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(BULLET) BT INVESTMENT FUNDS (BULLET)
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BT PRESERVATIONPLUS INCOME FUND
BT PreservationPlus Income Fund seeks to provide investors with a high level of
current income while seeking to maintain a stable net asset value ("NAV") per
share.
PROSPECTUS
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OCTOBER 27, 1998
BT Investment Funds (the "Trust") is an open-end management investment company
(mutual fund). BT PreservationPlus Income Fund (the "Fund") is a separate series
of the Trust and currently offers one class of shares (the "Shares"). The Shares
are offered exclusively to individual retirement accounts ("IRAs"), as defined
in this Prospectus, and to employees investing through participant-directed
employee benefit plans.
UNLIKE OTHER MUTUAL FUNDS, THE FUND SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY
INVESTING ALL OF ITS NET INVESTABLE ASSETS (THE "ASSETS") IN BT PRESERVATIONPLUS
INCOME PORTFOLIO (THE "PORTFOLIO"), A SEPARATE SUBTRUST OF BT INVESTMENT
PORTFOLIOS, A NEW YORK MASTER TRUST FUND (THE "PORTFOLIO TRUST"), WITH AN
IDENTICAL INVESTMENT OBJECTIVE. SEE "INFORMATION CONCERNING THE MASTER-FEEDER
FUND STRUCTURE." THE FUND IS NOT A MONEY MARKET FUND, AND THERE CAN BE NO
ASSURANCE THAT IT WILL BE ABLE TO MAINTAIN A STABLE NAV OR OTHERWISE ACHIEVE ITS
STATED INVESTMENT OBJECTIVE.
Please read this Prospectus before investing and keep it on file for future
reference. It contains important information concerning the Fund and the
Portfolio, including how the Portfolio invests and the services available to the
Fund's shareholders. Bankers Trust Company ("Bankers Trust") is the investment
adviser ("Adviser") of the Portfolio.
LIKE SHARES OF ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
To learn more about the Fund and the Portfolio, investors can obtain a copy of
the Fund's Statement of Additional Information ("SAI"), dated October 27,
1998, which has been filed with the Securities and Exchange Commission (the
"SEC") and is incorporated herein by this reference. For a copy of the SAI
please call the Trust's service agent at 1-800-677-7596. You may request a copy
of the SAI or a paper copy of this prospectus, if you have received your
prospectus electronically, free of charge by calling the Trust's Service Agent
at 1-800-677-7596. The SAI, material incorporated by reference into this
document, and other information regarding the Trust is maintained electronically
with the SEC at Internet Web site (http://www.sec.gov).
SHARES OF THE FUND ARE NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, BANKERS TRUST COMPANY, AND THE SHARES ARE NOT FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
AGENCY. AN INVESTMENT IN THE FUND IS SUBJECT TO RISK 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.
ICC DISTRIBUTORS, INC.
Two Portland Square, Portland, Maine 04101
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TABLE OF CONTENTS
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PAGE
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The Fund.......................................................................3
Investment Objective...........................................................3
Expense Summary................................................................3
Individual Retirement Accounts and Retirement Plans............................6
Types of Individual Retirement Accounts........................................6
Ownership of Shares through Plans..............................................8
Investment Objectives, Policies, Practices and Risk Factors....................8
Transactions in Fund Shares...................................................15
Additional Information about Redeeming Shares.................................18
Shareholder and Fund Information..............................................19
Management of the Trust and Portfolio.........................................22
Service Agent.................................................................24
Bankers Trust Company and its Affiliates......................................24
Additional Information about the Trust........................................24
Information Concerning the Master-Feeder Fund Structure.......................26
Definitions of Securities Purchased by the Portfolio..........................26
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2
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THE FUND
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WHO MAY INVEST
The Fund is designed for investors seeking preservation and stability of
principal and a level of current income higher than money market mutual funds
over most time periods. The Fund has been established to serve as an alternative
investment to short-term bond funds and money market funds. In addition, the
Fund is designed as a comparable investment to stable value or guaranteed
investment contract options offered in employee benefit plans (such as 401(k)
plans). The Fund currently offers one class of shares exclusively to individual
retirement accounts and to employees investing through participant-directed
employee benefit plans (each a "Plan" and together "Plans"). For the purpose of
this prospectus, individual retirement accounts include, but are not limited to,
those accounts commonly referred to as traditional IRAs, Roth IRAs, simplified
employee pension IRAs ("SEP-IRAs"), IRAs that are part of a savings incentive
match plan for employees ("SIMPLE IRAs"), Keogh plans and education IRAs (each,
an "IRA," collectively referred to herein as "IRAs"). See "Overview of the Types
of Individual Retirement Accounts" on page 6. The Fund is offering the Shares to
owners of IRAs (each an "IRA Owner") and participants of Plans who purchase
Shares through their Plan ("Plan Participants"). Shares are available to IRA
Owners directly through a BT Mutual Funds IRA or through another IRA provider
who makes available Shares of the Fund.
Shares are offered to Plans either directly, or through vehicles such as bank
collective funds or insurance company separate accounts consisting solely of
such Plans. Shares are also available to employee benefit plans which invest in
the Fund through an omnibus account or similar arrangement.
The Fund is not in itself a balanced investment plan. IRA Owners and Plan
Participants (collectively, "Shareholders") should consider their investment
objectives and tolerance for risk when making an investment decision. When
Shares are redeemed, they may be worth more or less than what they originally
cost, although the nature of the Portfolio's investments -- particularly the
Wrapper Agreements (as defined below) -- are intended to stabilize the Fund's
NAV per Share.
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INVESTMENT OBJECTIVE
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The Fund's investment objective is to provide investors with a high level of
current income while seeking to maintain a stable NAV per Share. The Fund seeks
to achieve its investment objective by investing all of its Assets in the
Portfolio. The Portfolio will seek to achieve this objective by investing in a
diversified portfolio of fixed income securities, money market instruments,
futures, options and other instruments ("Portfolio Securities") and by entering
into wrapper agreements with financial institutions, such as insurance companies
and banks, which are intended to stabilize the NAV per Share of the Fund (the
"Wrapper Agreements"). See "Overview of Wrapper Agreements and Associated Risks"
herein. In connection with the Global Asset Allocation Strategy (described
below), Portfolio Securities may include indexed securities, futures contracts
on securities indices, securities representing securities of foreign issuers
(e.g. ADRs, GDRs and EDRs), options on stocks, options on futures contracts,
foreign currency exchange transactions and options on foreign currencies. See
"Investment Objectives and Policies -- Global Asset Allocation Enhancement"
herein. There can be no assurance that the Fund will achieve its stated
investment objective.
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EXPENSE SUMMARY
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Annual operating expenses are paid out of the assets of the Portfolio and the
Fund. The Portfolio pays an investment advisory fee and an administrative
services fee to Bankers Trust and wrapper expenses to the Wrapper Providers (as
defined below). The Fund incurs additional administrative expenses such as
maintaining shareholder records and furnishing shareholder statements. The Fund
must also provide semi-annual financial reports.
The following tables are intended to assist investors in understanding the
expenses associated with investing in the Fund. The expenses shown on the
following pages
3
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are estimates for the first full year of operations. The table provides (i) a
summary of expenses related to purchases and redemptions (sales) of Shares and
the anticipated annual operating expenses of the Fund and the Portfolio, in the
aggregate, as a percentage of average daily net assets and (ii) an example
illustrating the dollar cost of such expenses on a $1,000 investment in the
Fund. THE TRUSTEES OF THE TRUST BELIEVE THAT THE AGGREGATE EXPENSES OF THE FUND
(INCLUDING ITS PROPORTIONATE SHARE OF THE PORTFOLIO'S EXPENSES) WILL BE LESS
THAN OR APPROXIMATELY EQUAL TO THE EXPENSES THAT THE FUND WOULD INCUR IF THE
TRUST DIRECTLY RETAINED THE SERVICES OF AN INVESTMENT ADVISER AND THE ASSETS OF
THE FUND WERE INVESTED DIRECTLY IN PORTFOLIO SECURITIES AND WRAPPER AGREEMENTS.
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<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
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<S> <C>
Maximum Sales Charge on Purchases........................................................................... N/A
Maximum Sales Charge on Reinvested Dividends................................................................ N/A
Maximum Redemption Fee...................................................................................... 3.0%
Maximum Contingent Deferred Sales Charge.................................................................... N/A
</TABLE>
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The redemption fee (the "Redemption Fee") payable to the Portfolio is designed
primarily to offset those expenses which may be incurred by the Portfolio in
connection with certain Shareholder redemptions. Proceeds from the Redemption
Fee will be used by the Portfolio to defray the actual portfolio and
administrative costs associated with such redemptions, including custodian,
transfer agent, settlement, and account processing costs, as well as the adverse
impact of such redemptions on the premiums paid for Wrapper Agreements and the
yield on Wrapper Agreements. The Redemption Fee may also have the effect of
discouraging redemptions initiated by shareholders attempting to take advantage
of short-term interest rate movements.
Qualified IRA Redemptions (as described in "Redeeming Shares Owned Through IRAs"
herein) and Qualified Plan Redemptions (as described in "Redeeming Shares Owned
Through Plans" herein) are not subject to the Redemption Fee at any time. All
other redemptions are subject to the Redemption Fee, in the amount of 3%, on the
proceeds of such redemptions of Shares by Shareholders on any day that the
"Interest Rate Trigger" (as described below) is "active," and not subject to
those charges on days that the Interest Rate Trigger is "inactive." The Interest
Rate Trigger is active on any day when, as of the preceding day, the "Reference
Index Yield" exceeds the sum of the "Annual Effective Yield of the Fund" plus
2.25%. The "Reference Index Yield" shall be defined on any determination date as
the previous day's closing "Yield to Worst" on the Lehman Brothers Intermediate
Treasury Bond Index(Register mark) and the "Annual Effective Yield of the Fund"
is defined as set forth under "Explanation of Performance Terms" on page 21
herein. See "Shareholder and Fund Information -- Explanation of Performance
Terms".
The status of the Interest Rate Trigger will either be "active" or "inactive" on
any day, and shall be determined on every day that an NAV is calculated for the
Fund. Once the Interest Rate Trigger is active, it remains active every day
until the Reference Index Yield is less than the sum of the Annual Effective
Yield of the Fund plus 2.0%, at which time the Interest Rate Trigger becomes
inactive on the following day and remains inactive every day thereafter until it
becomes active again. The following is an example of when and how the Redemption
Fee will apply to the redemption of Shares.
EXAMPLE
Shareholder is considering submitting a request for a redemption other
than a Qualified IRA Redemption or Qualified Plan Redemption to the Fund
on March 2nd in the amount of $5,000. Assume that the Reference Index
Yield is 9.1% as of the close of business on March 1st and the Annual
Effective Yield of the Fund is 6.65% as of that date. Since the Annual
Effective Yield of the Fund plus 2.25% (8.9%) is less than the Reference
Index Yield (9.1%), the Interest Rate Trigger is active. Thus, the net
redemption proceeds to the Shareholder will be $4,850. The Redemption Fee
will continue to apply to all redemptions which are not Qualified IRA
Redemptions or Qualified Plan Redemptions until the day after the
Reference Index Yield is less than the sum
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of the Annual Effective Yield of the Fund plus 2.0%.
(Please note that this example does not take into consideration an
individual Shareholder's tax issues or consequences including without
limitation any withholding taxes that may apply.)
Shareholders can obtain information regarding when the Interest Rate Trigger is
active, as well as the Annual Effective Yield of the Fund and the Reference
Index Yield by calling 1-800-677-7796 or the Shareholder's Service Agent. The
amount of, and method of applying, the Redemption Fee, including the operation
of the Interest Rate Trigger, may be changed in the future.
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<TABLE>
<CAPTION>
ANNUAL OPERATING EXPENSES
(as a percentage of the Fund's projected average daily net assets)
<S> <C>
.....................................................................................................................
Investment advisory fee (after reimbursement or waiver)* 0.42%
12b-1 fee None
Other expenses (after reimbursement or waiver)** 0.63%
Wrapper Fees*** 0.20%
.....................................................................................................................
Total operating expenses (after reimbursement or waiver) 1.25%
</TABLE>
* The Fund does not directly pay an investment advisory fee; the amount shown
reflects the Fund's proportionate share of the Portfolio's investment advisory
fee.
** "Other expenses" include certain additional services provided to the Fund
and the Portfolio by Bankers Trust, including a shareholder servicing fee of
0.25%.
*** Wrapper Agreements are contracts entered into by the Portfolio that are
intended to stabilize the value per Share of the Fund (see "Investment
Objectives, Policies, Practices, and Risk Factors").
EXPENSE 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. No
Redemption Fee has been included.
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
<S> <C> <C> <C>
$13 $40 $69 $151
</TABLE>
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The expense table and the example above show the estimated costs and expenses
that a Shareholder will bear directly or indirectly as a shareholder of the
Fund. Bankers Trust has voluntarily agreed to waive a portion of its investment
advisory fee payable by the Portfolio. Without such waiver, the Portfolio's
investment advisory fee would be 0.70% of its average daily net assets. Bankers
Trust has also voluntarily agreed to waive a portion of its administration fees
(included in "Other Expenses"). Without such waiver, "Other Expenses" would be
0.86% Bankers Trust may terminate or adjust these voluntary waivers and
reimbursements at any time in its sole discretion without notice to
shareholders. In addition, the Wrapper Fees shown above are estimates and may be
greater or less than 0.20%. The Wrapper Fee expenses incurred by the Portfolio
will be those fees actually charged by the Wrapper Providers. In the absence of
these waivers, assuming total class assets of $100 million, it is estimated that
"Total Operating Expenses" of the Shares would be 1.76%. THE EXAMPLE SHOULD NOT
BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES, AND ACTUAL EXPENSES
MAY BE GREATER OR LESS THAN THOSE SHOWN. Moreover, while the example assumes a
5% annual return, actual performance will vary and may result in a return
greater or less than 5%.
Shares of the Fund are sold by ICC Distributors, Inc. ("ICC") as the Trust's
distributor (the "Distributor"). For more information about the Fund's and the
Portfolio's expenses see "Management of the Fund" and "Valuation Details"
herein. The Fund and Bankers Trust have authorized one or more brokers to accept
on its behalf purchase and redemption orders. Such brokers are authorized to
designate other intermediaries to accept on their behalf purchase and redemption
orders. The Fund will be deemed to have received a purchase or redemption order
when an authorized broker or, if applicable, a broker's authorized designee,
accepts the order. Customer orders will be priced at the Fund's net asset value
next computed after they are accepted by an authorized broker or the broker's
authorized designee.
As of the date of this prospectus, the Fund has issued only one class of shares.
The Fund may issue additional classes in the future.
FUND FINANCIAL HIGHLIGHTS
The Fund will have a fiscal year end of September 30. As this is the Fund's
first fiscal year, financial information with respect to the Fund is not
available at this time.
5
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INDIVIDUAL RETIREMENT ACCOUNTS AND RETIREMENT PLANS
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OVERVIEW OF THE TYPES OF INDIVIDUAL RETIREMENT ACCOUNTS
In general, an IRA is a trust or custodial account established in the United
States for the exclusive benefit of an individual or his or her beneficiaries.
(Keogh plans are established by self-employed persons, including partnerships,
and also cover eligible non-owner employees.) Most IRAs are designed principally
as retirement savings vehicles. Education IRAs are designed to provide a
tax-favored means of saving for a child's educational expenses. IRAs may provide
significant tax savings to individuals, but are governed by a complex set of tax
rules set out under the Internal Revenue Code of 1986, as amended (the "Code"),
and the regulations promulgated by the Department of the Treasury thereunder. If
you already have an IRA, your IRA may be able to invest in the Fund. If you do
not presently have an IRA and you meet the requirements of the applicable tax
rules, you may be able to create an IRA and invest in Shares of the Fund through
that IRA. Included below is a general discussion of some IRA features. HOWEVER,
IRA OWNERS AND OTHER PROSPECTIVE INVESTORS SHOULD CONSULT WITH THEIR IRA
PROVIDER AND/OR PROFESSIONAL TAX AND FINANCIAL ADVISERS BEFORE ESTABLISHING AN
IRA OR INVESTING IN SHARES. CERTAIN TYPES OF THE IRAS DESCRIBED BELOW MAY NOT BE
AVAILABLE THROUGH BT MUTUAL FUNDS. FOR MORE INFORMATION CALL 1-800-677-7596.
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TYPES OF INDIVIDUAL RETIREMENT ACCOUNTS
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TRADITIONAL IRAS
If you are under age 70 1/2, and you (or if you file a joint return, your
spouse) have taxable compensation, you may set up a Traditional IRA and make
annual IRA contributions of up to $2,000, or 100% of your taxable compensation,
whichever is less. Taxable income includes wages, salaries, and other amounts
reported in box 1 of Form W-2, as well as earnings from self-employment. If you
file a joint return and your taxable compensation is less than that of your
spouse, you may make annual contributions to a Traditional IRA equal to the
lesser of $2,000, or the sum of (i) your taxable compensation and (ii) the
taxable compensation of your spouse, reduced by the amount of his or her IRA
deduction for the year.
Amounts contributed to a Traditional IRA generally are deductible for federal
income tax purposes. However, if you were covered by an employer retirement
plan, the amount of your contribution to a Traditional IRA that you may deduct
will be reduced or eliminated if your modified adjusted gross income exceeds
certain amounts (currently $50,000 for a married couple filing a joint return
and $30,000 for a single taxpayer). If your spouse is covered by an employer
retirement plan but you are not, you may be able to deduct your contributions to
a Traditional IRA; however, the deduction will be reduced or eliminated if your
adjusted gross income on a joint return exceeds $150,000. Even if your ability
to deduct contributions to a Traditional IRA is limited, you may still make
contributions up to the limits described above.
In general, you may also make a contribution to a Traditional IRA by "rolling
over" all or a portion of a distribution you receive from a qualified retirement
plan (such as a pension or profit-sharing plan or a 401(k) plan) or another
Traditional IRA. Amounts distributed from a Traditional IRA and eligible
rollover distributions from qualified retirement plans will not be includible in
income if they are contributed to a Traditional IRA in a rollover transaction
which meets certain conditions; however, a federal withholding tax may be
imposed on such distributions. Consult your Service Agent and professional tax
adviser for complete details on Traditional IRAs.
ROTH IRAS
Regardless of your age, you may be able to establish a Roth IRA. Contributions
to Roth IRAs are not deductible for federal income tax purposes. However, if all
of the applicable requirements are met, earnings in the account accumulate tax
free, and all withdrawals are also tax free. Generally, you may contribute up to
$2,000 annually to a Roth IRA; however, your ability to contribute to a Roth IRA
will be reduced or eliminated if your adjusted gross income exceeds certain
amounts (currently $150,000 for a married couple filing a joint return and
$95,000 for a single taxpayer). In addition, if you make contributions to both a
Traditional IRA and a
6
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Roth IRA, your contribution limit for the Roth IRA will be reduced by the amount
of the contribution you make to the Traditional IRA.
If certain requirements are met, and (i) your modified adjusted gross income is
not more than $100,00, and (ii) you are not married and filing a separate tax
return, you can roll over amounts from a Traditional IRA to a Roth IRA. The
amount rolled over generally will be included in your taxable income; however,
if you roll over from a Traditional IRA to a Roth IRA before 1999, you may elect
to have the taxable amount included in your income ratably over a four-year
period. You may also roll over amounts from one Roth IRA to another Roth IRA.
Consult your Service Agent and professional tax adviser for complete details on
Roth IRAs.
SEP-IRAS
SEP-IRAs are IRAs that are created in connection with a simplified employee
pension ("SEP") established and maintained by a self-employed individual, a
partnership or a corporation. SEP-IRAs must be created for each qualifying
employee of the employer that establishes a SEP. In general, a qualifying
employee is an employee who has: (i) reached the age of 21; and (ii) worked for
the employer at least three out of the past five years. Each SEP-IRA is owned by
the employee for whom it is created; assets of a SEP are not pooled together.
SEPs must provide for discretionary employer contributions. In other words,
employers are not required to make contributions to SEP-IRAs each year, but if
they do make contributions for any year, the contributions must be based on a
specific allocation formula set forth in the SEP, and must not discriminate in
favor of highly compensated employees.
Contributions to SEP-IRAs generally are deductible by the employer, subject to
certain limitations. Contributions to SEP-IRAs of self-employed individuals are
subject to certain additional limitations.
SEP-IRAs generally are subject to the same distribution and rollover rules that
apply to Traditional IRAs.
SIMPLE IRAS
In general, a SIMPLE plan may be established by any employer, including a sole
proprietorship, partnership or corporation, with 100 or fewer employees, and
must be the only retirement plan maintained by the employer.
Under a SIMPLE plan using SIMPLE IRAs, a SIMPLE IRA is created for each eligible
employee which, in general, includes all employees who received at least $5,000
in compensation during any two years preceding the year for which eligibility is
being determined (i.e., the current year) and is reasonably expected to earn at
least $5,000 during the current year. As with SEP-IRAs, SIMPLE IRAs are
individual accounts owned by each eligible employee.
Under a SIMPLE IRA plan, eligible employees can elect to contribute a portion of
their salary to their SIMPLE IRA. (These contributions are referred to as
"elective deferrals.") Elective deferrals are based on a stated percentage of
the employee's compensation, and are limited to $6,000 per year (indexed for
inflation). Elective deferrals are included in employees' gross income only for
Social Security and Medicare tax purposes (i.e., they are not included in wages
for federal income tax purposes).
In addition to elective deferrals by employees, under a SIMPLE IRA plan,
employers must make either: (i) matching contributions equal to each employee's
elective deferral, up to a maximum of 3% of the employee's compensation, or (ii)
nonelective contributions of 2% of compensation for each eligible employee
(subject to certain limits). Employer contributions to SIMPLE IRAs are excluded
from employees' gross income and are deductible by the employer.
SIMPLE IRAs generally are subject to the same distribution and rollover rules
that apply to Traditional IRAs. However, a rollover from a SIMPLE IRA to a
Traditional IRA can be made tax free only after the employee has participated in
the SIMPLE IRA plan for at least two years.
KEOGH PLANS
Keogh plans are qualified retirement plans established by sole proprietors or
partnerships. As with other qualified retirement plans, in general,
contributions to Keogh plans are deductible, and neither such contributions nor
the investment earnings thereon are subject to tax until they are distributed by
the plan.
A number of different types of plans may qualify as Keogh plans. In certain
circumstances, Keogh plans may provide greater tax advantages than other types
of retirement plans. However, Keogh plans must satisfy a number of complex
rules, including minimum participation requirements, under which certain
employees must be
7
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covered by the plan, and in some cases, minimum funding requirements.
Professional assistance generally is required to establish and maintain a Keogh
plan.
EDUCATION IRAS
An education IRA is a trust or custodial account created for the purpose of
paying the qualified higher education expenses of a designated beneficiary,
i.e., a child under the age of 18 at the time of the contributions. In general,
qualified higher education expenses include expenses for tuition, fees, books,
supplies and equipment required for the designated beneficiary of the Education
IRA to attend an eligible educational institution, which includes essentially
all accredited postsecondary educational institutions. Any individual may make
contributions to an education IRA so long as his or her modified adjusted gross
income is less than $110,000 ($160,000 for married taxpayers filing jointly).
The maximum total contributions that may be made to education IRAs for each
child is $500 per year. Generally, amounts may be rolled over from an education
IRA to another education IRA established for the same beneficiary or for certain
members of the beneficiary's family. Beneficiaries may make tax free withdrawals
from education IRAs to pay qualified higher education expenses. Other
withdrawals generally will be subject to tax. Consult your Service Agent and or
professional tax adviser for complete details on Education IRAs.
