corporation or the
Distributor. The Prospectus and this Statement of Additional
Information do not constitute an offer by any Fund or by the
Distributor to sell or solicit any offer to buy any of the securities
offered hereby in any jurisdiction to any person to whom it is
unlawful for the Funds or the Distributor to make such offer in such
jurisdictions.