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OWNERSHIP OF SHARES THROUGH PLANS
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Fund Shares owned by Plan Participants through Plans are held either directly by
the respective Plan, or beneficially through vehicles such as bank collective
funds or insurance company separate accounts consisting solely of such Plans
(collectively, "Plan Pools"), which will in turn offer the Fund as an investment
option to their participants. Investments in the Fund may by themselves
represent an investment option for a Plan or may be combined with other
investments as part of a pooled investment option for the Plan. In the latter
case, the Fund may require Plans to provide information regarding the withdrawal
order and other characteristics of any pooled investment option in which the
Shares are included prior to a Plan's initial investment in the Fund.
Thereafter, the Fund will require the Plan to provide information regarding any
changes to the withdrawal order and other characteristics of the pooled
investment option before such changes are implemented. The Fund in its sole
discretion may decline to sell Shares to Plans if the governing withdrawal order
or other characteristics of any pooled investment option in which the Shares are
included is determined at any time to be disadvantageous to the Fund.
Plan Participants should contact their Plan administrator or the organization
that provides recordkeeping services if they have questions concerning their
account. Plan administrators and fiduciaries should call 1-800-677-7596 for
information regarding a Plan's account with the Fund.
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INVESTMENT OBJECTIVES, POLICIES, PRACTICES AND RISK FACTORS
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INVESTMENT OBJECTIVES AND POLICIES
THE FUND
The Fund seeks to achieve its investment objective by investing all of its
Assets in the Portfolio, which has the same investment objective as the Fund.
Since the investment characteristics of the Fund will correspond directly to
those of the Portfolio, the following is a discussion of the various investments
of and techniques employed by the Portfolio. Additional information about the
investment policies of the Portfolio appears in "Risk Factors Relating to Fixed
Income Securities" herein and in the SAI. There can be no assurance that the
Fund's and the Portfolio's investment objective will be achieved.
THE PORTFOLIO
The Portfolio's investment objective is a high level of current income while
seeking to maintain a stable value
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per Share. The Portfolio will seek to achieve this objective by investing in the
Portfolio Securities and by entering into Wrapper Agreements, intended to
stabilize the NAV per Share of the Fund. Each Wrapper Agreement obligates the
Wrapper Provider to maintain the "Book Value" of a portion of the Portfolio's
assets ("Covered Assets") up to a specified maximum dollar amount, upon the
occurrence of certain specified events. Generally, the Book Value of the Covered
Assets is their purchase price plus interest on the Covered Assets accreted at a
rate specified in the Wrapper Agreement ("Crediting Rate"). The Crediting Rate
used in computing Book Value is calculated by a formula specified in the Wrapper
Agreement and is adjusted periodically. In the case of Wrapper Agreements
purchased by the Portfolio, the Crediting Rate is the actual interest earned on
the Covered Assets, or an index-based approximation thereof, plus or minus an
adjustment for an amount receivable from or payable to the Wrapper Provider
based on fluctuations in the market value of the Covered Assets. See "Overview
of Wrapper Agreements and Associated Risks" herein for further detail.
The Portfolio expects to invest at least 65% of its total assets in fixed- and
floating or variable-rate securities ("Fixed Income Securities") of varying
maturities rated, at the time of purchase, in one of the top four long-term
rating categories by Standard & Poor's ("S&P"), Moody's Investors Service, Inc.
("Moody's"), or Duff & Phelps Credit Rating Co., or comparably rated by another
nationally recognized statistical rating organization ("NRSRO"), or, if not
rated by a NRSRO, of comparable quality as determined by Bankers Trust in its
sole discretion. For example, included are those Fixed Income Securities rated
by S&P in long-term rating categories ranging from AAA to BBB- and the
comparable categories of Moody's, Duff & Phelps Credit Rating Co., or another
NRSRO, or, if not rated by a NRSRO, deemed to be of comparable quality as
determined by Bankers Trust in its sole discretion. Further, because high yield
securities will usually offer higher-yields than higher-rated securities, the
Portfolio may also invest up to ten percent (10%) of its assets in Fixed Income
Securities rated, at the time of purchase in the fifth and sixth long-term
rating categories by S&P (I.E., BB and B), Moody's, or Duff & Phelps Credit
Rating Co., or comparably rated by another NRSRO, or, if not rated by a NRSRO,
of comparable quality as determined by Bankers Trust in its sole discretion. See
"Lower Rated Debt Securities" herein.
WRAPPERS. In addition to the above, the Portfolio will enter into Wrapper
Agreements with insurance companies, banks or other financial institutions
("Wrapper Providers") that are rated, at the time of purchase, in one of the top
two long-term rating categories by Moody's or S&P. There is no active trading
market for Wrapper Agreements, and none is expected to develop; therefore, they
will be considered illiquid. At the time of purchase of any Wrapper Agreement,
the value of all of the Wrapper Agreements and any other illiquid securities
will not exceed 15% of the Portfolio's net assets.
FIXED INCOME SECURITIES. The Fixed Income Securities include fixed income
securities issued or guaranteed by the U.S. government, or any agency or
instrumentality thereof; publicly or privately issued U.S. dollar-denominated
debt of domestic or foreign entities, including corporate, sovereign or
supranational entities; publicly issued U.S. dollar denominated asset-backed
securities issued by domestic or foreign entities; mortgage pass-through
securities issued by the Government National Mortgage Association ("GNMA"), the
Federal Home Loan Mortgage Corporation ("FHLMC") or the Federal National
Mortgage Association ("FNMA"); mortgage pass-through securities issued by
non-government entities such as banks, mortgage lenders, or other financial
institutions, including private label mortgage pass-through securities and whole
loans; collateralized mortgage obligations ("CMOs") and real estate mortgage
investment conduits ("REMICs"), which are mortgage-backed debt instruments that
make payments of principal and interest at a variety of intervals and are
collateralized by any of the aforementioned mortgage pass-through securities or
whole loans; and obligations issued or guaranteed, or backed by securities
issued or guaranteed, by the U.S. government or any of its agencies or
instrumentalities, including Certificates of Accrual Treasury Securities
("CATS"), Treasury Income Growth Receipts ("TIGRs"), and Treasury Receipts
("TRs") and zero coupon securities (securities consisting solely of the
principal or interest component of a U.S. Treasury bond). See "Definitions of
Securities Purchased by the Portfolio" herein for a more detailed description of
the foregoing.
The Portfolio Securities purchased by the Portfolio also include short-term
investments rated, at the time of purchase, in one of the top two short-term
rating categories by an NRSRO or, if unrated, of comparable quality in the
opinion of the Adviser, including commercial paper and time deposits,
certificates of deposit, bankers' acceptances, other instruments of foreign and
domestic
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banks and thrift institutions and shares of money market mutual funds. The
Portfolio may invest up to 35% of its total assets in such short-term
investments for purposes of liquidity and up to 100% of its total assets in such
instruments for temporary defensive purposes.
GLOBAL ASSET ALLOCATION ENHANCEMENT. Although the Portfolio is intended to be
primarily invested in Fixed Income Securities, the Adviser intends to implement
its Global Asset Allocation Strategy (the "GAA Strategy") in an attempt to
enhance the return on the Portfolio's Assets. The GAA Strategy employs a
multi-factor, global asset allocation model which evaluates equity, bond, cash
and currency opportunities across domestic and international markets. The GAA
Strategy seeks to enhance long-term returns and manage risk by responding
effectively to changes in global markets using instruments including but not
limited to, futures, options and currency forwards.
In implementing the GAA Strategy, the Portfolio invests in options and futures
based on any type of security or index including options and futures traded on
foreign exchanges such as bonds and equity indices of foreign countries. Some
options and futures strategies, including selling futures, buying puts, and
writing calls, hedge the Portfolio's investments against price fluctuations.
Other strategies, including buying futures, writing puts, and buying calls, tend
to increase and will broaden the Portfolio's market exposure. Options and
futures may be combined with each other, or with forward contracts, in order to
adjust the risk and return characteristics of an overall strategy. The Portfolio
may also enter into forward currency exchange contracts (agreements to exchange
one currency for another at a future date), may buy and sell options and futures
contracts relating to foreign currencies, and may purchase securities indexed to
foreign currencies. Currency management strategies allow the Adviser to shift
investment exposure from one currency to another or to attempt to profit from
anticipated declines in the value of a foreign currency relative to the U.S.
dollar. Some of these strategies will require the Portfolio to segregate liquid
assets in a custodial account to cover its obligations. See "Definitions of
Securities Purchased by the Portfolio" herein. For further information regarding
the GAA Strategy, you should consult "Investment Policies -- Global Asset
Allocation Enhancement" in the Fund's SAI.
The Portfolio may also invest in and utilize the following investments and
investment techniques and practices: Rule 144A securities (as defined in
"Securities and Investment Practices of the Portfolio"), when-issued and delayed
delivery securities, repurchase agreements, reverse repurchase agreements and
dollar rolls, and options and futures contracts. See "Definitions of Securities
Purchased by the Portfolio" herein for a more detailed description of the
foregoing.
OTHER PORTFOLIO INFORMATION. In selecting securities for the Portfolio, the
Adviser attempts to maintain an average portfolio duration of the Portfolio
Securities within a range of 2.5 to 4.5 years. Duration is a measure of the
expected life of a Fixed Income Security on a present value basis which
incorporates the security's yield, coupon interest payments, final maturity and
call features into a single measure.
The Fund's investment objective is not a fundamental policy and may be changed
upon notice to, but without the need for approval of, its shareholders. If there
is a change in the Fund's investment objective, its shareholders should consider
whether the Fund remains an appropriate investment in light of their
then-current needs. The investment objective of the Portfolio also is not a
fundamental policy. Shareholders of the Fund will receive 30 days' prior written
notice with respect to any change in the investment objective of the Fund or the
Portfolio. See "Investment Restrictions" in the SAI for a description of the
fundamental policies of the Portfolio that cannot be changed without approval by
"the vote of a majority of the outstanding voting securities" (as defined in the
Investment Company Act of 1940 (the "1940 Act") ) of the Portfolio.
INVESTMENT PRACTICES OF THE PORTFOLIO
BORROWING. The Portfolio will not borrow money (including through reverse
repurchase agreements or dollar roll transactions) for any purpose in excess of
5% of its total assets, except that it may borrow for temporary or emergency
purposes up to 1/3 of its total assets. Under the 1940 Act, the Portfolio is
required to maintain continuous asset coverage of 300% with respect to such
borrowings and to sell (within three days) sufficient portfolio holdings to
restore such coverage if it should decline to less than 300% due to market
fluctuations or otherwise, even if such liquidation of the Portfolio's holdings
may be disadvantageous from an investment standpoint.
Leveraging by means of borrowing may exaggerate the effect of any increase or
decrease in the value of the Portfolio's securities and the Fund's NAV per
Share, and money borrowed by the Portfolio will be subject to
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interest and other costs (which may include commitment fees and/or the cost of
maintaining minimum average balances) that may exceed the income received from
the securities purchased with the borrowed funds. It is not the intention of the
Adviser to use leverage as a normal practice in the investment of the
Portfolio's Assets.
HEDGING STRATEGIES. The Portfolio may use certain strategies designed to adjust
the overall risk of its investment portfolio. These "hedging" strategies involve
derivative contracts, including U.S. Treasury and Eurodollar futures contracts
and exchange-traded put and call options on such futures contracts. New
financial products and risk management techniques continue to be developed and
may be used if consistent with the Portfolio's investment objective and
policies. Among other purposes, these hedging strategies may be used to
effectively maintain a desired portfolio duration or to protect against market
risk should the Portfolio change its investments among different types of Fixed
Income Securities. In this respect, these hedging strategies are designed for
different purposes than the investments in Wrapper Agreements. The SAI contains
further information on these strategies.
The Portfolio might not use any hedging strategies, and there can be no
assurance that any strategy used will succeed. If the Adviser is incorrect in
its judgment on market values, interest rates or other economic factors in using
a hedging strategy, the Portfolio may have lower net income and a net loss on
the investment.
Each of these strategies involves certain risks, which include: the fact that
the skills needed to use hedging instruments are different from those needed to
select securities for the Portfolio; the possibility of imperfect correlation,
or even no correlation, between the price movements of hedging instruments and
price movements of the securities or currencies being hedged; possible
constraints placed on the Portfolio's ability to purchase or sell portfolio
investments at advantageous times due to the need for the Portfolio to maintain
"cover" or to segregate securities; and the possibility that the Portfolio will
be unable to close out or liquidate its hedged position.
ASSET COVERAGE. To assure that the Portfolio's use of futures contracts and
related options, as well as when-issued and delayed-delivery securities, are not
used to achieve investment leverage, the Portfolio will cover such transactions,
as required under applicable interpretations of the SEC, either by owning the
underlying securities or by segregating or earmarking liquid securities with the
Portfolio's Custodian (Bankers Trust) in an amount at all times equal to or
exceeding the Portfolio's commitment with respect to these instruments or
contracts. The Portfolio will also cover its use of Wrapper Agreements to the
extent required to avoid the creation of a "senior security" (as defined in the
1940 Act) in connection with its use of such agreements.
GAA STRATEGY. In connection with the GAA Strategy, the Board of Trustees of the
Portfolio has adopted a restriction that the Portfolio will not enter into any
futures contracts or option on futures contracts if immediately thereafter the
amount of margin deposits on all of the futures contracts of the Portfolio and
premiums paid on outstanding options on futures contract owned by the Portfolio
(other than those entered into for bona fide hedging purposes) would exceed five
percent (5%) of the market value of the total assets of the Portfolio.
RISK FACTORS
The value of most of the Portfolio Securities will fluctuate based upon changes
in domestic or foreign interest rates, the credit quality of the issuer, market
conditions, and other economic and political news. In general, the prices of
Portfolio Securities will rise when interest rates fall, and fall when interest
rates rise. The Wrapper Agreements are intended to stabilize the value per Share
by offsetting fluctuations in the value of the Portfolio Securities under
certain conditions. Under most circumstances, the combination of Portfolio
Securities and Wrapper Agreements held by the Portfolio is expected to provide
Fund shareholders with a constant NAV per Share and a current rate of return
that is higher than most money market mutual funds over most time periods.
However, there can be no guarantee that the Portfolio will maintain a constant
NAV, and consequently that the Fund will be able to maintain a constant NAV per
Share.
The Portfolio incurs costs in connection with its investment in Wrapper
Agreements which will reduce the Fund's investment return. The Wrapper
Agreements may not insulate the Portfolio from loss if an issuer of Portfolio
Securities defaults on payments of interest or principal. Additionally, an
issuer of a Wrapper Agreement could default on its obligations under the
agreement or the Portfolio might be unable to obtain Wrapper Agreements covering
all of its assets. Either type of default or the inability to obtain Wrapper
Agreements might result in a decline in the value of the Shares. Moreover, in
valuing a Wrapper Agreement, the Board
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of Trustees of the Portfolio Trust may determine that such agreement should not
be carried by the Portfolio at a value sufficient to maintain the Portfolio's
NAV per Share.
Bankers Trust may use various investment techniques to hedge the Portfolio's
risks, but there is no guarantee that these strategies will work as intended.
See "Risk Factors Related to Fixed Income Securities" for more information.
RISK FACTORS RELATING TO PORTFOLIO SECURITIES
The following pages contain more detailed information about the specific types
of instruments in which the Portfolio may invest and strategies the Adviser may
employ in pursuit of the Portfolio's investment objective. A summary of the
risks and restrictions associated with these investments and investment
practices is included as well.
The Adviser may not buy all of these instruments or use all of these techniques
to the full extent permitted unless it believes that doing so will help the
Portfolio achieve its objective. Current holdings and investment strategies will
be described in the financial reports of the Fund and the Portfolio, which will
be sent to Fund shareholders twice a year.
All fixed income investments have exposure to three primary types of risks.
Credit risk is the possibility that the issuer of a Fixed Income Security will
fail to make timely payments of either interest or principal to the Portfolio.
Interest rate risk is the potential for fluctuations in the prices of Fixed
Income Securities due to changing interest rates. Income risk is the potential
for decline in the Portfolio's income due to the investment or reinvestment of
assets in Fixed Income Securities when market interest rates are falling.
Although there is no assurance that it will achieve its objective, the Portfolio
attempts to enhance yield while minimizing these risks. If an issuer of a Fixed
Income Security or a Wrapper Provider becomes financially impaired, it may
default on its obligations and the Portfolio's interest income may be reduced or
the Portfolio may incur a loss of principal. This is an example of credit risk.
In order to minimize credit risk, the Portfolio's assets are allocated among a
diversified group of issuers. Credit analysis is applied to every security and
Wrapper Provider selected for the Portfolio. Once purchased, a security and, in
the case of a Wrapper Agreement, the Wrapper Provider is monitored regularly by
Bankers Trust for maintenance of adequate credit characteristics. In the event
that the rating of a security or Wrapper Provider is downgraded by one or more
NRSRO, the Portfolio may elect to retain the security or applicable Wrapper
Agreement. However, some Wrapper Agreements may require that Fixed Income
Securities that fall below investment grade be liquidated within a set time
period typically within one year or less. The Portfolio may elect not to cover
with Wrapper Agreements any Fixed Income Securities with a remaining maturity of
60 days or less and any cash or short term investments.
When interest rates rise, Fixed Income Security prices generally decline. When
interest rates fall, Fixed Income Security prices generally increase. Generally,
the longer the maturity of the Fixed Income Security, the higher its yield,
although longer-term Fixed Income Securities tend to offer less price stability
in response to changes in interest rates than do shorter-term investments.
Therefore, portfolios with shorter average maturities tend to have less risk and
lower returns than portfolios with longer average maturities. This is an example
of interest rate risk. In order to help maintain an average portfolio duration
of 2.5 to 4.5 years, the Portfolio will invest primarily in Fixed Income
Securities of short- to intermediate-term maturities. This will help to minimize
interest rate risk. In addition, unlike most traditional fixed income
portfolios, the Portfolio purchases Wrapper Agreements that should offset
substantially all of the price fluctuations typically associated with
longer-term Fixed Income Securities.
It is important to note the distinction between the Portfolio and short-term
investments such as money market funds. The securities held by the Portfolio
have a longer average maturity than those of money market funds. Because a money
market fund has a shorter average maturity, its yield will track the direction
of current market rates of return more closely than the Portfolio. For example,
in a rising interest rate environment, money market yields may rise more quickly
than those of the Portfolio. In a falling interest rate environment, money
market yields may fall more quickly than those of the Portfolio. Over the
long-term, however, intermediate and long-term Fixed Income Securities such as
those purchased by the Portfolio have historically offered higher yields than
short-term investments (i.e., money market funds).
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LOWER-RATED DEBT SECURITIES ("JUNK BONDS")
The Portfolio may invest in debt securities rated in the fifth and sixth
long-term rating categories by S & P, Moody's and Duff & Phelps Credit Rating
Company, or comparably rated by another NRSRO, or if not rated by a NRSRO,
deemed to be of comparable quality as determined by the Adviser in its sole
discretion. While the market for high yield corporate debt securities has been
in existence for many years and has weathered previous economic downturns, the
1980's brought a dramatic increase in the use of such securities to fund highly
leveraged corporate acquisitions and restructuring. Past experience may not
provide an accurate indication of future performance of the high yield bond
market, especially during periods of economic recession. In fact, from 1989 to
1991, the percentage of lower-rated debt securities that defaulted rose
significantly above prior levels. The market for lower-rated debt securities may
be thinner and less active than that for higher-rated debt securities, which can
adversely affect the prices at which the former are sold. If market quotations
are not available, lower-rated debt securities will be valued in accordance with
procedures established by the Board of Trustees, including the use of outside
pricing services. Judgment plays a greater role in valuing high yield corporate
debt securities than is the case for securities for which more external sources
for quotations and last sale information is available. Adverse publicity and
changing investor perception may affect the availability of outside pricing
services to value lower-rated debt securities and the Portfolio's ability to
dispose of these securities.
Since the risk of default is higher for lower-rated debt securities, the
Adviser's research and credit analysis are an especially important part of
managing securities of this type held by the Portfolio. In considering
investments for the Portfolio, the Adviser will attempt to identify those
issuers of high- yielding debt securities whose financial conditions are
adequate to meet future obligations, have improved or are expected to improve in
the future. The Adviser's analysis focuses on relative values based on such
factors as interest on dividend coverage, asset coverage, earnings prospects and
the experience and managerial strength of the issuer. The Portfolio may choose,
at its expense or in conjunction with others, to pursue litigation or otherwise
exercise its rights as a security holder to seek to protect the interest of
security holders if it determines this to be in the interest of the Portfolio.
OVERVIEW OF WRAPPER AGREEMENTS AND ASSOCIATED RISKS
As discussed above, each Wrapper Agreement obligates the Wrapper Provider to
maintain the "Book Value" of the Covered Assets up to a specified maximum dollar
amount, upon the occurrence of certain specified events. The Book Value of the
Covered Assets is their purchase price (i) plus interest on the Covered Assets
at the Crediting Rate, and (ii) less an adjustment to reflect any defaulted
securities. The Crediting Rate used in computing Book Value is calculated by a
formula specified in the Wrapper Agreement and is adjusted periodically. In the
case of Wrapper Agreements purchased by the Portfolio, the Crediting Rate is the
actual interest earned on the Covered Assets, or an index-based approximation
thereof, plus or minus an adjustment for an amount receivable from or payable to
the Wrapper Provider based on fluctuations in the market value of the Covered
Assets. As a result, while the Crediting Rate will generally reflect movements
in the market rates of interest, it may at any time be more or less than these
rates or the actual interest income earned on the Covered Assets. The Crediting
Rate may also be impacted by defaulted securities and by increases and decreases
of the amount of Covered Assets as a result of contributions and withdrawals
tied to the purchase and redemption of Shares. Furthermore, the premiums due
Wrapper Providers in connection with the Portfolio's investments in Wrapper
Agreements are offset against interest earned and thus reduce the Crediting
Rate. These premiums are generally paid quarterly. In no event will the
Crediting Rate fall below zero percent under the Wrapper Agreements entered into
by the Portfolio.
Generally, under the terms of a Wrapper Agreement, if the market value (plus
accrued interest on the underlying securities) of the Covered Assets is less
than their Book Value at the time the Covered Assets are liquidated in order to
provide proceeds for withdrawals of Portfolio interests resulting from
redemptions of Shares by Shareholders, the Wrapper Provider becomes obligated to
pay to the Portfolio the difference. Conversely, the Portfolio becomes obligated
to make a payment to the Wrapper Provider if it is necessary for the Portfolio
to liquidate Covered Assets at a price above their Book Value in order to make
withdrawal payments. (Withdrawals generally will arise when the Fund must pay
shareholders who redeem Shares.) Because it is anticipated that each Wrapper
Agreement will cover all Covered Assets up to a specified dollar amount, if more
than one Wrapper Provider becomes obligated to pay to the Portfolio the
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difference between Book Value and market value (plus accrued interest on the
underlying securities), each Wrapper Provider will be obligated to pay a
pro-rata amount in proportion to the maximum dollar amount of coverage provided.
Thus, the Portfolio will not have the option of choosing which Wrapper Agreement
to draw upon in any such payment situation.
The terms of the Wrapper Agreements vary concerning when these payments must
actually be made between the Portfolio and the Wrapper Provider. In some cases,
payments may be due upon disposition of Covered Assets; other Wrapper Agreements
provide for settlement of payments only upon termination of the Wrapper
Agreement or total liquidation of the Covered Assets.
The Fund expects that the use of Wrapper Agreements by the Portfolio will under
most circumstances permit the Fund to maintain a constant NAV and to pay
dividends that will generally reflect over time both the interest income of, and
market gains and losses on, the Covered Assets held by the Portfolio less the
expenses of the Fund and the Portfolio. However, there can be no guarantee that
the Fund will maintain a constant NAV per Share or that any Shareholder will
realize the same investment return as might be realized by investing directly in
the Portfolio assets other than the Wrapper Agreements. For example, a default
by the issuer of a Portfolio Security or a Wrapper Provider on its obligations
might result in a decrease in the value of the Portfolio assets and,
consequently, the Shares. The Wrapper Agreements generally do not protect the
Portfolio from loss if an issuer of Portfolio Securities defaults on payments of
interest or principal. Additionally, a Fund shareholder may realize more or less
than the actual investment return on the Portfolio Securities. Furthermore,
there can be no assurance that the Portfolio will be able at all times to obtain
Wrapper Agreements. Although it is the current intention of the Portfolio to
obtain such agreements covering all of its assets (with the exceptions noted),
the Portfolio may elect not to cover some or all of its assets with Wrapper
Agreements should Wrapper Agreements become unavailable or should other
conditions such as cost, in Bankers Trust's sole discretion, render their
purchase inadvisable.
If, in the event of a default of a Wrapper Provider, the Portfolio were unable
to obtain a replacement Wrapper Agreement, Shareholders redeeming Shares might
experience losses if the market value of the Portfolio's assets no longer
covered by the Wrapper Agreement is below Book Value. The combination of the
default of a Wrapper Provider and an inability to obtain a replacement agreement
could render the Portfolio and the Fund unable to achieve their investment
objective of maintaining a stable NAV per Share. If the Board of Trustees of the
Portfolio Trust (the "Portfolio Trust Board") determines that a Wrapper Provider
is unable to make payments when due, that Board may assign a fair value to the
Wrapper Agreement that is less than the difference between the Book Value and
the market value (plus accrued interest on the underlying securities) of the
applicable Covered Assets and the Portfolio might be unable to maintain NAV
stability.
Some Wrapper Agreements require that the Portfolio maintain a specified
percentage of its total assets in short-term investments ("Liquidity Reserve").
These short-term investments must be used for the payment of withdrawals from
the Portfolio and Portfolio expenses. To the extent the Liquidity Reserve falls
below the specified percentage of total assets, the Portfolio is obligated to
direct all net cash flow to the replenishment of the Liquidity Reserve. The
obligation to maintain a Liquidity Reserve may result in a lower return for the
Portfolio and the Fund than if these funds were invested in longer-term Fixed
Income Securities. The Liquidity Reserve required by all Wrapper Agreements is
not expected to exceed 20% of the Portfolio's total assets.
Wrapper Agreements also require that the Covered Assets have a specified
duration or maturity, consist of specified types of securities or be of a
specified investment quality. The Portfolio will purchase Wrapper Agreements
whose criteria in this regard are consistent with the Portfolio's (and the
Fund's) investment objective and policies as described in this Prospectus.
Wrapper Agreements may also require the disposition of securities whose ratings
are downgraded below a certain level. This may limit the Portfolio's ability to
hold such downgraded securities. Please see the SAI for additional information
concerning Wrapper Agreements.
DERIVATIVES
The Portfolio may invest in various instruments, including the Wrapper
Agreements, that are commonly known as "derivatives." Broadly defined, a
derivative is a financial arrangement the value of which is based on, or
"derived" from, a traditional security, asset or market index. Some derivatives
such as mortgage-related and other asset-backed securities are in many respects
like any other investments, although they may be more volatile or less liquid
than more traditional debt securities. There are, in fact, many different types
of derivatives and many different ways to use them. There are a range of risks
associated with those uses. Futures contracts and options are commonly used for
traditional hedging purposes to attempt to protect an investor from exposure to
changing interest rates, securities prices or currency exchange rates and for
cash management purposes as a low cost method of gaining exposure to a
particular securities market without investing directly in those securities.
However, some derivatives are used for leverage, which tends to magnify the
effect of an instrument's price changes as market conditions change. Leverage
involves the use of a small amount of money to
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control a large amount of financial assets and can, in some circumstances, lead
to significant losses. Bankers Trust uses derivatives only in circumstances
where it believes they offer the most economic means of improving the
risk/reward profile of the Portfolio. Except as noted herein, derivatives will
not be used to increase portfolio risk above the level that could be achieved
using only traditional investment securities or to acquire exposure to changes
in the value of assets or indexes that by themselves would not be purchased for
the Portfolio. The use of derivatives for non-hedging purposes may be considered
speculative.
GAA STRATEGY. In implementing the GAA Strategy, the Portfolio's investment in
derivatives such as options, futures or forward contracts, and similar
strategies depend on the Adviser's judgment as to the potential risks and
rewards of implementing the different types of strategies. Options and futures
can be volatile investments, and may not perform as expected. If the Adviser
applies a hedge at an inappropriate time or judges price trends incorrectly,
options and futures strategies may lower the Portfolio's return. Additionally,
options and futures traded on foreign exchanges generally are not regulated by
U.S. authorities, and may offer less liquidity and less protection to a
Portfolio in the event of default by the other party to the contract. The
Portfolio could also experience losses if the prices of its options and futures
positions were poorly correlated with its other investments, or if it could not
close out its positions because of an illiquid secondary market.
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PURCHASING SHARES
Shares are offered for purchase at their net asset value ("NAV") without an
initial sales charge or commission. The Fund accepts purchase orders for Shares
at their NAV next determined after the order is received on each "Valuation Day"
(those days on which the New York Stock Exchange, Inc. (the "NYSE") is open).
Purchase orders for Shares that are received prior to the close of trading on
any Valuation Day by Bankers Trust (as Service Agent or Transfer Agent), or by a
Service Agent or other authorized agent of the Fund, generally will be effective
at that time. However, the Trust, Transfer Agent, and the Distributor reserve
the right to reject any purchase order. Certificates for Shares will not be
issued.
<TABLE>
<CAPTION>
MINIMUM INVESTMENTS
<S> <C>
To Open an Account $500
To Add to an Account $100
Minimum Balance $500
</TABLE>
PURCHASING SHARES THROUGH PLANS
Plan participant-directed purchases, exchanges and redemptions of Shares are
handled in accordance with each Plan's specific provisions. Plans may have
different provisions with respect to the timing and method of purchases,
exchanges and redemptions by Plan Participants. Plan Participants should contact
their Plan administrator for details concerning how they may direct transactions
in Shares. It is the responsibility of the Plan administrator or other Plan
service provider to forward instructions for these transactions to Bankers
Trust.
PURCHASING SHARES THROUGH IRAS
Shares may be purchased through an IRA established with BT Mutual Funds by
calling the BT Service Center at 1-800-677-7596. Alternatively, Shares may be
purchased through an IRA established with another Service Agent to the extent
that an IRA Owner's Service Agent makes Shares available.
Shares must be purchased in accordance with procedures established by and each
Service Agent and approved by the Fund's Transfer Agent. It is the
responsibility of each Service Agent to transmit to the Transfer Agent purchase
and redemption orders and to transmit to the Custodian purchase payments by the
following business day (trade date + 1) after an order for Shares is placed. The
Custodian must receive payment within one business day after an order for Shares
is placed; otherwise, the purchase order may be canceled and the investor could
be held liable for resulting fees and/or losses. An IRA Owner must settle with
the Service Agent for his or her entitlement to an effective purchase or
redemption order as of a particular time. Because Bankers Trust is the Custodian
and Transfer Agent of the Trust, funds may be transferred directly from or to a
customer's IRA account held with Bankers Trust to settle transactions with the
Fund without incurring the additional costs or delays associated with the wiring
of Federal funds.
For information regarding opening an IRA account or how to purchase shares
through an IRA, call the BT Service Center at 1-800-677-7596 or contact your
Service Agent, or address a written request to:
BT Service Center
P.O. Box 419210
Kansas City, MO 64141-6210
Overnight mailings:
BT Service Center
210 West 10th Street, 8th Floor
Kansas City, MO 64105-1716
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REDEEMING SHARES OWNED THROUGH PLANS
Redemption requests will be processed at the NAV per Share next determined after
a request for redemption is received in good order by Bankers Trust. There will
be no reduction of the NAV per Share for "Qualified Plan Redemptions," which are
redemptions resulting from a Plan Participant's death, disability, retirement or
termination of employment or to fund loans to, or "in service" withdrawals by, a
Plan Participant. All other redemptions of Shares, including those to fund
transfers to other Plan investment options, will be subject to the 3% Redemption
Fee, if the Interest Rate Trigger is active. See "EXPENSE SUMMARY" and
"Shareholder Transaction Expenses" above.
The Fund reserves the right to require written verification of whether a
redemption request is for a Qualified Plan Redemption in accordance with Plan
provisions and to establish the authenticity of this information before
processing a redemption request. Normally, the Fund will make payment for all
Shares redeemed within one business day after a request is received. In no event
will payment be made more than seven days after receipt of a redemption request
in good order. The Fund may suspend the right of redemption or postpone the date
at times when both the NYSE and the Fund's custodian bank (Bankers Trust) are
closed, or under any emergency circumstances as determined by the SEC.
The value of Shares at the time of redemption may be more or less than the Plan
Participant's cost at the time of purchase, depending upon the then-current
market value of the Fund's assets (its interest in the Portfolio). Plan
Participants should consult with their Plan administrator and/or professional
tax adviser with respect to the terms and conditions for withdrawal from, or
redemption of their interests in, their respective Plans.
REDEEMING SHARES OWNED THROUGH IRAS
Redemption Requests by IRA Owners should be transmitted in accordance with
procedures established by the Transfer Agent and, where applicable an IRA
Owner's Service Agent. Requests for redemptions of Shares held through IRAs must
be made in writing and describe the nature of the redemption in order to be
deemed "in good order." Forms are available from the BT Service Center at
1-800-677-7596 or an IRA Owner's Service Agent.
Redemption requests initiated by IRA Owners will be processed at the NAV per
Share next determined after a request for redemption is received in good order
by Bankers Trust or a Service Agent. Normally, the Fund will make payment for
all Shares redeemed under this procedure within one business day after a request
is received in good order. In no event will payment be made more than seven days
after receipt of a redemption request in good order. The Fund may suspend the
right of redemption or postpone the date at times when both the NYSE and the
Fund's Custodian bank (Bankers Trust) are closed, or under any emergency
circumstances as determined by the SEC.
The value of Shares at the time of redemption may be more or less than the IRA
Owner's cost at the time of purchase, depending upon the then-current market
value of the Fund's assets (its interest in the Portfolio). IRA Owners should
consult with their Service Agent and/or professional tax adviser with respect to
the terms and conditions for withdrawal of particular IRAs.
Redemptions of Shares which are not Qualified IRA Redemptions, as defined below,
will be subject to the 3% Redemption Fee, if the Interest Rate Trigger is
active. See "EXPENSE SUMMARY" and "Shareholder Transaction Expenses" above.
QUALIFIED IRA REDEMPTIONS
At any time, a redemption of Fund Shares can be effected without assessment of
the Redemption Fee, if such redemption is a "Qualified IRA Redemption." In
general, amounts distributed to a taxpayer from a Traditional IRA, SEP-IRA or
SIMPLE IRA prior to the date on which the taxpayer reaches age 59 1/2 are
includible in the taxpayer's gross income and, unless the distribution meets the
requirements of a specific exception, are also subject to an additional 10%
penalty tax. (The penalty is increased to 25% for early withdrawals from SIMPLE
IRAs that occur within two years of beginning participation.) Similar penalties
apply to early withdrawals from Roth IRAs, Keogh plans and education IRAs. In
general, rollovers from one IRA to another and direct trustee-to-trustee
transfers from an IRA to another IRA (or in some cases to other types of
qualified plans) are not subject to tax. In addition, conversions of Traditional
IRAs to Roth IRAs are subject to income tax but are not subject to the early
withdrawal penalty tax. A "Qualified IRA Redemption" is a redemption made by an
IRA Owner to effect a distribution from his or her IRA
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account that is not subject to any early withdrawal penalty tax, other than IRA
rollovers, direct trustee-to-trustee transfers and conversions of Traditional
IRAs to Roth IRAs ("Qualified Transfers"), unless the IRA Owner continues the
investment of the transferred amount in the Fund. IRA Owners requesting a
redemption of Fund Shares will be required to provide a written statement as to
whether the proceeds of the redemption will be subject to the early withdrawal
penalty tax and to identify the specific exception upon which the IRA Owner
intends to rely. The information provided by the IRA Owner will be reflected on
the Form 1099-R issued to the IRA Owner and filed with the Internal Revenue
Service in connection with the redemption as well as forming the basis for
redemption as a Qualified IRA Redemption. The Fund may require additional
evidence, such as the opinion of a certified public accountant or tax attorney,
that any particular redemption will not be subject to any penalty tax. If a
qualified exception to the early withdrawal penalty other than a Qualified
Transfer is not identified by the IRA Owner, the Redemption Fee will be assessed
on the redemption if the Interest Rate Trigger is active (unless shares of the
Fund are transferred). IRA OWNERS SHOULD CONSULT THEIR TAX ADVISERS REGARDING
THE TAX CONSEQUENCES OF ANY REDEMPTION.
Some of the exceptions to the early withdrawal penalty taxes are described
below. THIS DESCRIPTION IS INTENDED TO PROVIDE ONLY A BRIEF SUMMARY OF THE
PRINCIPAL EXCEPTIONS TO THE ADDITIONAL TAX IMPOSED ON EARLY WITHDRAWALS UNDER
THE CURRENT PROVISIONS OF THE CODE, WHICH MAY CHANGE FROM TIME TO TIME. THE FUND
INTENDS TO CONFORM THE DEFINITION OF QUALIFIED IRA REDEMPTIONS TO CHANGES IN
APPLICABLE TAX LAWS; HOWEVER, THE FUND RESERVES THE RIGHT TO CONTINUE TO DEFINE
QUALIFIED IRA REDEMPTIONS BY REFERENCE TO CODE PROVISIONS NOW IN EFFECT OR
OTHERWISE TO DEFINE SUCH PHRASE INDEPENDENTLY OF FUTURE CODE PROVISIONS.
TRADITIONAL IRAS, SEP-IRAS AND SIMPLE IRAS
In general, the early withdrawal penalty tax imposed by the Code will not apply
to the following types of distributions from a Traditional IRA, SEP-IRA or a
SIMPLE IRA and these will be treated as Qualified IRA Redemptions:
<TABLE>
<C> <S>
1. Distributions made on or after the date
on which the IRA Owner attains age 59
1/2;
2. Distributions made to a beneficiary (or to the estate of the IRA Owner) on
or after the death of the IRA Owner;
3. Distributions attributable to the IRA Owner's being disabled;
4. Distributions made to the IRA Owner to the extent such distributions do
not exceed the amount of unreimbursed medical expenses allowed as a tax
deduction;
5. Distributions to unemployed individuals to the extent such distributions
do not exceed the amount paid for medical insurance for the IRA Owner, and
his or her spouse and dependents;
6. Distributions to an IRA Owner to the extent such distributions do not
exceed the qualified higher education expenses for the IRA Owner;
7. Distributions to an IRA Owner that are used to acquire a first home, and
that meet the definition of "qualified first-@ time homebuyer
distributions" under the @ Code; and
8. Distributions that are part of a series of substantially equal periodic
payments made at least annually for the life (or life expectancy) of the
IRA Owner, or the joint lives (or life expectancies) of the IRA Owner and
his or her designated beneficiary.
</TABLE>
ROTH IRAS
With respect to a Roth IRA, all "qualified distributions" are excluded from
gross income and, therefore, from the early withdrawal penalty tax. In general,
qualified distributions from a Roth IRA which will be treated as Qualified IRA
Redemptions include:
<TABLE>
<C> <S>
1. Distributions made on or after the date
on which the IRA Owner attains age 59
1/2;
2. Distributions made to a beneficiary (or to the estate of the IRA Owner) on
or after the death of the IRA Owner;
3. Distributions attributable to the IRA Owner's being disabled; and
</TABLE>
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<TABLE>
<C> <S>
4. Distributions to an IRA Owner that are used to acquire a first home, and
that meet the definition of "qualified first- time homebuyer
distributions" under the Code.
</TABLE>
However, a distribution will not be a qualified distribution, even if it
otherwise meets the definition, if it is made within the 5-year period beginning
with the first taxable year for which the IRA Owner made a contribution to the
Roth IRA (or such person's spouse made a contribution to a Roth IRA established
for the IRA Owner). Special rules apply with respect to certain types of
rollovers.
To the extent a distribution from a Roth IRA is not a qualified distribution,
either because it does not meet the definition of a qualified distribution in
the first instance, or because it is made within the five-year period described
above, the portion of the distribution that represents earnings will be subject
to tax under the Code, and will also be subject to the early withdrawal penalty
tax. The same exceptions to the penalty tax that apply to Traditional IRAs will
apply to nonqualified distributions from Roth IRAs.
In the event of a nonqualified distribution from a Roth IRA, only the earnings
in the account are subject to tax; contributions may be recovered tax-free
(since no deduction is permitted for such contributions). Under the Code,
distributions from Roth IRAs are considered to come first from contributions, to
the extent that distributions do not exceed the total amount of contributions.
KEOGH PLANS
In general, the early withdrawal penalty tax imposed by the Code will not apply
to the following types of distributions from a Keogh plan:
<TABLE>
<C> <S>
1. Distributions made on or after the date
on which the IRA Owner attains age 59
1/2;
2. Distributions made to a beneficiary (or to the estate of the IRA Owner) on
or after the death of the IRA Owner;
3. Distributions attributable to the IRA Owner's being disabled;
4. Distributions made to the IRA Owner
after separation from service after age @
55;
5. Distributions to unemployed individuals to the extent such distributions
do not exceed the amount of unre- imbursed medical expenses allowed as a
tax deduction;
6. Distributions to an alternate payee (e.g., a former spouse) pursuant to a
qualified domestic relations order; and
7. Distributions that are part of a series of substantially equal periodic
payments made at least annually for the life (or life expectancy) of the
IRA Owner, or the joint lives (or life expectancies) of the IRA Owner and
his or her designated beneficiary.
</TABLE>
EDUCATION IRAS
Distributions from an education IRA are included in income unless the qualified
higher education expenses of the designated beneficiary are equal to or greater
than the amount of such distributions. In addition, certain special rules are
provided that permit certain rollovers or changes in beneficiaries. Any
distribution that is subject to tax under the Code is also subject to the early
withdrawal penalty tax. Thus, in general, any distribution from an education IRA
that exceeds the amount of qualified higher education expenses of the designated
beneficiary will be subject to the early withdrawal penalty tax.
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ADDITIONAL INFORMATION ABOUT REDEEMING SHARES
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As noted above, all requests for redemptions in connection with Qualified IRA
Withdrawals must be in writing. In addition, certain other redemption requests
must be in writing and include a signature guarantee to protect you and Bankers
Trust from fraud. Redemption requests must include a signature guarantee if any
of the following situations apply:
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(Bullet) Your account registration has changed within the last 30 days,
(Bullet) The check is being mailed to a different address than the one on your
account (record address),
(Bullet) The check is being made payable to someone other than the account
owner,
(Bullet) The redemption proceeds are being transferred to a BT account with a
different registration, or
(Bullet) You wish to have redemption proceeds wired to a non-predesignated bank
account.
A signature guarantee is also required if you change the pre-designated bank
information for receiving redemption proceeds on your account. You should be
able to obtain a signature guarantee from a bank, broker, dealer, credit union
(if authorized under state law), securities exchange or association, clearing
agency, or savings association. A notary public cannot provide a signature
guarantee.
Service Agents may allow redemptions by telephone (other than in connection with
Qualified IRA Withdrawals) and may disclaim liability for following instructions
communicated by telephone that the Service Agent reasonably believes to be
genuine. The Service Agent must provide the investor with an opportunity to
choose whether or not to utilize the telephone redemption privilege. The
Transfer Agent and the Service Agent must employ reasonable procedures to
confirm that instructions communicated by telephone are genuine. Such procedures
may include, among others, requiring some form of personal identification prior
to acting upon instructions received by telephone, providing written
confirmation of such transactions and/or tape recording of telephone
instructions.
Redemption orders are processed without charge by the Trust. A Service Agent
may, on at least 30 days' notice, involuntarily redeem a Shareholder's account
with the Fund having a balance below the minimum, but not if an account is below
the minimum due to a change in market value. See "Minimum Investments" above for
minimum balance amounts.
The Fund reserves the right to honor any request for redemption by making
payment in whole or in part in securities selected solely in the discretion of
Bankers Trust provided, however, that such "securities" shall not include
Wrapper Agreements. The Fund intends to exercise this right under certain
extraordinary conditions as determined by the Fund. To the extent that payment
is made in securities, a Shareholder may incur brokerage expenses in converting
these securities into cash. Please see the Fund's Statement of Additional
Information for additional information concerning redemptions in kind. The Fund
has elected, however, to redeem Shares solely in cash up to the lesser of
$250,000 or 1% of the NAV of the Fund during any 90-day period for any one IRA
or Plan Shareholder.
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SHAREHOLDER AND FUND INFORMATION
- --------------------------------------------------------------------------------
INVESTOR SERVICES
BT Investment Funds provide a variety of services to help you manage your
account. Information Services Statements and reports that your Service Agent or
the Transfer Agent may send to you include the following:
(Bullet) confirmation statements (after every transaction that affects your
account balance, including distributions or your account registration);
(Bullet) Account statements (monthly);
(Bullet) Financial reports (every six months)
To reduce expenses, only one copy of most financial reports will be mailed, even
if you have more than one account in the Fund. Call your Investment Professional
or the BT Service Center at 1-800-677-7596 if you need additional copies of
financial reports.
NET ASSET VALUE
The NAV is calculated on each day on which the New York Stock Exchange, Inc.
(the "NYSE") is open (each such day being a "Valuation Day"). The NYSE is
currently open on each day, Monday through Friday, except (a) January 1st,
Martin Luther King Day, Presidents' Day (the third Monday in February), Good
Friday, Memorial Day (the last Monday in May), July 4th, Labor Day (the first
Monday in September), Thanksgiving Day (the last Thursday in November) and
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December 25th; and (b) the preceding Friday or the subsequent Monday when one of
the calendar-determined holidays falls on a Saturday or Sunday, respectively.
The NAV per Share is calculated once on each Valuation Day as of the close of
regular trading on the NYSE (the "Valuation Time"), which is currently 4:00
p.m., Eastern time, or if the NYSE closes early, at the time of the early
closing. The NAV per Share is computed by dividing the value of the Fund's
assets (i.e., the value of its investment in the Portfolio and other assets, if
any), less all liabilities, by the total number of its Shares outstanding. The
Portfolio's securities and other assets are valued primarily on the basis of
market quotations or, if quotations are not readily available, by a method that
the Portfolio Trust Board believes accurately reflects fair value.
Pursuant to procedures adopted by the Portfolio Trust Board, the fair value of a
Wrapper Agreement ("Wrapper Value") generally will be equal to the difference
between the Book Value and the market value (plus accrued interest on the
underlying securities) of the applicable Covered Assets. If the market value
(plus accrued interest on the underlying securities) of the Covered Assets is
greater than their Book Value, the Wrapper Value will be reflected as a
liability of the Portfolio in the amount of the difference, i.e., a negative
value, reflecting the potential liability of the Portfolio to the Wrapper
Provider. If the market value (plus accrued interest on the underlying
securities) of the Covered Assets is less than their Book Value, the Wrapper
Value will be reflected as an asset of the Portfolio in the amount of the
difference, i.e., a positive value, reflecting the potential liability of the
Wrapper Provider to the Portfolio. In performing its fair value determination,
the Portfolio Trust Board expects to consider the creditworthiness and ability
of a Wrapper Provider to pay amounts due under the Wrapper Agreement. If the
Portfolio Trust Board determines that a Wrapper Provider is unable to make such
payments, that Board may assign a fair value to the Wrapper Agreement that is
less than the difference between the Book Value and the market value (plus
accrued interest on the underlying securities) of the applicable Covered Assets
and the Portfolio might be unable to maintain NAV stability.
Under procedures adopted by the Trust Board, an NAV per Share later determined
to have been inaccurate for any reason will be recalculated. Purchases and
redemptions made at the NAV per Share and determined to have been inaccurate
will be adjusted, although in certain circumstances, such as where the
difference between the original NAV per Share and the recalculated NAV per Share
divided by the latter is 0.005 (1/2 of 1%) or less or shareholder transactions
are otherwise insubstantially affected, action is not required.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
The Fund intends to distribute all of its net investment income and net capital
gains, if any, to its shareholders each year. Dividends from net investment
income are declared daily and are paid monthly, and any net capital gains are
distributed annually. An additional annual distribution ("Additional
Distribution") may be paid to satisfy the tax requirements that the Fund
distribute each year substantially all of its investment company taxable income
(see "Tax Considerations").
Dividends and other distributions are automatically reinvested in additional
Shares unless the Plan participant directs otherwise.
The Fund may declare and pay dividends in amounts which are not equal to the
amount of the net investment income it actually earns. Consequently, in any year
the amount actually distributed may differ from the income earned. If, for any
year, those distributions exceed the income earned, the excess may be considered
a return of capital. On the other hand, if the income earned exceeds the amount
of the dividends distributed, the Fund may make an Additional Distribution of
that excess. To enable the Fund to maintain a stable NAV per Share in the event
of an Additional Distribution, the Trust Board may declare, effective on the
ex-distribution date of an Additional Distribution, a reverse split of the
Shares in an amount that will cause the total number of Shares held by each
shareholder, including Shares acquired on reinvestment of that distribution, to
remain the same as before that distribution was paid.
For example, if the Fund declares an Additional Distribution of $0.10 per Share
at a time when the NAV per Share is $10.00, a shareholder holding one Share
would receive 0.01 additional Shares on reinvestment of that distribution. If
there were no reverse split, the per Share NAV of the 1.01 Shares held by the
shareholder would be approximately $9.90, and the aggregate value thereof would
be $10.00. If a 1.01-for-1 reverse Share split were declared, however, the
shareholder's holdings would be consolidated back into one Share having an NAV
of
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$10.00. Thus, a reverse Share split will not affect the value of the total
holdings of a shareholder.
TAX CONSIDERATIONS
The Fund intends to qualify to be treated as a regulated investment company
under the Code. As a regulated investment company, the Fund will not be subject
to U.S. federal income tax on its investment company taxable income (generally
consisting of net investment income and the excess of net short-term capital
gain over net long-term capital loss, if any) and net capital gain (the excess
of net long-term capital gain over net short-term capital loss), if any, that it
distributes to its shareholders. The Fund intends to distribute to its
shareholders all of its investment company taxable income and net capital gain
at least annually, if necessary through Additional Distributions, and therefore
does not anticipate incurring any federal income tax liability.
For IRA Owners and Plan Participants, the dividend and capital gain
distributions from the Fund generally will not be subject to current taxation,
but will accumulate on a tax-deferred basis. To the extent that distributions
from an IRA or Plan are taxable, they are taxable as ordinary income. IRAs and
Plans are governed by a complex set of tax rules. IRA Owners and Plan
Participants should consult with their IRA provider or Plan Administrator,
respectively, and/or with a professional tax adviser regarding the tax
consequences associated with an investment in the Fund.
PERFORMANCE
The Fund's performance may be used from time to time in advertisements,
shareholders reports or other communications to shareholders or prospective
shareholders. Performance information may include investment results and/or
comparisons of its investment results to the IBC Averages, Lipper Averages, an
appropriate guaranteed interest contract average, or other various unmanaged
indices or results of other mutual funds or investment or saving vehicles. The
Portfolio's strategies, holdings and performance will be detailed twice a year
in the Fund's financial reports, which are sent to all Fund shareholders.
Mutual fund performance is commonly measured as total return and/or yield. The
performance of a class of shares is affected by its expenses and its share of
those expenses of the Portfolio.
EXPLANATION OF PERFORMANCE TERMS
Total Return is the change in value of an investment in the Shares over a given
period, assuming reinvestment of any dividends and capital gain distributions. A
cumulative total return reflects actual performance over a stated period of
time. An average annual total return is a hypothetical rate of return that, if
achieved annually, would have produced the same cumulative total return if
performance had been constant over the entire period. Average annual total
return calculations smooth out variations in performance; they are not the same
as actual year-by-year results. Average annual total returns covering periods of
less than one year assume that performance will remain constant for the rest of
the year.
Yield refers to the income generated by an investment in the Shares over a given
period of time, expressed as an annual percentage rate. Yields are calculated
according to a standard that is required for all stock and bond funds. Because
this differs from other accounting methods, the quoted yield may not equal the
income actually paid to shareholders.
Per SEC regulations, the yield of the Fund (the "SEC Yield") shall be calculated
on any determination date as follows:
2[((a-b)/c*d)+1)6-1]
a= Current income measured over a 30-day period b= Expenses accrued during the
same 30-day period
c= Average daily number of shares outstanding during the same 30-day period d=
Maximum offering price per share on the last day of the period.
The "Annual Effective Yield of the Fund" is intended to represent one day's
investment income expressed as an annualized yield and compounded annually. The
Annual Effective Yield of the Fund shall be expressed as a percentage and
calculated on each business day as follows based on the dividend declared for
the previous day:
[(1 + Previous Day's Dividend Factor) ^ 365-1]
NAV Per Share
EXAMPLE: If on March 1st the Fund's Dividend Factor is 0.00174163 and the Fund's
NAV per share is $10, then the Fund's Annual Effective Yield for March 2nd
equals 6.56%.
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The Annual Effective Yield of the Fund is used in determining when the Interest
Rate Trigger is active, as discussed in "Shareholder Transaction Expenses," on
page 2.
Performance information or advertisements may include comparisons of the Shares'
investment results to various unmanaged indices or results of other mutual funds
or investment or savings vehicles. From time to time, the Shares' ranking may be
quoted from various sources, such as Lipper Analytical Services, Inc., Value
Line, Inc. and Morningstar, Inc.
Unlike some bank deposits or other investments that pay a fixed yield for a
stated period of time, the total return of the Shares will vary depending upon
interest rates, the current market value of the Portfolio Securities and the
value of the Wrapper Agreements and changes in the expenses of the Shares and
the Portfolio. In addition, during certain periods for which total return may be
provided, Bankers Trust may have voluntarily agreed to waive portions of its
fees, or to reimburse certain operating expenses of the Fund or the Portfolio,
on a month-to-month basis. Such waivers will have the effect of increasing the
Fund's net income (and therefore its yield and total return) during the period
such waivers are in effect.
TOTAL RETURNS AND YIELDS ARE BASED ON PAST RESULTS AND ARE NOT AN INDICATION OF
FUTURE PERFORMANCE.
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MANAGEMENT OF THE TRUST AND PORTFOLIO
- --------------------------------------------------------------------------------
BOARDS OF TRUSTEES
The Trust and the Portfolio Trust (collectively the "Trusts") are each governed
by a Board of Trustees that is responsible for protecting the interests of
investors. A majority of the Trustees who are not "interested persons" (as
defined in the 1940 Act) of either Trust have adopted written procedures
reasonably appropriate to deal with potential conflicts of interest arising from
the fact that some of the same individuals may be Trustees of both Trusts, up to
and including creating separate boards of trustees. See "Management of the
Trusts" in the SAI for more information with respect to the Trustees and
officers of the Trusts.
INVESTMENT ADVISER
The Fund has not retained the services of an investment adviser because it seeks
to achieve its investment objective by investing all of its Assets in the
Portfolio. The Portfolio has retained the services of Bankers Trust as its
investment adviser pursuant to an Investment Advisory Agreement between the
Portfolio Trust and Bankers Trust dated April 28, 1993 (the "Investment Advisory
Agreement").
Bankers Trust, subject to the supervision and direction of the Portfolio Trust's
Board, manages the Portfolio in accordance with the Portfolio's investment
objective and stated investment policies, makes investment decisions for the
Portfolio, places orders to purchase and sell securities and other financial
instruments on behalf of the Portfolio and employs professional investment
managers and securities analysts who provide research services to the Portfolio.
Bankers Trust may utilize the expertise of any of its worldwide subsidiaries and
affiliates to assist it in its role as investment adviser. All orders for
investment transactions on behalf of the Portfolio are placed by Bankers Trust
with broker-dealers and other financial intermediaries that it selects,
including those affiliated with Bankers Trust. A Bankers Trust affiliate will be
used in connection with a purchase or sale of an investment for the Portfolio
only if Bankers Trust believes that the affiliate's charge for the transaction
does not exceed usual and customary levels. The Portfolio will not invest in
obligations, including Wrapper Agreements, for which Bankers Trust or any of its
affiliates is the ultimate obligor or accepting bank. The Portfolio may,
however, invest in the obligations of correspondents and customers of Bankers
Trust.
THE INVESTMENT ADVISORY AGREEMENT
The Investment Advisory Agreement provides for the Portfolio Trust to pay
Bankers Trust a fee, accrued daily and paid monthly, equal to 0.70% per year of
the average daily net assets of the Portfolio. Bankers Trust has indicated that
it will voluntarily waive all but 0.42% of this fee.
Bankers Trust has been advised by its counsel that, in counsel's opinion,
Bankers Trust currently may perform the services for the Trusts described in
this Prospectus
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and the SAI without violation of the Glass-Steagall Act or other applicable
banking laws or regulations. State laws on this issue may differ from the
interpretations of relevant federal law, and banks and financial institutions
may be required to register as dealers pursuant to state securities law.
PORTFOLIO MANAGEMENT
Eric Kirsch (CFA), is a Managing Director and the Chief Investment Officer of
the Structured Fixed Income Group at Bankers Trust in New York. In this
capacity, he oversees over $15 billion of stable value and fixed income
portfolios and coordinates fixed income portfolio management and trading
functions with regards to these portfolios' investments. He has over ten years
of investment experience relating to structured fixed income portfolios, and
previous experience in Employee Benefit Trust Administration. Mr. Kirsch joined
Bankers Trust in 1980.
Louis R. D'Arienzo is a Vice President and a portfolio manager of the Structured
Fixed Income Group at Bankers Trust in New York, where he is responsible for
managing Structured Fixed Income accounts. He has managed the Fixed Income
Securities of the Portfolio since its inception. Mr. D'Arienzo has 17 years of
trading and investment experience in structured portfolios, quantitative
analysis of fixed income and derivative securities. Mr. D'Arienzo joined Bankers
Trust in 1981.
John D. Axtell, Jr. is a Principal and a Stable Value portfolio manager at
Bankers Trust in New York, where he is responsible for the portfolio management
and trading activities relating to Stable Value Investments for client
portfolios. He previously managed $2 billion in Structured Bond Portfolios for
four years. Mr. Axtell is a former fixed income portfolio strategist at Drexel
Burnham Lambert, Inc. and has prior experience as Systems Engineer at Hewlett
Packard. Mr. Axtell joined Bankers Trust in 1990.
Bankers Trust investment personnel may invest in securities for their own
account pursuant to a code of ethics that establishes procedures for personal
investing and restricts certain transactions.
ADMINISTRATOR
Under an Administration and Services Agreement with the Trust, Bankers Trust
calculates the Fund's NAV and generally assists the Trust Board in all aspects
of the administration and operation of the Fund. This Administration and
Services Agreement provides for the Trust to pay Bankers Trust a fee, accrued
daily and paid monthly, equal to 0.35% per year of the average daily net assets
of the Fund.
Under an Administration and Services Agreement with the Portfolio Trust, Bankers
Trust calculates the NAV of the Portfolio and generally assists the Portfolio in
all aspects of the administration and operation of the Portfolio. This
Administration and Services Agreement provides for the Portfolio to pay Bankers
Trust a fee, accrued daily and paid monthly, equal to 0.05% per year of the
Portfolio's average daily net assets. Under this Administration and Services
Agreement, Bankers Trust may delegate one or more of its responsibilities to
others, including the Distributor, at Bankers Trust's expense.
In addition, subject to certain conditions, Bankers Trust may, out of its own
resources, make ongoing payments to brokerage firms, plan administrators and
fiduciaries, financial institutions (including banks) and other entities that
facilitate the administration and servicing of shareholder accounts.
DISTRIBUTOR
ICC Distributors, Inc., as Distributor, serves as the Trust's principal
underwriter on a best efforts basis. In addition, ICC and its affiliates
currently provide administration and distribution services for other registered
investment companies. ICC is a registered broker/dealer and is unaffiliated with
Bankers Trust. Its principal offices are at Two Portland Square, Portland, Maine
04101.
CUSTODIAN AND TRANSFER AGENT
Bankers Trust acts as custodian ("Custodian") for the assets of the Portfolio
and serves as the Trust's transfer agent (the "Transfer Agent") under the
Administration and Services Agreement with the Trust. It is not separately
compensated for these services and may, at its own expense, delegate certain
services to other Service Agents.
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SERVICE AGENT
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Shares of the Fund are available through broker dealers, investment advisers,
financial institutions, plan administrators and others who have arranged to
serve as service agents for the Fund ("Service Agents"), Bankers Trust is
compensated for its efforts as a Service Agent pursuant to the terms of its
Administration and Services Agreement with the Trust and by the Shareholder
Servicing Fee paid to it by the Fund. Other Service Agents' service fees may be
paid by Bankers Trust from its fees.
In exchange for these fees, Bankers Trust and other Service Agents provide such
services as processing purchase and redemption transactions, arranging for bank
wires, performing shareholder sub-accounting, answering inquiries regarding the
Fund, assisting in changing dividend options, account designations and
addresses, as establishing and maintaining IRA accounts including updating the
IRA documentation as necessary, providing periodic statements showing the
client's account balance, transmitting proxy statements, periodic reports,
updated prospectuses and other communications to Shareholders and, with respect
to meetings of Shareholders, collecting, tabulating and forwarding to the Trust
executed proxies and obtaining such other information and performing such other
services as the Administrator or the Service Agent's clients may reasonably
request and agree upon with the Service Agent. A Service Agent may also serve as
Plan administrator, IRA trustee or custodian or make arrangements for another
party to serve in this capacity. Some Service Agents may separately charge their
clients additional fees to cover the provision of such services. In addition,
IRA Owners may be charged a transaction fee for effecting transactions in Fund
shares through their Service Agent.
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BANKERS TRUST COMPANY AND ITS AFFILIATES
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Bankers Trust Company, a New York banking corporation with principal offices at
130 Liberty Street (One Bankers Trust Plaza), New York, New York 10006, is a
wholly owned subsidiary of Bankers Trust New York Corporation. Bankers Trust
conducts a variety of general banking and trust activities and is a major
wholesale supplier of financial services to the international and domestic
institutional market.
As of December 31, 1997, Bankers Trust New York Corporation was the seventh
largest bank holding company in the United States with total assets of
approximately $100 billion. Bankers Trust is a worldwide merchant bank dedicated
to servicing the needs of corporations, governments, financial institutions and
private clients through a global network of over 90 offices in more than 50
countries.
Investment management is a core business of Bankers Trust, built on a tradition
of excellence from its roots as a trust bank founded in 1903. Bankers Trust is
one of the nation's largest and most experienced investment managers, with over
$317 billion in assets under management globally. The scope of Bankers Trust's
investment management capability is unique due to its leadership positions in
both active and passive quantitative management and its presence in major equity
and fixed income markets around the world. Bankers Trust's officers have had
extensive experience in managing investment portfolios having objectives similar
to those of the Fund and the Portfolio. Bankers Trust has more than 50 years of
experience managing retirement assets for the nation's largest corporations and
institutions.
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ADDITIONAL INFORMATION ABOUT THE TRUST
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The Fund is a mutual fund: an investment that pools shareholders' money and
invests it toward a specified goal. The Fund is a separate series of the Trust,
a Massachusetts business trust organized pursuant to a Declaration of Trust
dated July 21, 1986. The Portfolio is a separate subtrust of the Portfolio
Trust, a New York master trust fund organized pursuant to a Declaration of Trust
dated March 27, 1993.
Each Trust reserves the right to add additional series/subtrusts in the future.
There are currently no other funds investing in the Portfolio. Other funds
investing in the Portfolio may have sales charges and/or
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different expenses than the Fund, which may affect performance. The Trust also
reserves the right to issue additional classes of shares of the Fund. Each class
represents an identical interest in the Fund's investment portfolio. As a
result, the classes have the same rights, privileges and preferences, except
with respect to: (1) the designation of each class; (2) the expenses allocated
exclusively to each class; and (3) voting rights on matters exclusively
affecting a single class. The Trust Board does not anticipate that there will be
any conflicts among the interests of the holders of the different classes and
will take appropriate action if any such conflict arises. For more information
about the different classes of shares of the Fund, please call 1-800-677-7596.
Each Trust may hold special meetings and mail proxy materials. These meetings
may be called to elect or remove Trustees, change fundamental policies, approve
the Portfolio's investment advisory agreement, or for other purposes.
Shareholders not attending a Trust meeting are encouraged to vote by proxy. The
Transfer Agent will mail proxy materials in advance, including a voting card and
information about the proposals to be voted on.
When matters are submitted for shareholder vote, shareholders of the Fund will
have one vote for each full Share held and proportionate, fractional votes for
fractional Shares held. A separate vote of the Fund is required on any matter
affecting only the Fund on which shareholders are entitled to vote; shareholders
of the Fund are not entitled to vote on Trust matters that do not affect the
Fund and do not require a separate vote of the Fund. All series of the Trust
will vote together on certain matters, such as electing Trustees or approving
independent public auditors. Under certain circumstances, the shareholders of
one of series of the Trust could control the outcome of these votes. There
normally will be no meetings of shareholders for the purpose of electing
Trustees unless and until such time as less than a majority of Trustees holding
office has been elected by shareholders, at which time the Trustees then in
office will call a shareholders' meeting for the election of Trustees. Any
Trustee may be removed from office upon the vote of shareholders holding at
least two-thirds of the Trust's outstanding shares at a meeting called for that
purpose. The Trustees are required to call such a meeting upon the written
request of shareholders holding at least 10% of the Trust's outstanding shares.
The Trust will also assist shareholders in communicating with one another as
provided for in the 1940 Act.
Each subtrust of the Portfolio Trust, including the Portfolio, will vote
separately on any matter involving that subtrust. Holders of interests in all
the subtrusts of the Portfolio Trust, however, will vote together to elect
Trustees of the Portfolio Trust and for certain other matters. The subtrusts of
the Portfolio Trust will vote together or separately on matters in the same
manner, and in the same circumstances, as do the series of the Trust. As with
the Trust, the investors in one or more subtrusts of the Portfolio Trust could
control the outcome of these votes. No subtrust of the Portfolio Trust has any
preference over any other subtrust.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a business trust may,
under certain circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder's incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the Trust itself was unable to meet its
obligations.
The Portfolio Trust was organized as a trust under the laws of the State of New
York. The Portfolio Trust's Declaration of Trust provides that the entities
investing in the Portfolio (e.g., investment companies such as the Fund and
common and commingled trust funds) will each be liable for all obligations of
the Portfolio. However, the risk of the Fund's 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 Trustees of the Trust believe that neither the Fund nor its
shareholders will be adversely affected by reason of the Fund's investing in the
Portfolio.
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INFORMATION CONCERNING THE MASTER-FEEDER FUND STRUCTURE
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Unlike other mutual funds that directly acquire and manage their own portfolio
securities, the Fund seeks to achieve its investment objective by investing all
of its Assets in the Portfolio, a separate subtrust of a registered investment
company with the same investment objective as the Fund. Therefore, a Fund
shareholder's interest in the Portfolio's assets is indirect. In addition to
selling a beneficial interest to the Fund, the Portfolio may sell beneficial
interests to other mutual funds or institutional investors. Such investors will
invest in the 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 are not required to sell their shares or other
interests at the same public offering price as the Fund, due to variations in
sales commissions and other operating expenses. Therefore, investors in the Fund
should be aware that these differences may result in differences in returns
experienced by investors in the different entities that invest in the Portfolio.
Such differences in returns are also present in other mutual fund structures.
Information concerning other holders of interests in the Portfolio is available
from Bankers Trust, as the Administrator, at 1-800-677-7596.
The master-feeder structure is relatively complex, so shareholders should
carefully consider this investment approach. Smaller investors in the Portfolio
may be materially affected by the actions of larger investors in the Portfolio.
For example, if a large investor withdraws from the Portfolio, the remaining
investors may experience higher pro rata operating expenses, thereby producing
lower returns (however, this possibility exists as well for traditionally
structured funds that have large investors). Additionally, the Portfolio may
become less diverse, resulting in increased portfolio risk. Also, investors with
a greater pro rata ownership in the Portfolio could have effective voting
control of its operations. Except as permitted by the SEC, whenever the Trust is
requested to vote on matters pertaining to the Portfolio, the Trust will hold a
meeting of shareholders of the Fund and will cast all of its votes in the same
proportion as the votes of the Fund's shareholders. Fund shareholders who do not
vote will not affect the Trust's votes on the Portfolio's matters; the Trust's
votes representing Fund shareholders not voting will be voted by the Trustees or
officers of the Trust in the same proportion as the Fund shareholders who do, in
fact, vote. Certain changes in the Portfolio's investment objective, policies or
restrictions may require the Fund to withdraw its interest in the Portfolio. Any
such withdrawal could result in a distribution "in kind" of Portfolio assets (as
opposed to a cash distribution from the Portfolio). If securities are
distributed, the Fund could incur brokerage, tax or other charges in converting
the securities to cash. In addition, the distribution in kind may result in a
less diversified portfolio of investments or adversely affect the liquidity of
the Fund. Notwithstanding the above, there are other means for meeting
redemption requests, such as borrowing. The Fund may withdraw its investment
from the Portfolio at any time, if the Board of Trustees of the Trust (the
"Trust Board") determines that it is in the best interests of the shareholders
of the Fund to do so. Upon any such withdrawal, the Trust Board 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 as
the Fund or the retaining of an investment adviser to manage the Fund's assets
in accordance with the investment policies described herein with respect to the
Portfolio.
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DEFINITIONS OF SECURITIES PURCHASED BY THE PORTFOLIO
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ASSET-BACKED SECURITIES. Asset-backed securities have structural characteristics
similar to mortgage-backed securities. However, the underlying assets are not
first lien mortgage loans or interests therein but include assets such as motor
vehicle installment sale contracts, other installment sale contracts, home
equity loans, leases of various types of real and personal property, and
receivables from revolving credit (credit card) agreements. Such assets are
securitized through the use of trusts or special purpose corporations. Payments
or distributions of principal and interest on asset-backed securities may be
guaranteed up to certain amounts and for a certain time period by a letter of
credit or a pool
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insurance policy issued by a financial institution unaffiliated with the issuer,
or other credit enhancements may be present.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities do not have the benefit
of the same type of security interest in the related collateral. Credit card
receivables are generally unsecured, and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
give such debtors the right to avoid payment of certain amounts owed on the
credit cards, thereby reducing the balance due. There is the risk in connection
with automobile receivables that recoveries on repossessed collateral may not,
in some cases, be available to support payments on those securities.
COLLATERALIZED MORTGAGE OBLIGATIONS. CMOs are mortgage-backed bonds that
separate mortgage pools into different classes, called tranches. Tranches pay
different rates of interest and can mature in a few months, or in as long as 20
years. Issued by the Federal Home Loan Mortgage Corporation (Freddie Mac) and
private issuers, CMOs are usually backed by government-guaranteed or other
top-grade mortgages and have AAA ratings. In return for a lower yield, CMOs
provide investors with increased security throughout the life of their
investment compared to purchasing a whole mortgage-backed security. Even so, if
mortgage rates drop sharply, causing a flood of refinancings, prepayment rates
will soar and CMO tranches will be repaid before their expected maturity. See
also REMICs, below.
MORTGAGE-BACKED SECURITIES. The Portfolio may purchase mortgage-backed
securities issued by the U.S. government, its agencies or instrumentalities and
non-governmental entities such as banks, mortgage lenders or other financial
institutions. Mortgage-backed securities include mortgage pass-through
securities, mortgage-backed bonds and mortgage pay-through securities. A
mortgage pass-through security is a pro rata interest in a pool of mortgages
where the cash flow generated from the mortgage collateral is passed through to
the security holder. A mortgage-backed bond is a general obligation of the
issuer, payable out of the issuer's general funds and additionally secured by a
first lien on a pool of mortgages. Mortgage pay-through securities exhibit
characteristics of both pass-through and mortgage-backed bonds. The mortgage
pass-through securities issued by non-governmental entities such as banks,
mortgage lenders or other financial institutions in which the Portfolio may
invest include private label mortgage pass-through securities and whole loans.
Mortgage-backed securities also include other debt obligations secured by
mortgages on commercial real estate or residential properties. Other types of
mortgage-backed securities will likely be developed in the future, and the
Portfolio may invest in them if Bankers Trust determines they are consistent
with the Portfolio's investment objective and policies.
Unlike ordinary Fixed Income Securities, which generally pay a fixed rate of
interest and return principal upon maturity, mortgage-backed securities repay
both interest income and principal as part of their periodic payments. Because
the mortgages underlying mortgage-backed certificates can be prepaid at any time
by homeowners or corporate borrowers, mortgage-backed securities give rise to
certain unique "pre-payment" risks. Prepayment risk or call risk is the
likelihood that, during periods of falling interest rates, securities with high
stated interest rates will be prepaid (or "called") prior to maturity, requiring
the Portfolio to invest the proceeds at generally lower interest rates.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS. REMICs are pass-through vehicles
created under the tax reform act of 1986 to issue multiclass mortgage-backed
securities. REMICs may be organized as corporations, partnerships or trusts.
Interests in REMICs may be senior or junior, regular (DEBT INSTRUMENTS) or
residual (equity interests). CMOs (described above) normally have AAA bond
ratings, whereas REMICs represent a range of risk levels.
REPURCHASE AGREEMENTS. In a repurchase agreement, the Portfolio buys a security
at one price and simultaneously agrees to sell it back to the seller on a
specific date and at a higher price reflecting a market rate of interest
unrelated to the coupon rate or maturity of the underlying security. Delays or
losses could result if the other party to the agreement defaults or becomes
insolvent.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS. In a reverse repurchase
agreement, the Portfolio temporarily transfers possession of a portfolio
instrument to another party in return for cash. This could increase the risk of
fluctuation in the Fund's yield or in the market value of its interest in the
Portfolio. In a dollar roll, the Portfolio sells mortgage-backed or other
securities for delivery in the current month and simultaneously contracts to
purchase substantially similar securities on a specified future date. Reverse
repurchase agreements and dollar rolls are forms of borrowing and will be
counted towards the Portfolio's borrowing restrictions. See "Borrowing" on the
following pages and in the SAI. Wrapper Agreements would cover the cash proceeds
of such transactions but not the portfolio instruments transferred
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to another party until possession of such instruments is returned to the
Portfolio.
RULE 144A SECURITIES. Rule 144A Securities are securities that are not
registered for sale under the federal securities laws but can be resold to
institutions pursuant to Rule 144A under the Securities Act of 1933. Provided
that a dealer or institutional trading market in such securities exists, these
restricted securities are treated as exempt from the Portfolio's 15% limit on
illiquid securities. Under the supervision of the Portfolio Trust Board, Bankers
Trust determines the liquidity of restricted securities; and through reports
from Bankers Trust, the Portfolio Trust Board monitors trading activity in
restricted securities. If institutional trading in restricted securities were to
decline, the liquidity of the Portfolio could be adversely affected.
SHORT-TERM INVESTMENTS. The Portfolio's assets may be invested in high quality
short-term investments with remaining maturities of 397 days or less to maintain
the Liquidity Reserve, to meet anticipated redemptions and expenses for
day-to-day operating purposes and when, in Bankers Trust's opinion, it is
advisable to adopt a temporary defensive position because of unusual and adverse
conditions affecting the respective markets.
U.S. GOVERNMENT SECURITIES. U.S. government securities are high-quality debt
securities issued or guaranteed by the U.S. Treasury or by an agency or
instrumentality of the U.S. government. Not all U.S. government securities are
backed by the full faith and credit of the United States. For example,
securities issued by the Farm Credit Banks or by the FNMA are supported by the
instrumentality's right to borrow money from the U.S. Treasury under certain
circumstances. However, securities issued by certain other U.S. agencies or
instrumentalities are supported only by the credit of the entity that issued
them.
OTHER U.S. DOLLAR-DENOMINATED FIXED INCOME SECURITIES. Bonds and other debt
instruments are used by issuers to borrow money from investors. The issuer pays
the investor a fixed or variable rate of interest and must repay the amount
borrowed at maturity. Some debt securities, such as zero coupon bonds, do not
pay current interest but are purchased at a discount from their face values.
Debt securities, loans and other direct debt have varying degrees of quality and
varying levels of sensitivity to changes in interest rates. Longer-term bonds
are generally more sensitive to interest rate changes than short-term bonds.
U.S. DOLLAR-DENOMINATED FOREIGN SECURITIES. The Portfolio may invest a portion
of its assets in the dollar-denominated debt securities of foreign companies.
Investing in the securities of foreign companies involves more risks than
investing in securities of U.S. companies. Their value is subject to economic
and political developments in the countries where the companies operate and to
changes in foreign currency values. Values may also be affected by foreign tax
laws, changes in foreign economic or monetary policies, exchange control
regulations and regulations involving prohibitions on the repatriation of
foreign currencies.
In general, less information may be available about foreign companies than about
U.S. companies, and foreign companies are generally not subject to the same
accounting, auditing and financial reporting standards as are U.S. companies.
Foreign securities markets may be less liquid and subject to less regulation
than the U.S. securities markets. The costs of investing outside the United
States frequently are higher than those in the United States. These costs
include relatively higher brokerage commissions and foreign custody expenses.
U.S. DOLLAR-DENOMINATED SOVEREIGN AND SUPRANATIONAL FIXED INCOME SECURITIES.
Debt instruments issued or guaranteed by foreign governments, agencies and
supranational organizations ("sovereign debt obligations"), especially sovereign
debt obligations of developing countries, may involve a high degree of risk. The
issuer of the obligation or the governmental authorities that control the
repayment of the debt may be unable or unwilling to repay principal and interest
when due and may require renegotiation or rescheduling of debt payments. In
addition, prospects for repayment of principal and interest may depend on
political as well as economic factors.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. Delivery of and payment
for these securities may take place as late as a month or more after the date of
the purchase commitment. The value of these securities is subject to market
fluctuations during this period, and no income accrues to the Portfolio until
settlement takes place.
ZERO COUPON SECURITIES. Zero Coupon Securities including CATS, TIGRs and TRs,
are the separate income or principal components of a debt instrument. These
involve risks that are similar to those of other debt securities, although they
may be more volatile, and the value of certain zero coupon securities moves in
the same direction as interest rates. Zero coupon bonds do not make regular
interest payments.
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BT INVESTMENT FUNDS
BT PRESERVATIONPLUS INCOME FUND
INVESTMENT ADVISER OF THE PORTFOLIO AND ADMINISTRATOR
BANKERS TRUST COMPANY
130 Liberty Street
(One Bankers Trust Plaza)
New York, New York 10006
DISTRIBUTOR
ICC DISTRIBUTORS, INC.
Two Portland Square
Portland, Maine 04101
CUSTODIAN AND TRANSFER AGENT
BANKERS TRUST COMPANY
130 Liberty Street
(One Bankers Trust Plaza)
New York, New York 10006
INDEPENDENT ACCOUNTANTS ERNST & YOUNG LLP 787 Seventh Avenue New York, NY 10019
COUNSEL
WILLKIE FARR & GALLAGHER
787 Seventh Avenue
New York, NY 10019
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus, the SAI or the
Fund's official sales literature in connection with the offering of the Shares
and, if given or made, such other information or representations must not be
relied on as having been authorized by the Fund. This Prospectus does not
constitute an offer in any state in which, or to any person to whom, such offer
may not lawfully be made.
Cusip #055922660
PRPLINC300(8/98)
STATEMENT OF
ADDITIONAL INFORMATION
OCTOBER 27, 1998
BT INVESTMENT FUNDS:
BT PRESERVATIONPLUS INCOME FUND
BT PreservationPlus Income Fund (the "Fund") is a separate series of BT
Investment Funds (the "Trust"), an open-end, management investment company
(mutual fund) offering shares of the Fund ("Shares") are described herein.
As described in the Fund's Prospectus, the Fund seeks to achieve its investment
objective by investing all its net investable assets (the "Assets") in BT
PreservationPlus Income Portfolio (the "Portfolio"), a diversified open-end
management investment company having the same investment objective as the Fund.
The Portfolio is a separate subtrust of BT Investment Portfolios, a New York
master trust fund (the "Portfolio Trust").
Because the investment characteristics of the Fund correspond directly to those
of the Portfolio (in which the Fund invests all of its assets), the following is
a discussion of the various investments of and techniques employed by the
Portfolio. The Fund has been established to serve as an alternative investment
to short-term bond funds and money market funds. In addition, since to date,
there has been no comparable investment substitute for those individuals who are
"rolling" assets over from the stable value or guaranteed investment contract
("GIC") option of their employee benefit plans (such as 401(k) plans), the Fund
is designed to be that comparable alternative.
Shares of the Fund are sold by ICC Distributors, Inc., the Fund's distributor
(the "Distributor"), solely to individual retirement accounts as defined in
Section 408 of the Internal Revenue Code of 1986, as amended (the "Code")
including "SIMPLE IRAs" and "SEP IRAs", Roth IRAs as defined in Section 408A of
the Code, education individual retirement accounts as defined in Section 530 of
the Code and "Keogh Plans" (sometimes collectively referred to herein as
"IRAs"), and to employees investing through participant-directed employee
benefit plans (each a "Plan" and together "Plans"). Shares are offered to Plans
either directly, or through vehicles such as bank collective funds or insurance
company separate accounts consisting solely of such Plans. Shares are also
available to employee benefit plans which invest in the Fund through an omnibus
account or similar arrangement.
The Fund's Prospectus (the "Prospectus") is dated October 27, 1998 . The
Prospectus provides the basic information investors should know before investing
and may be obtained without charge by calling the Trust at the telephone number
listed below. This Statement of Additional Information ("SAI"), which is not a
prospectus, is intended to provide additional information regarding the
activities and operations of the Fund and the Portfolio and should be read in
conjunction with the Prospectus. This SAI is not an offer by the Fund to an
investor that has not received a Prospectus. Capitalized terms not otherwise
defined in this SAI have the meanings accorded to them in the Prospectus.
BANKERS TRUST COMPANY
INVESTMENT ADVISER OF THE PORTFOLIO AND ADMINISTRATOR
ICC DISTRIBUTORS, INC.
DISTRIBUTOR
Two Portland Square Portland, Maine 04101 1-(800) 730-1313
<PAGE>
TABLE OF CONTENTS
Investment Objectives, Policies and Restrictions.................1
Performance Information.........................................14
Valuation of Assets; Redemptions in Kind........................15
Qualified IRA Redemptions.......................................17
Management of the Trusts........................................19
Organization of the Trust.......................................23
Taxation........................................................24
Appendix: Description of Ratings...............................27
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INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVE
The investment objective of the Fund is a high level of current income while
seeking to maintain a stable value per share. There can, of course, be no
assurance that the Fund will achieve its investment objective.
INVESTMENT POLICIES
The Fund seeks to achieve its investment objective by investing all of its
Assets in the Portfolio. The Trust may withdraw the Fund's investment from the
Portfolio at any time if the Trust Board determines that it is in the best
interests of the Fund to do so.
The following is a discussion of the various investments of and techniques
employed by the Portfolio.
SHORT-TERM INSTRUMENTS. The Portfolio may hold short-term investments consisting
of foreign and domestic (i) short-term obligations of sovereign governments,
their agencies, instrumentalities, authorities or political subdivisions; (ii)
other short-term debt securities rated in one of the top two short-term rating
categories by an NRSRO or, if unrated, of comparable quality in the opinion of
Bankers Trust Company, the Portfolio's investment adviser (the "Adviser"); (iii)
commercial paper; (iv) bank obligations, including negotiable certificates of
deposit, time deposits and bankers' acceptances; and (v) repurchase agreements.
At the time the Portfolio invests in commercial paper, bank obligations or
repurchase agreements, the issuer or the issuer's parent must have an
outstanding long-term debt rating of A or higher by Standard & Poor's Ratings
Group ("S&P") or A-2 or higher by Moody's Investors Service, Inc. ("Moody's") or
outstanding commercial paper or bank obligations rated A-1 by S&P or Prime-1 by
Moody's; or, if no such ratings are available, the instrument must be of
comparable quality in the opinion of Bankers Trust.
CERTIFICATES OF DEPOSIT AND BANKERS' ACCEPTANCES. Certificates of deposit are
receipts issued by a depository institution in exchange for the deposit of
funds. The issuer agrees to pay the amount deposited plus interest to the bearer
of the receipt on the date specified on the certificate. The certificate usually
can be traded in the secondary market prior to maturity. Bankers' acceptances
typically arise from short-term credit arrangements designed to enable
businesses to obtain funds to finance commercial transactions. Generally, an
acceptance is a time draft drawn on a bank by an exporter or an importer to
obtain a stated amount of funds to pay for specific merchandise. The draft is
then "accepted" by a bank that, in effect, unconditionally guarantees to pay the
face value of the instrument on its maturity date. The acceptance may then be
held by the accepting bank as an earning asset or it may be sold in the
secondary market at the going rate of discount for a specific maturity. Although
maturities for acceptances can be as long as 270 days, most acceptances have
maturities of six months or less.
COMMERCIAL PAPER. Commercial paper consists of short-term (usually from one to
270 days) unsecured promissory notes issued by corporations in order to finance
their current operations. A variable amount master demand note (which is a type
of commercial paper) represents a direct borrowing arrangement involving
periodically fluctuating rates of interest under a letter agreement between a
commercial paper issuer and an institutional lender pursuant to which the lender
may determine to invest varying amounts.
For a description of commercial paper ratings, see the Appendix.
MORTGAGE- AND ASSET-BACKED SECURITIES. The yield characteristics of the
mortgage- and asset-backed securities in which the Portfolio may invest differ
from those of traditional debt securities. Among the major differences are that
interest and principal payments are made more frequently on mortgage- and
asset-backed securities (usually monthly) and that principal may be prepaid at
any time because the underlying mortgage loans or other assets generally may be
prepaid at any time. As a result, if the Portfolio purchases these securities at
a premium, a prepayment rate that is faster than expected will reduce their
yield, while a prepayment rate that is slower than expected will have the
opposite effect of increasing yield. Conversely, if the Portfolio purchases
these securities at a discount, faster than expected prepayments will increase,
while slower than expected prepayments will reduce, their yield. Amounts
available for reinvestment by the Portfolio are likely to be greater during a
period of declining interest rates and, as a result, are likely to be reinvested
at lower interest rates than during a period of rising interest rates.
In general, the prepayment rate for mortgage-backed securities decreases as
interest rates rise and increases as interest rates fall. However, rising
interest rates will tend to decrease the value of these securities. In addition,
an increase in interest rates may affect the volatility of these securities by
effectively changing a security that was considered a short-term security at the
time of purchase into a long-term security. Long-term securities generally
fluctuate more widely in response to changes in interest rates than short- or
intermediate-term securities.
The market for privately issued mortgage- and asset-backed securities is smaller
and less liquid than the market for U.S. government mortgage-backed securities.
Collateralized mortgage obligation ("CMO") classes may be specially structured
in a manner that provides any of a wide variety of investment characteristics,
such as yield, effective maturity and interest rate sensitivity. As market
conditions change, however, and particularly during periods of rapid or
unanticipated changes in market interest rates, the attractiveness of the CMO
classes and the ability of the structure to provide the anticipated investment
characteristics may be significantly reduced. These changes can result in
volatility in the market value, and in some instances reduced liquidity, of the
CMO class.
ZERO-COUPON SECURITIES. The Portfolio may invest in certain zero coupon
securities that are "stripped" U.S. Treasury notes and bonds. Zero coupon
securities usually trade at a substantial discount from their face or par value.
Zero coupon securities are subject to greater fluctuations of market value in
response to changing interest rates than debt obligations of comparable
maturities that make current distributions of interest in cash.
WRAPPER AGREEMENTS. Wrapper Agreements are structured with a number of different
features. Wrapper Agreements purchased by the Portfolio are of three basic
types: (1) non-participating, (2) participating and (3) "hybrid." In addition,
the Wrapper Agreements will either be of fixed-maturity or open-end maturity
("evergreen"). The Portfolio enters into particular types of Wrapper Agreements
depending upon their respective cost to the Portfolio and the Wrapper Provider's
creditworthiness, as well as upon other factors. Under most circumstances, it is
anticipated that the Portfolio will enter into participating Wrapper Agreements
of open-end maturity and hybrid Wrapper Agreements.
Under a NON-PARTICIPATING WRAPPER AGREEMENT, the Wrapper Provider becomes
obligated to make a payment to the Portfolio whenever the Portfolio sells
Covered Assets at a price below Book Value to meet withdrawals of a type covered
by the Wrapper Agreement (a "Benefit Event"). Conversely, the Portfolio becomes
obligated to make a payment to the Wrapper Provider whenever the Portfolio sells
Covered Assets at a price above their Book Value in response to a Benefit Event.
In neither case is the Crediting Rate adjusted at the time of the Benefit Event.
Accordingly, under this type of Wrapper Agreement, while the Portfolio is
protected against decreases in the market value of the Covered Assets below Book
Value, it does not realize increases in the market value of the Covered Assets
above Book Value; those increases are realized by the Wrapper Providers.
Under a PARTICIPATING WRAPPER AGREEMENT, the obligation of the Wrapper Provider
or the Portfolio to make payments to each other typically does not arise until
all of the Covered Assets have been liquidated. Instead of payments being made
on the occurrence of each Benefit Event, these obligations are a factor in the
periodic adjustment of the Crediting Rate.
Under a HYBRID WRAPPER AGREEMENT, the obligation of the Wrapper Provider or the
Portfolio to make payments does not arise until withdrawals exceed a specified
percentage of the Covered Assets, after which time payment covering the
difference between market value and Book Value will occur.
A FIXED-MATURITY WRAPPER AGREEMENT terminates at a specified date, at which time
settlement of any difference between Book Value and market value of the Covered
Assets occurs. A fixed-maturity Wrapper Agreement tends to ensure that the
Covered Assets provide a relatively fixed rate of return over a specified period
of time through bond immunization, which targets the duration of the Covered
Assets to the remaining life of the Wrapper Agreement.
An EVERGREEN WRAPPER AGREEMENT has no fixed maturity date on which payment must
be made, and the rate of return on the Covered Assets accordingly tends to vary.
Unlike the rate of return under a fixed-maturity Wrapper Agreement, the rate of
return on assets covered by an evergreen Wrapper Agreement tends to more closely
track prevailing market interest rates and thus tends to rise when interest
rates rise and fall when interest rates fall. An evergreen Wrapper Agreement may
be converted into a fixed-maturity Wrapper Agreement that will mature in the
number of years equal to the duration of the Covered Assets.
Wrapper Providers are banks, insurance companies and other financial
institutions. The number of Wrapper Providers has been increasing in recent
years. As of April 1998, there were approximately fifteen Wrapper Providers
rated in one of the top two long-term rating categories by Moody's, S&P or
another NRSRO. The cost of Wrapper Agreements is typically 0.10% to 0.25% per
dollar of Covered Assets per annum.
In the event of the default of a Wrapper Provider, the Portfolio could
potentially lose the Book Value protections provided by the Wrapper Agreements
with that Wrapper Provider. However, the impact of such a default on the
Portfolio as a whole may be minimal or non-existent if the market value of the
Covered Assets thereunder is greater than their Book Value at the time of the
default, because the Wrapper Provider would have no obligation to make payments
to the Portfolio under those circumstances. In addition, the Portfolio may be
able to obtain another Wrapper Agreement from another Wrapper Provider to
provide Book Value protections with respect to those Covered Assets. The cost of
the replacement Wrapper Agreement might be higher than the initial Wrapper
Agreement due to market conditions or if the market value (plus accrued interest
on the underlying securities) of those Covered Assets is less than their Book
Value at the time of entering into the replacement agreement. Such cost would
also be in addition to any premiums previously paid to the defaulting Wrapper
Provider. If the Portfolio were unable to obtain a replacement Wrapper
Agreement, participants redeeming Shares might experience losses if the market
value of the Portfolio's assets no longer covered by the Wrapper Agreement is
below Book Value. The combination of the default of a Wrapper Provider and an
inability to obtain a replacement agreement could render the Portfolio and the
Fund unable to achieve their investment objective of seeking to maintain a
stable value per Share.
With respect to payments made under the Wrapper Agreements between the Portfolio
and the Wrapper Provider, some Wrapper Agreements, as noted in the Fund's
prospectus, provide that payments may be due upon disposition of the Covered
Assets, while others provide for payment only upon the total liquidation of the
Covered Assets or upon termination of the Wrapper Agreement. In none of these
cases, however, would the terms of the Wrapper Agreements specify which
Portfolio Securities are to be disposed of or liquidated. Moreover, because it
is anticipated that each Wrapper Agreement will cover all Covered Assets up to a
specified dollar amount, if more than one Wrapper Provider becomes obligated to
pay to the Portfolio the difference between Book Value and market value (plus
accrued interest on the underlying securities), each Wrapper Provider will pay a
pro-rata amount in proportion to the maximum dollar amount of coverage provided.
Thus, the Portfolio will not have the option of choosing which Wrapper Agreement
to draw upon in any such payment situation. Under the terms of most Wrapper
Agreements, the Wrapper Provider will have the right to terminate the Wrapper
Agreement in the event that material changes are made to the Portfolio's
investment objectives or limitations or to the nature of the Portfolio's
operations. In such event, the Portfolio may be obligated to pay the Wrapper
Provider termination fees equal in amount to the premiums that would have been
due had the Wrapper Agreement continued through the predetermined period. The
Portfolio will have the right to terminate a Wrapper Agreement for any reason.
Such right, however, may also be subject to the payment of termination fees. In
the event of termination of a Wrapper Agreement or conversion of an evergreen
Wrapper Agreement to a fixed maturity, some Wrapper Agreements may require that
the duration of some portion of the Fund's portfolio securities be reduced to
correspond to the fixed maturity or termination date and that such securities
maintain a higher credit rating than is normally required, either of which
requirements might adversely affect the return of the Portfolio and the Fund.
For a description of Wrapper Provider ratings, see the Appendix.
ILLIQUID SECURITIES. Mutual funds do not typically hold a significant amount of
illiquid securities because of the potential for delays on resale and
uncertainty in valuation. Limitations on resale may have an adverse effect on
the marketability of portfolio securities, and a mutual fund might be unable to
dispose of illiquid securities promptly or at reasonable prices and might
thereby experience difficulty satisfying redemptions within seven days. A mutual
fund might also have to register restricted securities in order to dispose of
them, resulting in additional expense and delay. Adverse market conditions could
impede such a public offering of securities.
In recent years, however, a large institutional market has developed for certain
securities that are not registered under the 1933 Act, including repurchase
agreements, commercial paper, foreign securities, municipal securities and
corporate bonds and notes. Institutional investors depend on an efficient
institutional market in which the unregistered security can be readily resold or
on an issuer's ability to honor a demand for repayment. The fact that there are
contractual or legal restrictions on resale of such investments to the general
public or to certain institutions may not be indicative of their liquidity.
The Securities and Exchange Commission (the "SEC") has adopted Rule 144A under
the 1933 Act, which allows a broader institutional trading market for securities
otherwise subject to restriction on their resale to the general public. Rule
144A establishes a "safe harbor" from the registration requirements of the 1933
Act for resales of certain securities to qualified institutional buyers. The
Adviser anticipates that the market for certain restricted securities such as
institutional commercial paper will expand further as a result of this rule and
the development of automated systems for the trading, clearance and settlement
of unregistered securities of domestic and foreign issuers, such as the PORTAL
System sponsored by the National Association of Securities Dealers, Inc.
The Adviser will monitor the liquidity of Rule 144A securities held by the
Portfolio under the supervision of the Portfolio Trust Board. In reaching
liquidity decisions, the Adviser will consider, among other things, the
following factors: (1) the frequency of trades and quotes for the security; (2)
the number of dealers and other potential purchasers or sellers of the security;
(3) dealer undertakings to make a market in the security; and (4) the nature of
the security and of the marketplace trades (e.g., the time needed to dispose of
the security, the method of soliciting offers and the mechanics of the
transfer).
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. Delivery of and payment
for these securities can take place a month or more after the date of the
purchase commitment. The purchase price and the interest rate payable, if any,
on the securities are fixed on the purchase commitment date or at the time the
settlement date is fixed. The value of such securities is subject to market
fluctuation, and no interest accrues to the Portfolio until settlement takes
place. At the time the Portfolio makes the commitment to purchase securities on
a when-issued or delayed delivery basis, it will record the transaction, reflect
the value each day of such securities in determining its NAV and, if applicable,
calculate the maturity for the purposes of average maturity from that date. At
the time of settlement, a when-issued security may be valued at less than the
purchase price. To facilitate such acquisitions, the Portfolio will maintain
with its custodian (Bankers Trust) a segregated account with liquid assets,
consisting of cash, U.S. government securities or other appropriate securities,
in an amount at least equal to such commitments. On delivery dates for such
transactions, the Portfolio will meet its obligations from maturities or sales
of the securities held in the segregated account and/or from cash flow. If the
Portfolio chooses to dispose of the right to acquire a when-issued security
prior to its acquisition, it could, as with the disposition of any other
portfolio obligation, realize a gain or loss due to market fluctuation. It is
the current policy of the Portfolio not to enter into when-issued commitments
exceeding in the aggregate 15% of the market value of its total assets, less
liabilities other than the obligations created by when-issued commitments.
ADDITIONAL U.S. GOVERNMENT OBLIGATIONS. The Portfolio may invest in obligations
issued or guaranteed by U.S. government agencies or instrumentalities. These
obligations may or may not be backed by the "full faith and credit" of the
United States. In the case of securities not backed by the full faith and credit
of the United States, the Portfolio must look principally to the federal agency
issuing or guaranteeing the obligation for ultimate repayment and may not be
able to assert a claim against the United States itself in the event the agency
or instrumentality does not meet its commitments. Securities in which the
Portfolio may invest that are not backed by the full faith and credit of the
United States include obligations of the Tennessee Valley Authority, the Federal
Home Loan Mortgage Corporation and the U.S. Postal Service, each of which has
the right to borrow from the U.S. Treasury to meet its obligations, and
obligations of the Federal Farm Credit System and the Federal Home Loan Banks,
both of whose obligations may be satisfied only by the individual credit of the
issuing agency. Securities that are backed by the full faith and credit of the
United States include obligations of the Government National Mortgage
Association (the "GNMA"), the Farmers Home Administration and the Export-Import
Bank.
LOWER-RATED DEBT SECURITIES ("JUNK BONDS"). The Portfolio may invest in debt
securities rated in the fifth and sixth long-term rating categories by S & P,
Moody's and Duff & Phelps Credit Rating Company, or comparably rated by another
NRSRO, or if not rated by a NRSRO, of comparable quality as determined by
Bankers Trust in its sole discretion. While the market for high yield corporate
debt securities has been in existence for many years and has weathered previous
economic downturns, the 1980's brought a dramatic increase in the use of such
securities to fund highly leveraged corporate acquisitions and restructuring.
Past experience may not provide an accurate indication of future performance of
the high yield bond market, especially during periods of economic recession. In
fact, from 1989 to 1991, the percentage of lower-rated debt securities that
defaulted rose significantly above prior levels.
The market for lower-rated debt securities may be thinner and less active than
that for higher rated debt securities, which can adversely affect the prices at
which the former are sold. If market quotations are not available, lower-rated
debt securities will be valued in accordance with procedures established by the
Board of Trustees, including the use of outside pricing services. Judgment plays
a greater role in valuing high yield corporate debt securities than is the case
for securities for which more external sources for quotations and last sale
information is available. Adverse publicity and changing investor perception may
affect the availability of outside pricing services to value lower-rated debt
securities and the Portfolio's ability to dispose of these securities.
Since the risk of default is higher for lower-rated debt securities, Bankers
Trust's research and credit analysis are an especially important part of
managing securities of this type held by the Portfolio. In considering
investments for the Portfolio, Bankers Trust will attempt to identify those
issuers of high yielding debt securities whose financial conditions are adequate
to meet future obligations, have improved or are expected to improve in the
future. Bankers Trust's analysis focuses on relative values based on such
factors as interest on dividend coverage, asset coverage, earnings prospects and
the experience and managerial strength of the issuer.
The Portfolio may choose, at its expense or in conjunction with others, to
pursue litigation or otherwise exercise its rights as a security holder to seek
to protect the interest of security holders if it determines this to be in the
interest of the Portfolio.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS -- GENERAL. The successful
use of these instruments draws upon the Adviser's skill and experience with
respect to such instruments and usually depends on its ability to forecast
interest rate movements correctly. If interest rates move in an unexpected
manner, the Portfolio may not achieve the anticipated benefits of futures
contracts or options thereon or may realize losses and thus will be in a worse
position than if such strategies had not been used. In addition, the correlation
between movements in the price of futures contracts or options thereon and
movements in the price of the securities hedged or used for cover will not be
perfect and could produce unanticipated losses.
FUTURES CONTRACTS. The Portfolio may enter into contracts for the purchase or
sale for future delivery of fixed-income securities or contracts based on
financial indices, including any index of U.S. government securities, foreign
government securities or corporate debt securities. U.S. futures contracts have
been designed by exchanges that have been designated "contracts markets" by the
Commodity Futures Trading Commission ("CFTC") and must be executed through a
futures commission merchant, or brokerage firm, that is a member of the relevant
contract market. Futures contracts trade on a number of exchange markets, and,
through their clearing corporations, the exchanges guarantee performance of the
contracts as between the clearing members of the exchange. The Portfolio may
enter into futures contracts based on debt securities that are backed by the
full faith and credit of the U.S. government, such as long-term U.S. Treasury
bonds, U.S. Treasury notes, GNMA modified pass-through mortgage-backed
securities and three-month U.S. Treasury bills. The Portfolio may also enter
into futures contracts that are based on bonds issued by entities other than the
U.S. government.
At the same time a futures contract is purchased or sold, the Portfolio must
allocate cash or securities as a deposit payment ("initial margin"). It is
expected that the initial margin would be approximately 1 1/2% to 5% of a
contract's face value. Daily thereafter, the futures contract is valued and
"variation margin" may be required (that is, the Portfolio may have to provide
or may receive cash that reflects any decline or increase in the contract's
value).
At the time of delivery of securities pursuant to a futures contract,
adjustments are made to recognize differences in value arising from the delivery
of securities with a different interest rate from that specified in the
contract. In some (but not many) cases, securities called for by a futures
contract may not have been issued when the contract was written.
Although futures contracts by their terms call for the actual delivery or
acquisition of securities, in most cases the contractual obligation is fulfilled
before the termination date of the contract without having to make or take
delivery of the securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a commodities
exchange an identical futures contract calling for delivery in the same month.
Such a transaction, which is effected through a member of an exchange, cancels
the obligation to make or take delivery of the securities. Since all
transactions in the futures market are made, offset or fulfilled through a
clearinghouse associated with the exchange on which the contracts are traded,
the Portfolio will incur brokerage fees when it purchases or sells futures
contracts.
The purpose of the Portfolio's acquisition or sale of a futures contract is to
attempt to protect the Portfolio from fluctuations in interest rates without
actually buying or selling fixed-income securities. For example, if interest
rates were expected to increase (which thus would cause the prices of debt
securities to decline), the Portfolio might enter into futures contracts for the
sale of debt securities. Such a sale would have much the same effect as selling
an equivalent value of the debt securities owned by the Portfolio. If interest
rates did increase, the value of the debt securities held by the Portfolio would
decline, but the value of the futures contracts to the Portfolio would increase
at approximately the same rate, thereby keeping the Portfolio's NAV from
declining as much as it otherwise would have. The Portfolio could accomplish
similar results by selling debt securities and investing in bonds with short
maturities when interest rates are expected to increase. However, since the
futures market is more liquid than the cash market, the use of futures contracts
as an investment technique allows the Portfolio to maintain a defensive position
without having to sell its portfolio securities.
Similarly, when it is expected that interest rates may decline (thus increasing
the value of debt securities), futures contracts for the acquisition of debt
securities may be purchased to attempt to hedge against anticipated purchases of
debt securities at higher prices. Since the fluctuations in the value of futures
contracts should be similar to those of the underlying debt securities, the
Portfolio could take advantage of the anticipated rise in the value of debt
securities without actually buying them until the market had stabilized. At that
time, the futures contracts could be liquidated and the Portfolio could then buy
debt securities on the cash market. To the extent the Portfolio enters into
futures contracts for this purpose, the assets in the segregated asset account
maintained to cover the Portfolio's obligations with respect to such futures
contracts will consist of cash, cash equivalents or high quality liquid debt
securities from its portfolio in an amount equal to the difference between the
fluctuating market value of such futures contracts and the aggregate value of
the initial and variation margin payments made by the Portfolio with respect to
such futures contracts.
The ordinary spreads between prices in the cash and futures market, due to
differences in the nature of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial and variation
margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions that could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by Bankers Trust may still not
result in a successful transaction.
In addition, futures contracts entail risks. Although the Adviser believes that
use of such contracts will benefit the Portfolio, if its investment judgment
about the general direction of interest rates is incorrect, the Portfolio's
overall performance would be poorer than if it had not entered into any such
contract. For example, if the Portfolio has hedged against the possibility of an
increase in interest rates that would adversely affect the price of debt
securities held in its portfolio and interest rates decrease instead, the
Portfolio will lose part or all of the benefit of the increased value of its
debt securities that it has hedged because it will have offsetting losses in its
futures positions. In addition, in such situations, if the Portfolio has
insufficient cash, it may have to sell debt securities from its portfolio to
meet daily variation margin requirements. Such sales of securities may be, but
will not necessarily be, at increased prices that reflect the rising market. The
Portfolio may have to sell securities at a time when it may be disadvantageous
to do so.
OPTIONS ON FUTURES CONTRACTS. The Portfolio may purchase and write (sell)
options on futures contracts for hedging purposes. The purchase of a call option
on a futures contract is similar in some respects to the purchase of a call
option on an individual security. Depending on the pricing of the option
compared to either the price of the futures contract upon which it is based or
the price of the underlying debt securities, it may or may not be less risky
than ownership of the futures contract or underlying debt securities. As with
the purchase of futures contracts, when the Portfolio is not fully invested it
may purchase a call option on a futures contract to hedge against a market
advance due to declining interest rates.
The writing of a call option on a futures contract constitutes a partial hedge
against declining prices of the security that is deliverable upon exercise of
the futures contract. If the futures price at expiration of the option is below
the price specified in the option ("exercise price"), the Portfolio will retain
the full amount of the net premium (the premium received for writing the option
less any commission), which will provide a partial hedge against any decline
that may have occurred in its portfolio holdings. The writing of a put option on
a futures contract constitutes a partial hedge against increasing prices of the
security that is deliverable upon exercise of the futures contract. If the
futures price at expiration of the option is higher than the exercise price, the
Portfolio will retain the full amount of the option net premium, which will
provide a partial hedge against any increase in the price of securities that the
Portfolio intends to purchase. If a put or call option the Portfolio has written
is exercised, the Portfolio may incur a loss that will be reduced by the amount
of the net premium it receives. Depending on the degree of correlation between
changes in the value of its portfolio securities and changes in the value of its
futures positions, such losses from existing options on futures may to some
extent be reduced or increased by changes in the value of portfolio securities.
The purchase of a put option on a futures contract is similar in some respects
to the purchase of put options on portfolio securities. For example, the
Portfolio may purchase a put option on a futures contract to hedge its portfolio
against the risk of rising interest rates. The amount of risk the Portfolio
assumes when it purchases an option on a futures contract is the premium paid
for the option plus related transaction costs. In addition to the correlation
risks discussed above, the purchase of an option also entails the risk that
changes in the value of the underlying futures contract will not be fully
reflected in the value of the option purchased.
The Portfolio Trust Board has adopted a restriction that the Portfolio will not
enter into any futures contract or option on a futures contract if immediately
thereafter the amount of margin deposits on all the futures contracts held by
the Portfolio and premiums paid on outstanding options on its futures contracts
(other than those entered into for BONA FIDE hedging purposes) would exceed 5%
of the market value of the Portfolio's total assets.
OPTIONS ON SECURITIES. The Portfolio may write (sell) covered call and put
options on its portfolio securities ("covered options") to a limited extent in
an attempt to increase income. However, the Portfolio may forgo the benefits of
appreciation on securities sold or may pay more than the market price on
securities acquired pursuant to call and put options it writes. A call option
written by a Portfolio is "covered" if the Portfolio owns the underlying
security covered by the call or has an absolute and immediate right to acquire
that security without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion or
exchange of other securities held in its portfolio. A call option is also
covered if the Portfolio holds a call option on the same security and in the
same principal amount as the written call option where the exercise price of the
call option so held (a) is equal to or less than the exercise price of the
written call option or (b) is greater than the exercise price of the written
call option if the difference is maintained by the Portfolio in cash, U.S.
government securities and other high quality liquid securities in a segregated
account with its custodian.
When the Portfolio writes a covered call option, it gives the purchaser of the
option the right to buy the underlying security at the exercise price by
exercising the option at any time during the option period. If the option
expires unexercised, the Portfolio will realize income in an amount equal to the
premium received for writing the option. If the option is exercised, a decision
over which the Portfolio has no control, the Portfolio must sell the underlying
security to the option holder at the exercise price. By writing a covered call
option, the Portfolio forgoes, in exchange for the net premium, the opportunity
to profit during the option period from an increase in the market value of the
underlying security above the exercise price.
When the Portfolio writes a covered put option, it gives the purchaser of the
option the right to sell the underlying security to the Portfolio at the
exercise price at any time during the option period. If the option expires
unexercised, the Portfolio will realize income in the amount of the net premium
received for writing the option. If the put option is exercised, a decision over
which the Portfolio has no control, the Portfolio must purchase the underlying
security from the option holder at the exercise price. By writing a covered put
option, the Portfolio, in exchange for the net premium, accepts the risk of a
decline in the market value of the underlying security below the exercise price.
The Portfolio will only write put options involving securities for which a
determination is made at the time the option is written that the Portfolio
wishes to acquire the securities at the exercise price.
The Portfolio may terminate its obligation as the writer of a call or put option
by purchasing an option with the same exercise price and expiration date as the
option previously written. This transaction is called a "closing purchase
transaction." The Portfolio will realize a profit or loss on a closing purchase
transaction if the amount paid to purchase the option is less or more, as the
case may be, than the amount received from the sale thereof. To close out a
position as a purchaser of an option, the Portfolio may enter into a "closing
sale transaction," which involves liquidating the Portfolio's position by
selling the option previously purchased. Where the Portfolio cannot effect a
closing purchase transaction, it may be forced to incur brokerage commissions or
dealer spreads in selling securities it receives or it may be forced to hold
underlying securities until an option is exercised or expires.
When the Portfolio writes an option, an amount equal to the net premium received
is included in the liability section of its Statement of Assets and Liabilities
as a deferred credit. The amount of the deferred credit will be subsequently
marked to market to reflect the current market value of the option. The current
market value of a traded option is the last sale price or, in the absence of a
sale, the mean between the closing bid and asked prices. If an option expires or
if the Portfolio enters into a closing purchase transaction, the Portfolio will
realize a gain (or loss if the cost of the closing purchase transaction exceeds
the net premium received when the option was sold), and the deferred credit
related to such option will be eliminated. If a call option is exercised, the
Portfolio will realize a gain or loss from the sale of the underlying security
and the proceeds of the sale will be increased by the premium originally
received. The writing of covered call options may be deemed to involve the
pledge of the securities against which the option is being written. Securities
against which call options are written will be segregated on the books of the
custodian for the Portfolio.
The Portfolio may purchase call and put options on any securities in which it
may invest. The Portfolio would normally purchase a call option in anticipation
of an increase in the market value of such securities. The purchase of a call
option would entitle the Portfolio, in exchange for the premium paid, to
purchase a security at a specified price during the option period. The Portfolio
would ordinarily have a gain if the value of the securities increased above the
exercise price sufficiently to cover the premium and would have a loss if the
value of the securities remained at or below the exercise price during the
option period.
The Portfolio would normally purchase put options in anticipation of a decline
in the market value of securities in its portfolio ("protective puts") or
securities of the type in which it is permitted to invest. The purchase of a put
option would entitle the Portfolio, in exchange for the premium paid, to sell a
security, which may or may not be held in the Portfolio's holdings, at a
specified price during the option period. The purchase of protective puts is
designed merely to offset or hedge against a decline in the market value of the
Portfolio's holdings. Put options also may be purchased by the Portfolio for the
purpose of benefiting from a decline in the price of securities that the
Portfolio does not own. The Portfolio would ordinarily recognize a gain if the
value of the securities decreased below the exercise price sufficiently to cover
the premium and would recognize a loss if the value of the securities remained
at or above the exercise price. Gains and losses on the purchase of protective
put options would tend to be offset by countervailing changes in the value of
underlying portfolio securities.
The Portfolio has adopted certain non-fundamental policies concerning option
transactions that are discussed below. The Portfolio's activities in options may
also be restricted by the requirements of the Internal Revenue Code of 1986, as
amended (the "Code"), for qualification as a regulated investment company.
The hours of trading for options on securities may not conform to the hours
during which the underlying securities are traded if the option markets close
before the markets for the underlying securities, significant price and rate
movements can take place in the underlying securities markets that will not be
reflected in the option markets. It is impossible to predict the volume of
trading that may exist in such options, and there can be no assurance that
viable exchange markets will develop or continue.
The Portfolio may engage in over-the-counter options transactions with
broker-dealers who make markets in these options. At present, approximately ten
broker-dealers, including several of the largest primary dealers in U.S.
government securities, make these markets. The ability to terminate
over-the-counter option positions is more limited than with exchange-traded
option positions because the predominant market is the issuing broker rather
than an exchange and may involve the risk that broker-dealers participating in
such transactions will not fulfill their obligations. To reduce this risk, the
Portfolio will purchase such options only from broker-dealers who are primary
U.S. government securities dealers recognized by the Federal Reserve Bank of New
York and who agree to (and are expected to be capable of) entering into closing
transactions, although there can be no guarantee that any such option will be
liquidated at a favorable price prior to expiration. Bankers Trust will monitor
the creditworthiness of dealers with whom the Portfolio enters into such options
transactions under the general supervision of the Portfolio Board.
GLOBAL ASSET ALLOCATION ENHANCEMENT. In connection with the GAA Strategy and in
addition to the securities described above, the Portfolio may invest in indexed
securities, futures contracts on securities indices, securities representing
securities of foreign issuers (e.g. ADRs, GDRs and EDRs), options on stocks,
options on futures contracts, foreign currency exchange transactions and options
on foreign currencies. These are discussed below, to the extent not already
described above.
INDEXED SECURITIES. The indexed securities in which the Portfolio may invest
include debt securities whose value at maturity is determined by reference to
the relative prices of various currencies or to the price of a stock index. The
value of such securities depends on the price of foreign currencies, securities
indices or other financial values or statistics. These securities may be
positively or negatively indexed; that is, their value may increase or decrease
if the underlying instrument appreciates.
FUTURES CONTRACTS ON SECURITIES INDICES. Futures contracts on securities indices
provide for the making and acceptance of a cash settlement based upon changes in
the value of an index of securities, and will be entered into by the Portfolio
to hedge against anticipated future change in general market prices which
otherwise might either adversely affect the value of securities held by the
Portfolio or adversely affect the prices of securities which are intended to be
purchased at a later date for the Portfolio, or as an efficient means of
managing allocations between asset classes. A futures contract may also be
entered into to close out or offset an existing futures position. The risks
attendant to futures contracts on securities indices are similar to those of
futures contracts, discussed above.
SECURITIES REPRESENTING SECURITIES OF FOREIGN ISSUERS. The Portfolio's
investments in the securities of foreign issuers may be made directly or in the
form of American Depositary Receipts ("ADRs"), Global Depositary Receipts
("GDRs"), European Depositary Receipts ("EDRs") or other similar securities
representing securities of foreign issuers. These securities may not necessarily
be denominated in the same currency as the securities they represent, and while
designed for use as alternatives to the purchase of the underlying securities in
their national markets and currencies, are subject to the same risks as the
foreign securities to which they relate.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS. The Portfolio from time to time may
enter into foreign currency exchange transactions to convert to and from
different foreign currencies and to convert foreign currencies to and from the
U.S. dollar, either on a spot (i.e., cash) basis at the spot rate prevailing in
the foreign currency exchange market, or through forward contracts to purchase
or sell foreign currencies. A forward foreign currency exchange contract
obligates the Portfolio to purchase or sell a specific currency at a future
date, which may be any fixed number of days from the date of the contract.
Forward foreign currency exchange contracts establish an exchange rate at a
future date. These contracts are transferable in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. A forward foreign currency exchange contract generally has no deposit
requirement and is traded at a net price without commission. Neither spot
transactions nor forward foreign currency exchange contracts eliminate
fluctuations in the prices of the Portfolio's securities or in foreign exchange
rates, or prevent loss if the prices of these securities should decline.
The Portfolio may enter into foreign currency hedging transactions in an attempt
to protect against changes in foreign currency exchange rates between the trade
and settlement dates of specific securities transactions or changes in foreign
currency exchange rates that would adversely affect a portfolio position or an
anticipated investment position. Since consideration of the prospect for
currency parities will be incorporated into Bankers Trust's long term investment
decisions, the Portfolio will not routinely enter into foreign currency hedging
transactions with respect to security transactions; however, Bankers Trust
believes that it is important to have the flexibility to enter into foreign
currency hedging transactions when it determines that the transactions would be
in the Portfolio's best interest. Although these transactions tend to minimize
the risk of loss due to a decline in the value of the hedged currency, at the
same time they tend to limit any potential gain that might be realized should
the value of the hedged currency increase. The precise matching of the forward
contract amounts and the value of the securities involved will not generally be
possible because the future value of such securities in foreign currencies will
change as a consequence of market movements in the value of such securities
between the date the forward contract is entered into and the date it matures.
The projection of currency market movements is extremely difficult, and the
successful execution of a hedging strategy is highly uncertain.
OPTIONS ON FOREIGN CURRENCIES. The Portfolio may write covered put and call
options and purchase put and call options on foreign currencies for the purpose
of protecting against declines in the dollar value of portfolio securities and
against increases in the dollar cost of securities to be acquired. The Portfolio
may use options on currency to cross hedge, which involves writing or purchasing
options on one currency to hedge against changes in exchange rates for a
different, but related currency. As with other types of options, however, the
writing of an option on foreign currency will constitute only a partial hedge up
to the amount of the premium received, and the Portfolio could be required to
purchase or sell foreign currencies at disadvantageous exchange rates, thereby
incurring losses. The purchase of an option on foreign currency may be used to
hedge against fluctuations in exchange rates although, in the event of exchange
rate movements adverse to the Portfolio's position, it may forfeit the entire
amount of the premium plus related transaction costs. In addition, the Portfolio
may purchase call options on currency when the Adviser anticipates that the
currency will appreciate in value.
There is no assurance that a liquid secondary market on an options exchange will
exist for any particular option, or at any particular time. If the Portfolio is
unable to effect a closing purchase transaction with respect to covered options
it has written, the Portfolio will not be able to sell the underlying currency
or dispose of assets held in a segregated account until the options expire or
are exercised. Similarly, if the Portfolio is unable to effect a closing sale
transaction with respect to options it has purchased, it would have to exercise
the options in order to realize any profit and will incur transaction costs upon
the purchase or sale of underlying currency. The Portfolio pays brokerage
commissions or spreads in connection with its options transactions.
As in the case of forward contracts, certain options on foreign currencies are
traded over the counter and involve liquidity and credit risks which may not be
present in the case of exchange traded currency options. The Portfolio's ability
to terminate OTC options will be more limited than with exchange traded options.
It is also possible that broker dealers participating in OTC options
transactions will not fulfill their obligations. Until such time as the staff of
the SEC changes its position, the Portfolio will treat purchased OTC options and
assets used to cover written OTC options as illiquid securities. With respect to
options written with primary dealers in U.S. Government securities pursuant to
an agreement requiring a closing purchase transaction at a formula price, the
amount of illiquid securities may be calculated with reference to the repurchase
formula.
There can be no assurance that the use of these portfolio strategies will be
successful.
RATING SERVICES
The ratings of rating services represent their opinions as to the quality of the
securities that they undertake to rate. It should be emphasized, however, that
ratings are relative and subjective and are not absolute standards of quality.
Although these ratings are an initial criterion for selection of portfolio
investments, the Adviser also makes its own evaluation of these securities,
subject to review by the Portfolio Trust Board. After purchase by the Portfolio,
an obligation may cease to be rated or its rating may be reduced below the
minimum required for purchase by the Portfolio. Neither event would require the
Portfolio to eliminate the obligation from its portfolio, but the Adviser will
consider such an event in its determination of whether the Portfolio should
continue to hold the obligation. A description of the ratings referred to herein
and in the Prospectus is set forth in the Appendix.
INVESTMENT RESTRICTIONS
The following investment restrictions are "fundamental policies" of the Fund and
the Portfolio and may not be changed without the approval of a "majority of the
outstanding voting securities" of the Fund or the Portfolio, as the case may be.
"Majority of the outstanding voting securities" under the 1940 Act, and as used
in this SAI and the Prospectus, means, with respect to the Fund (or the
Portfolio), the lesser of (1) 67% or more of the outstanding voting securities
of the Fund (or of the total beneficial interests of the Portfolio) present at a
meeting, if the holders of more than 50% of the outstanding voting securities of
the Fund (or of the total beneficial interests of the Portfolio) are present or
represented by proxy or (2) more than 50% of the outstanding voting securities
of the Fund (or of the total beneficial interests of the Portfolio). Whenever
the Trust is requested to vote on a fundamental policy of the Portfolio, the
Trust will hold a meeting of the Fund's shareholders and will cast its vote as
instructed by them. Fund shareholders who do not vote will not affect the
Trust's votes at the Portfolio meeting. The Trust's votes representing Fund
shareholders not voting will be voted by the Trustees of the Trust in the same
proportion as the Fund shareholders who do, in fact, vote.
None of the fundamental and non-fundamental policies described below shall
prevent the Fund from investing all of its assets in an open-end investment
company with substantially the same investment objective. Because the Fund and
the Portfolio have the same fundamental policies and the Fund invests all of its
Assets in the Portfolio, the following discussion (though speaking only of the
Portfolio) applies to the Fund as well.
FUNDAMENTAL RESTRICTIONS. As a matter of fundamental policy, the Portfolio
may not:
(1)Borrow money (including through reverse repurchase or dollar roll
transactions) in excess of 5% of the Portfolio's total assets (taken at
cost), except that the Portfolio may borrow for temporary or emergency
purposes up to 1/3 of its total assets. The Portfolio may pledge,
mortgage or hypothecate not more than 1/3 of such assets to secure such
borrowings provided that collateral arrangements with respect to
options and futures, including deposits of initial and variation
margin, are not considered a pledge of assets for purposes of this
restriction and except that assets may be pledged to secure letters of
credit solely for the purpose of participating in a captive insurance
company sponsored by the Investment Company Institute;
(2) Underwrite securities issued by other persons except insofar as
the Portfolio may be deemed an underwriter under the 1933 Act in
selling a portfolio security;
(3)Make loans to other persons except (a) through the lending of the
Portfolio's portfolio securities and provided that any such loans not
exceed 30% of its total assets (taken at market value); (b) through the
use of repurchase agreements or the purchase of short-term obligations;
or (c) by purchasing a portion of an issue of debt securities of types
distributed publicly or privately;
(4)Purchase or sell real estate (including limited partnership interests
but excluding securities secured by real estate or interests therein),
interests in oil, gas or mineral leases, commodities or commodity
contracts (except futures and option contracts) in the ordinary course
of business (except that the Portfolio may hold and sell, for its
portfolio, real estate acquired as a result of the Portfolio's
ownership of securities);
(5)Concentrate its investments in any particular industry (excluding U.S.
government securities), but if it is deemed appropriate for the
achievement of the Portfolio's investment objective, up to 25% of its
total assets may be invested in any one industry;
(6)Issue any senior security (as that term is defined in the 1940 Act) if
such issuance is specifically prohibited by the 1940 Act or the rules
and regulations promulgated thereunder, provided that collateral
arrangements with respect to options and futures contracts, including
deposits of initial and variation margin, are not considered to be the
issuance of a senior security for purposes of this restriction;
(7)Purchase, with respect to 75% of the Portfolio's total assets,
securities of any issuer if such purchase at the time thereof would
cause the Portfolio to hold more than 10% of any class of securities of
such issuer, for which purposes all indebtedness of an issuer shall be
deemed a single class and all preferred stock of an issuer shall be
deemed a single class, except that options or futures contracts shall
not be subject to this restriction; and
(8)Invest, with respect to 75% of the Portfolio's total assets, more than
5% of its total assets in the securities (excluding U.S. government
securities) of any one issuer.
NON-FUNDAMENTAL RESTRICTIONS. In order to comply with certain statutes and
policies and for other reasons, the Portfolio will not, as a matter of operating
policy (these restrictions may be changed by a vote of the Trustees or the
Portfolio Trust or the Trust as applicable without shareholder approval):
(i)purchase any security or evidence of interest therein on margin,
except that short-term credit necessary for the clearance of
purchases and sales of securities may be obtained and deposits of
initial and variation margin may be made in connection with the
purchase, ownership, holding or sale of futures contracts;
(ii) sell securities it does not own (short sales). (This restriction
does not preclude short sales "against the box" (that is, sales of
securities (a) the Portfolio contemporaneously owns or (b) where the
Portfolio has the right to obtain securities equivalent in kind and
amount to those sold). The Portfolio has no current intention to
engage in short selling);
(iii) purchase securities issued by any investment company except to
the extent permitted by the 1940 Act (including any exemptions or
exclusions therefrom), except that this limitation does not apply to
securities received or acquired as dividends, through offers of
exchange, or as a result of reorganization, consolidation or merger;
and
(iv) invest more than 15% of the Portfolio's net assets (taken at the
greater of cost or market value) in securities that are illiquid or
not readily marketable (excluding Rule 144A securities deemed by the
Portfolio Board to be liquid).
An investment restriction will not be considered violated if that restriction is
complied with at the time the relevant action is taken, notwithstanding a later
change in the market value of an investment, in net or total assets or in the
change of securities rating of the investment or any other later change.
The Portfolio will comply with the permitted investments and investment
limitations in the securities laws and regulations of all states in which the
Fund, or any other registered investment company investing in the Portfolio, is
registered.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
The Adviser is responsible for decisions to buy and sell securities, futures
contracts and options thereon for the Portfolio, the selection of brokers,
dealers and futures commission merchants to effect transactions and the
negotiation of brokerage commissions, if any. Broker-dealers may receive
brokerage commissions on portfolio transactions, including options, futures
contracts and options on futures transactions and the purchase and sale of
underlying securities upon the exercise of options. Orders may be directed to
any broker-dealer or futures commission merchant, including, to the extent and
in the manner permitted by applicable law, the Adviser or its subsidiaries or
affiliates. Purchases and sales of certain portfolio securities on behalf of the
Portfolio are frequently placed by the Adviser with the issuer or a primary or
secondary market-maker for these securities on a net basis, without any
brokerage commission being paid by the Portfolio. Trading does, however, involve
transaction costs. Transactions with dealers serving as market-makers reflect
the spread between the bid and asked prices. Transaction costs may also include
fees paid to third parties for information as to potential purchasers or sellers
of securities. Purchases of underwritten issues may be made that will include an
underwriting fee paid to the underwriter.
The Adviser seeks to evaluate the overall reasonableness of the brokerage
commissions paid (to the extent applicable) in placing orders for the purchase
and sale of securities for the Portfolio taking into account such factors as
price, commission (negotiable in the case of national securities exchange
transactions), if any, size of order, difficulty of execution and skill required
of the executing broker-dealer through familiarity with commissions charged on
comparable transactions, as well as by comparing commissions paid by the
Portfolio to reported commissions paid by others. The Adviser reviews on a
routine basis commission rates, execution and settlement services performed,
making internal and external comparisons.
The Adviser is authorized, consistent with Section 28(e) of the Securities
Exchange Act of 1934, as amended, when placing portfolio transactions for the
Portfolio with a broker to pay a brokerage commission (to the extent applicable)
in excess of that which another broker might have charged for effecting the same
transaction on account of the receipt of research, market or statistical
information. The term "research, market or statistical information" includes (a)
advice as to (i) the value of securities, (ii) the advisability of investing in,
purchasing or selling securities, and (iii) the availability of securities or
purchasers or sellers of securities and (b) furnishing analyses and reports
concerning issuers, industries, securities, economic factors and trends,
portfolio strategy and the performance of accounts. Higher commissions may be
paid to firms that provide research services to the extent permitted by law. The
Adviser may use this research information in managing the Portfolio's assets, as
well as the assets of other clients.
Consistent with the policy stated above, the Conduct Rules of the National
Association of Securities Dealers, Inc. and such other policies as the Portfolio
Trust Board may determine, the Adviser may consider sales of shares of the Fund
and of other investment company clients of the Adviser as a factor in the
selection of broker-dealers to execute portfolio transactions. The Adviser will
make such allocations if commissions are comparable to those charged by
nonaffiliated, qualified broker-dealers for similar services.
Except for implementing the policies stated above, there is no intention to
place portfolio transactions with particular brokers or dealers or groups
thereof. In effecting transactions in over-the-counter securities, orders are
placed with the principal market-makers for the security being traded unless,
after exercising care, it appears that more favorable results are available
otherwise.
Although certain research, market or statistical information from brokers and
dealers can be useful to the Portfolio and to the Adviser, it is the opinion of
the Portfolio's management that such information is only supplementary to the
Adviser's own research effort, since the information must still be analyzed,
weighed and reviewed by the Adviser's staff. Such information may be useful to
the Adviser in providing services to clients other than the Portfolio, and not
all such information is used by the Adviser in connection with the Portfolio.
Conversely, such information provided to the Adviser by brokers and dealers
through whom other clients of the Adviser effect securities transactions may be
useful to the Adviser in providing services to the Portfolio.
In certain instances there may be securities that are suitable for the
Portfolio, as well as for one or more of the Adviser's other clients. Investment
decisions for the Portfolio and for the Adviser's other clients are made with a
view to achieving their respective investment objectives. It may develop that a
particular security is bought or sold for only one client even though it might
be held by, or bought or sold for, other clients. Likewise, a particular
security may be bought for one or more clients when one or more clients are
selling that same security. Some simultaneous transactions are inevitable when
several clients receive investment advice from the same investment adviser,
particularly when the same security is suitable for the investment objectives of
more than one client. When two or more clients are simultaneously engaged in the
purchase or sale of the same security, the securities are allocated between
(among) clients in a manner believed to be equitable to each. It is recognized
that in some cases this system could have a detrimental effect on the price or
volume of the security as far as the Portfolio is concerned. However, it is
believed that the ability of the Portfolio to participate in volume transactions
will produce better executions for the Portfolio.
PERFORMANCE INFORMATION
STANDARD PERFORMANCE INFORMATION
From time to time, quotations of the Fund's performance may be included in
advertisements, sales literature or shareholder reports. These performance
figures are calculated in the following manner:
YIELD: Yield refers to the income generated by an investment over a given
period of time, expressed as an annual percentage rate. Yields are
calculated according to a standard that is required for all stock and bond
mutual funds. Because this differs from other accounting methods, the
quoted yield may not equal the income actually paid to shareholders.
Performance information or advertisements may include comparisons of the
Fund's investment results to various unmanaged indices or results of other
mutual funds or investment or savings vehicles. From time to time, the
Fund's ranking may be quoted from various sources, such as Lipper
Analytical Services, Inc., Value Line, Inc. and Morningstar, Inc.
Unlike some bank deposits or other investments that pay a fixed yield for
a stated period of time, the total return of the Shares will vary
depending upon interest rates, the current market value of the securities
held by the Portfolio and the Wrapper Agreements and changes in the
expenses of the Shares and the Portfolio. In addition, during certain
periods for which total return may be provided, Bankers Trust may have
voluntarily agreed to waive portions of its fees, or to reimburse certain
operating expenses of the Fund or the Portfolio, on a month-to-month
basis. Such waivers will have the effect of increasing the Fund's net
income (and therefore its yield and total return) during the period such
waivers are in effect.
TOTAL RETURN: The Fund's average annual total return is calculated for
certain periods by determining the average annual compounded rates of
return over those periods that would cause an investment of $1,000 (made
at the maximum public offering price with all distributions reinvested) to
reach the value of that investment at the end of the periods. The Fund may
also calculate total return figures that represent aggregate performance
over a period or year-by-year performance.
PERFORMANCE RESULTS: Any performance information provided for the Fund
should not be considered as representative of its performance in the
future, because the NAV and public offering price of Shares will vary
based not only on the type, quality and maturities of the securities held
by the Portfolio but also on changes in the current value of such
securities and on changes in the expenses of the Fund and the Portfolio.
Total return reflects the performance of both principal and income.
COMPARISON OF FUND PERFORMANCE
Comparison of the quoted nonstandardized performance of various investments is
valid only if performance is calculated in the same manner. Since there are
different methods of calculating performance, investors should consider the
effect of the methods used to calculate performance when comparing performance
of the Fund with performance quoted with respect to other investment companies
or types of investments.
In connection with communicating its performance to current or prospective
shareholders, the Fund also may compare these figures to the performance of
other mutual funds tracked by mutual fund rating services or to unmanaged
indices that may assume reinvestment of dividends but generally do not reflect
deductions for administrative and management costs. Evaluations of the Fund's
performance made by independent sources may also be used in advertisements
concerning the Fund. Sources for the Fund's performance information could
include the following: ASIAN WALL STREET JOURNAL, BARRON'S, BUSINESS WEEK,
CHANGING TIMES, THE KIPLINGER MAGAZINE, CONSUMER DIGEST, FINANCIAL TIMES,
FINANCIAL WORLD, FORBES, FORTUNE, GLOBAL INVESTOR, INVESTOR'S DAILY, LIPPER
ANALYTICAL SERVICES, INC.'S MUTUAL FUND PERFORMANCE ANALYSIS, MONEY, MORNINGSTAR
INC., NEW YORK TIMES, PERSONAL INVESTING NEWS, PERSONAL INVESTOR, SUCCESS, U.S.
NEWS AND WORLD REPORT, VALUELINE, WALL STREET JOURNAL, WEISENBERGER INVESTMENT
COMPANIES SERVICES, WORKING WOMEN and WORTH.
ECONOMIC AND MARKET INFORMATION
Advertising and sales literature of the Fund may include discussions of
economic, financial and political developments and their effect on the
securities market. Such discussions may take the form of commentary on these
developments by Fund portfolio managers and their views and analysis on how such
developments could affect the Fund. In addition, advertising and sales
literature may quote statistics and give general information about the mutual
fund industry, including the growth of the industry, from sources such as the
Investment Company Institute ("ICI"). For example, according to the ICI,
thirty-seven percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $3.5 trillion to the more than 6,000 funds available.
VALUATION OF ASSETS; REDEMPTIONS IN KIND
Debt securities (other than short-term debt obligations maturing in 60 days or
less), including listed securities and securities for which price quotations are
available, will normally be valued on the basis of market valuations furnished
by a pricing service. Such market valuations may represent the last quoted price
on the securities' major trading exchange or quotes received from dealers or
market makers in the relevant securities or may be determined through the use of
matrix pricing. In matrix pricing, pricing services may use various pricing
models, involving comparable securities, historic relative price movements,
economic factors and dealer quotations. Over-the-counter securities will
normally be valued at the bid price. Short-term debt obligations and money
market securities maturing in 60 days or less are valued at amortized cost.
Securities for which market quotations are not readily available are valued by
Bankers Trust pursuant to procedures adopted by the Portfolio's Trust Board.
The NAV per Share is calculated once on each Valuation Day as of the Valuation
Time, which is currently 4:00 p.m., Eastern time, or if the NYSE closes early,
at the time of such early closing. The NAV per Share is computed by dividing the
value of the Fund's assets (I.E., the value of its investment in the Portfolio
and other assets, if any), less all liabilities, by the total number of its
Shares outstanding. The Portfolio's securities and other assets are valued
primarily on the basis of market quotations or, if quotations are not readily
available, by a method that the Portfolio Trust Board believes accurately
reflects fair value.
Pursuant to procedures adopted by the Portfolio Trust Board, the Wrapper Value
generally will be equal to the difference between the Book Value and the market
value (plus accrued interest on the underlying securities) of the applicable
Covered Assets. If the market value (plus accrued interest on the underlying
securities) of the Covered Assets is greater than their Book Value, the Wrapper
Value will be reflected as a liability of the Portfolio in the amount of the
difference, I.E., a negative value, reflecting the potential liability of the
Portfolio to the Wrapper Provider. If the market value (plus accrued interest on
the underlying securities) of the Covered Assets is less than their Book Value,
the Wrapper Value will be reflected as an asset of the Portfolio in the amount
of the difference, I.E., a positive value, reflecting the potential liability of
the Wrapper Provider to the Portfolio. In performing its fair value
determination, the Portfolio Trust Board expects to consider the
creditworthiness and ability of a Wrapper Provider to pay amounts due under the
Wrapper Agreement. If the Portfolio Trust Board determine that a Wrapper
Provider is unable to make such payments, that Board may assign a fair value to
the Wrapper Agreement that is less than the difference between the Book Value
and the market value (plus accrued interest on the underlying securities) of the
applicable Covered Assets and the Portfolio might be unable to maintain NAV
stability.
The problems inherent in making a good faith determination of value are
recognized in the codification effected by SEC Financial Reporting Release No. 1
(formerly Accounting Series Release No. 113) ("FRR 1"), which concludes that
there is "no automatic formula" for calculating the value of restricted
securities. It recommends that the best method simply is to consider all
relevant factors before making any calculation.
According to FRR 1, such factors would include consideration of the --
type of security involved, financial statements, cost at date of
purchase, size of holding, discount from market value of
unrestricted securities of the same class at the time of purchase,
special reports prepared by analysts, information as to any
transactions or offers with respect to the security, existence of
merger proposals or tender offers affecting the security, price and
extent of public trading in similar securities of the issuer or
comparable companies, and other relevant matters.
The Adviser will value securities purchased by the Portfolio that are restricted
as to resale or for which current market quotations are not readily available,
including Wrapper Agreements, based upon all relevant factors as outlined in FRR
1.
The Fund and the Portfolio each reserves the right, if conditions exist that
make cash payments undesirable, or for other reasons, to honor any request for
redemption or withdrawal, respectively, by making payment wholly or partly in
Portfolio Securities, as the same may be chosen by the Adviser in its sole
discretion (a "redemption in kind"). Such securities shall not include Wrapper
Agreements, and shall be valued as they are for purposes of computing the Fund's
or the Portfolio's NAV, as the case may be. If payment is made to a Fund
shareholder in securities, the shareholder may incur transaction expenses in
converting those securities into cash.
The Trust, on behalf of the Fund, and the Portfolio have elected to redeem
Shares or beneficial interests, respectively, with respect to any one investor
during any 90-day period solely in cash up to the lesser of $250,000 or 1% of
the NAV of the Fund or the Portfolio, as the case may be, at the beginning of
the period
The Portfolio has agreed to make a redemption in kind to the Fund whenever the
Fund wishes to make a redemption in kind to a shareholder thereof, and therefore
Fund shareholders that receive redemptions in kind will receive Portfolio
Securities of the Portfolio and in no case will they receive a security issued
by the Portfolio. The Portfolio has advised the Trust that the Portfolio will
not redeem in kind except in circumstances in which the Fund is permitted to
redeem in kind or unless requested by the Fund.
Each investor in the Portfolio, including the Fund, may add to or reduce its
investment in the Portfolio on each business day the Portfolio determines its
NAV. At the close of business on each such day, the value of each investor's
beneficial interest in the Portfolio will be determined by multiplying the NAV
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 that are to be effected as of the close of business on
that day will then be effected. The investor's percentage of the aggregate
beneficial interests in the Portfolio will then be recomputed as the percentage
equal to a fraction (a) the numerator of which is the value of the investor's
investment in the Portfolio as of the close of business on that day plus or
minus, as the case may be, the amount of net additions to or withdrawals from
the investor's investment in the Portfolio effected as of the close of business
on that day, and (b) the denominator of which is the aggregate NAV of the
Portfolio as of the close of business on that day plus or minus, as the case may
be, the amount of net additions to or withdrawals from the aggregate investments
in the Portfolio by all investors therein. The percentage so determined will
then be applied to determine the value of the investor's interest in the
Portfolio as the close of business on the following business day.
QUALIFIED REDEMPTIONS
At any time, a redemption of Fund Shares can be effected without assessment of
the Redemption Fee described in "Shareholder Transaction Expenses" in the
Prospectus, if such redemption is a "Qualified Plan Redemtiopn" or a "Qualified
IRA Redemption." "Qualified Plan Redemptions" are redemptions resulting from a
Plan Participant's death, disability, retirement or termination of employment or
to fund loans to, or "in service" withdrawals by, a Plan Participant.A
"Qualified IRA Redemption" is a redemption made by an IRA Owner to effect a
distribution from his or her IRA account that is not subject to the 10% penalty
tax imposed by section 72(t) or 530(d), as applicable, other than IRA rollovers,
direct trustee-to-trustee transfers and conversions of Traditional IRAs to Roth
IRAs, unless the IRA Owner continues the investment of the transferred amount in
the Fund. In general, section 72(t) of the Code imposes a 10% penalty tax on any
distribution received by a taxpayer from a Traditional IRA, SEP-IRA or SIMPLE
IRA prior to the date on which the taxpayer reaches age 59 1/2, unless the
distribution meets the requirements of a specific exception to the penalty tax.
Similar penalties apply to early withdrawals from Roth IRAs and Keogh Plans.
Section 530(d) as currently written, imposes a separate 10% penalty tax on
distributions from an education IRA not used to pay qualified higher education
expenses. In general, rollovers from one IRA to another and direct
trustee-to-trustee transfers from an IRA to another IRA (or in some cases to
other types of qualified plans) are not subject to tax. In addition, conversions
of Traditional IRAs to Roth IRAs are subject to income tax but are not subject
to the early withdrawal penalty tax. IRA Owners requesting a redemption of Fund
Shares will be required to provide a written statement as to whether the
proceeds of the redemption will be subject to a penalty tax and, if not, to
identify the specific exception upon which the IRA Owner intends to rely. The
information provided by the IRA Owner will be reflected on the Form 1099-R
issued to the IRA Owner and filed with the Internal Revenue Services in
connection with the redemption as well as forming the basis for redemption as a
Qualified IRA Redemption. The Fund may require additional evidence, such as the
opinion of a certified public accountant or tax attorney, that any particular
redemption will not be subject to any penalty tax. IRA OWNERS SHOULD CONSULT
THEIR TAX ADVISERS REGARDING THE TAX CONSEQUENCES OF ANY REDEMPTION.
Some of the exceptions to the 10% penalty taxes are described below. This
description is intended to provide only a brief summary of the principal
exceptions to the additional tax imposed on early withdrawals under the current
provisions of the Code, which may change from time to time. The Fund intends to
conform the definition of Qualified IRA Redemptions to changes in applicable tax
laws; however, the Fund reserves the right to continue to define Qualified IRA
Redemptions by reference to Code provisions now in effect or otherwise to define
such phrase independently of future Code provisions.
TRADITIONAL IRAS, SEP-IRAS AND SIMPLE IRAS
In general, the 10% penalty tax imposed by section 72(t) of the Code will
not apply to the following types of distributions from a Traditional
IRA, SEP-IRA or SIMPLE IRA:
1. Distributions made on or after the date on which the IRA Owner attains
age 59 1/2; 2. Distributions made to a beneficiary (or to the estate of the IRA
Owner) on or after the death of the IRA Owner; 3. Distributions attributable to
the IRA Owner's being disabled within the meaning of section 72(m)(7) of the
Code; 4. Distributions made to the IRA Owner to the extent such distributions do
not exceed the amount of unreimbursed medical expenses allowed as a deduction
under section 213 of the Code; 5. Distributions to unemployed individuals to the
extent such distributions do not exceed the amount paid for medical insurance as
described in section 213(d)(1)(D) of the Code for the IRA Owner, and his or her
spouse and dependents; 6. Distributions to an IRA Owner to the extent such
distributions do not exceed the qualified higher education expenses, as defined
in section 72(t)(7), for the IRA Owner; 7. Distributions to an IRA Owner that
are used to acquire a first home, and that meet the definition of "qualified
first-time homebuyer distributions" under section 72(t) (8) of the Code; and 8.
Distributions that are part of a series of substantially equal periodic payments
made at least annually for the life (or life expectancy) of the IRA Owner, or
the joint lives (or life expectancies) of the IRA Owner and his or her
designated beneficiary.
ROTH IRAS
With respect to a Roth IRA, all "qualified distributions" are excluded from
gross income and, therefore, from the 10% penalty tax imposed by section 72(t).
In general, qualified distributions from a Roth IRA include:
1. Distributions made on or after the date on which the IRA Owner attains
age 59 1/2; 2. Distributions made to a beneficiary (or to the estate of the IRA
Owner) on or after the death of the IRA Owner; 3. Distributions attributable to
the IRA Owner's being disabled within the meaning of section 72(m)(7) of the
Code; and 4. Distributions to an IRA Owner that are used to acquire a first
home, and that meet the definition of "qualified first-time homebuyer
distributions" under section 72(t) (8) of the Code.
However, a distribution will not be a qualified distribution, even if it
otherwise meets the definition, if it is made within the 5-year period beginning
with the first taxable year for which the IRA Owner made a contribution to the
Roth IRA (or such person's spouse made a contribution to a Roth IRA established
for the IRA Owner). Special rules apply with respect to certain types of
rollovers.
To the extent a distribution from a Roth IRA is not a qualified distribution,
either because it does not meet the definition of a qualified distribution in
the first instance, or because it is made within the five-year period described
in section 408A(d)(2)(B), the portion of the distribution that represents
earnings will be subject to tax in accordance with section 72 of the Code,
including the 10% penalty tax imposed under section 72(t). The same exceptions
to the penalty tax that apply to Traditional IRAs will apply to nonqualified
distributions from Roth IRAs.
In the event of a nonqualified distribution from a Roth IRA, only the earnings
in the account are subject to tax; contributions may be recovered tax-free
(since no deduction is permitted for such contributions). Section 408A(d)
provides that distributions from Roth IRAs are considered to come first from
contributions, to the extent that distributions do not exceed the total amount
of contributions.
KEOGH PLANS
In general, the 10% penalty tax imposed by section 72(t) of the Code will
not apply to the following types of distributions from a Traditional
IRA:
1. Distributions made on or after the date on which the IRA Owner attains
age 59 1/2; 2. Distributions made to a beneficiary (or to the estate of the IRA
Owner) on or after the death of the IRA Owner; 3. Distributions attributable to
the IRA Owner's being disabled within the meaning of section 72(m)(7) of the
Code; 4. Distributions made to the IRA Owner after separation from service after
age 55; 5. Distributions to unemployed individuals to the extent such
distributions do not exceed the amount of unreimbursed medical expenses allowed
as a deduction under section 213 of the Code; 6. Distributions to an alternate
payee (e.g., a former spouse) pursuant to a qualified domestic relations order;
and 7. Distributions that are part of a series of substantially equal periodic
payments made at least annually for the life (or life expectancy) of the IRA
Owner, or the joint lives (or life expectancies) of the IRA Owner and his or her
designated beneficiary.
EDUCATION IRAS
Distributions from an education IRA are included in income unless the qualified
higher education expenses of the designated beneficiary are equal to or greater
than the amount of such distributions. In addition, certain special rules are
provided that permit certain rollovers or changes in beneficiaries. Any
distribution that is subject to tax under section 530 is also subject to the 10%
penalty tax imposed by section 530(d)(4). Thus, in general, any distribution
from an education IRA that exceeds the amount of qualified higher education
expenses of the designated beneficiary will be subject to the 10% penalty tax.
MANAGEMENT OF THE TRUSTS
Each Board of Trustees is composed of persons experienced in financial matters
who meet throughout the year to oversee the activities of the Fund or the
Portfolio, as the case may be. In addition, the Trustees review contractual
arrangements with companies that provide services to the Fund/Portfolio and
review the Fund's performance.
The Trustees and officers of the Trusts, their birthdates, and their principal
occupations during the past five years are set forth below. Their titles may
have varied during that period. Unless otherwise indicated, the address of each
officer is ICC Distributors, Inc., Two Portland Square, Portland, Maine 04101
TRUSTEES OF BT INVESTMENT FUNDS
S. LELAND DILL (birthdate: March 28, 1930 ) -- Trustee; Retired; Director,
Coutts Group; Coutts (U.S.A.) International; Coutts Trust Holdings Ltd;
Director, Zweig Series Trust; formerly Partner of KPMG Peat Marwick; Director,
Vinters International Company Inc.; General Partner of Pemco (an investment
company registered under the 1940 Act). His address is 5070 North Ocean Drive,
Singer Island, Florida 33404.
KELVIN J. LANCASTER (birthdate: December 10, 1924) -- Trustee; Professor,
Department of Economics, Columbia University. His address is 35
Claremont Avenue, New York, New York 10027.
PHILIP SAUNDERS, JR. (birthdate: October 11, 1935) -- Trustee; Principal, Philip
Saunders Associates (Consulting); former Director of Financial Industry
Consulting, Wolf & Company; President, John Hancock Home Mortgage Corporation;
and Senior Vice President of Treasury and Financial Services, John Hancock
Mutual Life Insurance Company, Inc. His address is 445 Glen Road, Weston,
Massachusetts 02193.
TRUSTEES OF BT INVESTMENT PORTFOLIOS
CHARLES P. BIGGAR (birthdate: October 14, 1930) -- Trustee; Retired; Director of
Chase/NBW Bank Advisory Board; Director, Batemen, Eichler, Hill Richards Inc.;
formerly Vice President of International Business Machines and President of the
National Services and the Field Engineering Divisions of IBM. His address is 12
Hitching Post Lane, Chappaqua, New York 10514.
S. LELAND DILL (birthdate: March 28, 1930) -- Trustee; Retired; Director, Coutts
Group; Coutts (U.S.A.) International; Coutts Trust Holdings Ltd; Director, Zweig
Series Trust; formerly Partner of KPMG Peat Marwick; Director, Vinters
International Company Inc.; General Partner of Pemco (an investment company
registered under the 1940 Act). His address is 5070 North Ocean Drive, Singer
Island, Florida 33404.
PHILIP SAUNDERS, JR. (birthdate: October 11, 1935) -- Trustee; Principal, Philip
Saunders Associates (Consulting); former Director of Financial Industry
Consulting, Wolf & Company; President, John Hancock Home Mortgage Corporation;
and Senior Vice President of Treasury and Financial Services, John Hancock
Mutual Life Insurance Company, Inc. His address is 445 Glen Road, Weston,
Massachusetts 02193.
OFFICERS OF THE TRUSTS AND BT INVESTMENT PORTFOLIOS
Unless otherwise specified, each officer listed below holds the same position
with the Trusts and BT Investment Portfolios.
RONALD M. PETNUCH (birthdate: February 27, 1960) -- President and Treasurer;
Senior Vice President, Federated Services Company ("FSC"); formerly, Director of
Proprietary Client Services, Federated Administrative Services ("FAS"), and
Associate Corporate Counsel, Federated Investors ("FI").
CHARLES L. DAVIS, JR. (birthdate: March 23, 1960) -- Vice President and
Assistant Treasurer; Vice President, FAS.
JAY S. NEUMAN (birthdate: April 22, 1950) -- Secretary; Corporate Counsel, FI.
Messrs. Petnuch, Davis, and Neuman also hold similar positions for other
investment companies for which FI or an affiliate serves as the
principal underwriter.
No person who is an officer or director of Bankers Trust is an officer or
Trustee of a Trust or the Portfolio. No director, officer or employee of FAS, FI
or any of their affiliates will receive any compensation from a Trust or the
Portfolio for serving as an officer or Trustee of the Trusts or the Portfolio.
TRUSTEE COMPENSATION TABLE
AGGREGATE AGGREGATE TOTAL COMPENSATION
NAME OF PERSON, COMPENSATION COMPENSATION FROM FUND COMPLEX**
POSITION FROM TRUST*+ FROM PORTFOLIOS+ PAID TO TRUSTEES***
Kelvin Lancaster,
Trustee of Trust $13,125 N/A $27,500
Philip Saunders, Jr.,
Trustee of Trust and
Portfolios $13,125 $13,750 $27,500
Charles Biggar,
Trustee of Portfolios N/A $13,750 $27,500
S. Leland Dill,
Trustee of Trust
and Portfolios $13,125 $13,750 $27,500
* The aggregate compensation is provided for the BT Investment Funds which is
comprised of 17 funds.
+ Information is provided for the Trust's and the Portfolio's most recent fiscal
years ended December 31, 1997.
** Aggregated information is furnished for the BT Family of Funds which consists
of the following: BT Investment Funds, BT Institutional Funds, BT Pyramid
Funds, BT Advisor Funds, BT Investment Portfolios, Cash Management Portfolio,
Treasury Money Portfolio, Tax Free Money Portfolio, NY Tax Free Money
Portfolio, International Equity Portfolio, Short Intermediate U.S. Government
Securities Portfolio, Intermediate Tax Free Portfolio, Asset Management
Portfolio, Equity 500 Index Portfolio, and Capital Appreciation Portfolio.
*** The compensation is provided for the calendar year ended December 31, 1997.
As of March 31, 1998, the Trustees and Officers of the Trust and the
Portfolio owned in the aggregate less than 1% of the shares of any Fund or the
Trust (all series taken together).
INVESTMENT ADVISER
Under the terms of the Portfolio's investment advisory agreement with Bankers
Trust (the "Advisory Agreement"), Bankers Trust manages the Portfolio subject to
the supervision and direction of the Board of Trustees of the Portfolio. Bankers
Trust will: (i) act in strict conformity with the Portfolio's Declaration of
Trust, the 1940 Act and the Investment Advisers Act of 1940, as the same may
from time to time be amended; (ii) manage the Portfolio in accordance with the
Portfolio's investment objectives, restrictions and policies; (iii) make
investment decisions for the Portfolio; and (iv) place purchase and sale orders
for securities and other financial instruments on behalf of the Portfolio.
Bankers Trust bears all expenses in connection with the performance of services
under the Advisory Agreement. The Trust and the Portfolio bears certain other
expenses incurred in its operation, including: taxes, interest, brokerage fees
and commissions, if any; fees of Trustees of the Trust or the Portfolio who are
not officers, directors or employees of Bankers Trust, FAS, FI or any of their
affiliates; SEC fees and state Blue Sky qualification fees; charges of
custodians and transfer and dividend disbursing agents; certain insurance
premiums; outside auditing and legal expenses; costs of maintenance of corporate
existence; costs attributable to investor services, including, without
limitation, telephone and personnel expenses; costs of preparing and printing
prospectuses and SAIs for regulatory purposes and for distribution to existing
shareholders; costs of shareholders' reports and meetings of shareholders,
officers and Trustees of the Trust or the Portfolio; and any extraordinary
expenses.
Bankers Trust may have deposit, loan and other commercial banking relationships
with the issuers of obligations which may be purchased on behalf of the
Portfolio, including outstanding loans to such issuers which could be repaid in
whole or in part with the proceeds of securities so purchased. Such affiliates
deal, trade and invest for their own accounts in such obligations and are among
the leading dealers of various types of such obligations. Bankers Trust has
informed the Portfolio that, in making its investment decisions, it does not
obtain or use material inside information in its possession or in the possession
of any of its affiliates. In making investment recommendations for the
Portfolio, Bankers Trust will not inquire or take into consideration whether an
issuer of securities proposed for purchase or sale by the Portfolio is a
customer of Bankers Trust, its parent or its subsidiaries or affiliates and, in
dealing with its customers, Bankers Trust, its parent, subsidiaries and
affiliates will not inquire or take into consideration whether securities of
such customers are held by any fund managed by Bankers Trust or any such
affiliate.
ADMINISTRATOR
Under the administration and services agreements, Bankers Trust is obligated on
a continuous basis to provide such administrative services as the Board of
Trustees of the Trust and the Portfolio reasonably deem necessary for the proper
administration of the Trust or the Portfolio. Bankers Trust will generally
assist in all aspects of the Fund's and Portfolio's operations; supply and
maintain office facilities (which may be in Bankers Trust's own offices),
statistical and research data, data processing services, clerical, accounting,
bookkeeping and record keeping services (including without limitation the
maintenance of such books and records as are required under the 1940 Act and the
rules thereunder, except as maintained by other agents), executive and
administrative services, and stationery and office supplies; prepare reports to
shareholders or investors; prepare and file tax returns; supply financial
information and supporting data for reports to and filings with the SEC and
various state Blue Sky authorities; supply supporting documentation for meetings
of the Board of Trustees; provide monitoring reports and assistance regarding
compliance with Declarations of Trust, by-laws, investment objectives and
policies and with Federal and state securities laws; arrange for appropriate
insurance coverage; calculate net asset values, net income and realized capital
gains or losses; and negotiate arrangements with, and supervise and coordinate
the activities of, agents and others to supply services.
Pursuant to a sub-administration agreement (the "Sub-Administration Agreement"),
FSC performs such sub-administration duties for the Trust and the Portfolio as
from time to time may be agreed upon by Bankers Trust and FSC. The
Sub-Administration Agreement provides that FSC will receive such compensation as
from time to time may be agreed upon by FSC and Bankers Trust. All such
compensation will be paid by Bankers Trust.
CUSTODIAN AND TRANSFER AGENT
Bankers Trust, 130 Liberty Street (One Bankers Trust Plaza), New York, New York
10006, serves as Custodian for the Trust and for the Portfolio pursuant to the
administration and services agreements. As Custodian, it holds the Fund's and
the Portfolio's assets. Bankers Trust also serves as transfer agent of the Trust
and of the Portfolio pursuant to the respective administration and services
agreement. Under its transfer agency agreement with the Trust, Bankers Trust
maintains the shareholder account records for the Fund, handles certain
communications between shareholders and the Trust and causes to be distributed
any dividends and distributions payable by the Trust. Bankers Trust may be
reimbursed by the Fund or the Portfolio for its out-of-pocket expenses. Bankers
Trust will comply with the self-custodian provisions of Rule 17f-2 under the
1940 Act.
USE OF NAME
The Trust and Bankers Trust have agreed that the Trust may use the letters "BT"
as part of its name for so long as Bankers Trust serves as investment adviser to
the Portfolio. The Trust has acknowledged that the letters "BT" is used by and
is a property right of certain subsidiaries of Bankers Trust and that those
subsidiaries and/or Bankers Trust may at any time permit others to use that
term.
The Trust may be required, on 60 days' notice from Bankers Trust at any time, to
abandon use of the letters "BT" as part of its name. If this were to occur, the
Trustees would select an appropriate new name for the Trust, but there would be
no other material effect on the Trust, its shareholders or activities.
BANKING REGULATORY MATTERS
Bankers Trust has been advised by its counsel that in its opinion Bankers Trust
may perform the services for the Portfolio contemplated by the Advisory
Agreement and other activities for the Fund and the Portfolio described in the
Prospectus and this SAI without violation of the Glass-Steagall Act or other
applicable banking laws or regulations. However, counsel has pointed out that
future changes in either Federal or state statutes and regulations concerning
the permissible activities of banks or trust companies, as well as future
judicial or administrative decisions or interpretations of present and future
statutes and regulations, might prevent Bankers Trust from continuing to perform
those services for the Trust and the Portfolio. State laws on this issue may
differ from the interpretations of relevant Federal law and banks and financial
institutions may be required to register as dealers pursuant to state securities
law. If the circumstances described above should change, the Boards of Trustees
would review the relationships with Bankers Trust and consider taking all
actions necessary in the circumstances.
COUNSEL AND INDEPENDENT ACCOUNTANTS
Willkie Farr & Gallagher, One Citicorp Center, 153 East 53rd Street, New York,
New York 10022-4669, serves as counsel to the Trusts. Ernst & Young LLP, 787
Seventh Avenue, New York, New York 10019, acts as independent accountants of the
Fund and the Portfolio.
ORGANIZATION OF THE TRUST
BT Investment Funds was organized on July 21, 1986, under the name BT Tax-Free
Investment Trust, and assumed its current name on May 16, 1988. The shares of
each series participate equally in the earnings, dividends and assets of the
particular series. The Trusts may create and issue additional series of shares.
Each Trust's Declaration of Trust permits the Trustees to divide or combine the
shares into a greater or lesser number of shares without thereby changing the
proportionate beneficial interest in series. Each share represents an equal
proportionate interest in a series with each other share. Shares when issued are
fully paid and non-assessable, except as set forth below. Shareholders are
entitled to one vote for each share held.
Shares of the Trust do not have cumulative voting rights, which means that
holders of more than 50% of the shares voting for the election of Trustees can
elect all Trustees. Shares are transferable but have no preemptive, conversion
or subscription rights. Shareholders generally vote by Fund, except with respect
to the election of Trustees and the ratification of the selection of independent
accountants.
Massachusetts law provides that shareholders could under certain circumstances
be held personally liable for the obligations of the Trust. However, the Trust's
Declaration of Trust disclaims shareholder liability for acts or obligations of
the Trust and requires that notice of this disclaimer be given in each
agreement, obligation or instrument entered into or executed by the Trust or a
Trustee. The Declaration of Trust provides for indemnification from the Trust's
property for all losses and expenses of any shareholder held personally liable
for the obligations of the Trust. Thus, the risk of a shareholder's incurring
financial loss on account of shareholder liability is limited to circumstances
in which the Trust itself would be unable to meet its obligations, a possibility
that the Trust believes is remote. Upon payment of any liability incurred by the
Trust, the shareholder paying the liability will be entitled to reimbursement
from the general assets of the Trust. The Trustees intend to conduct the
operations of the Trust in a manner so as to avoid, as far as possible, ultimate
liability of the shareholders for liabilities of the Trust.
Whenever a Trust is requested to vote on matters pertaining to a Portfolio, the
Trust will vote its shares without a meeting of shareholders of the respective
Fund if the proposal is one, which 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, a Trust will hold a meeting of shareholders of
its respective Fund and, at the meeting of the investors in the Portfolio, the
Trust will cast all of its votes in the same proportion as votes in all its
shares at the Portfolio meeting, other investors with a greater pro rata
ownership of the Portfolio could have effective voting control of the operations
of the Portfolio.
TAXATION
TAXATION OF THE FUND
The Fund intends to qualify annually to be treated as a regulated investment
company under the Code. To qualify for that treatment, the Fund must, among
other things, (a) derive at least 90% of its gross income each taxable year from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of securities or foreign currencies, or other
income (including gains from options, futures or forward contracts) derived with
respect to its business of investing in securities or those currencies (the
"Income Requirement"), (b) diversify its holdings so that, at the end of each
quarter of its taxable year, (i) at least 50% of the value of its assets is
represented by cash and cash items (including receivables), U.S. government
securities, securities of other regulated investment companies and other
securities, with such other securities of any one issuer limited to an amount
not greater than 5% of the value of the Fund's total assets and not greater than
10% of the issuer's outstanding voting securities 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 regulated
investment companies), and (c) distribute for each taxable year at least 90% of
its investment company taxable income (generally consisting of interest,
dividends and the excess of net short-term capital gain over net long-term
capital loss).
The Fund will be subject to a nondeductible 4% federal excise tax to the extent
it fails to distribute by the end of any calendar year substantially all of its
ordinary income for that year and capital gain net income for the one-year
period ending on October 31 of that year, plus any undistributed amount from the
prior year.
The Fund, as an investor in the Portfolio, will be deemed to own a proportionate
share of the Portfolio's assets, and to earn a proportionate share of the
Portfolio's income, for purposes of determining whether the Fund satisfies all
the requirements described above to qualify as a regulated investment company.
See the next section for a discussion of the tax consequences to the Fund of
hedging transactions engaged in by the Portfolio.
TAXATION OF THE PORTFOLIO
The Portfolio will be treated as a separate partnership for federal income tax
purposes and will not be a "publicly traded partnership." As a result, the
Portfolio will not be subject to federal income tax. Instead, the Fund and other
investors in the Portfolio will be required to take into account, in computing
their federal income tax liability, their respective shares of the Portfolio's
income, gains, losses, deductions and credits, without regard to whether they
have received any cash distributions from the Portfolio. The Portfolio also will
not be subject to state income or franchise tax.
Because, as noted above, the Fund will be deemed to own a proportionate share of
the Portfolio's assets, and to earn a proportionate share of the Portfolio's
income, for purposes of determining whether the Fund satisfies the requirements
to qualify as a regulated investment company, the Portfolio intends to conduct
its operations so that the Fund will be able to satisfy all those requirements.
Distributions received by the Fund from the Portfolio (whether pursuant to a
partial or complete withdrawal or otherwise) generally will not result in the
Fund's recognizing any gain or loss for federal income tax purposes, except that
(a) gain will be recognized to the extent any cash that is distributed exceeds
the Fund's basis for its interest in the Portfolio prior to the distribution,
(b) income or gain will be realized if the distribution is in liquidation of the
Fund's entire interest in the Portfolio and includes a disproportionate share of
any unrealized receivables held by the Portfolio, and (c) gain or loss will be
recognized if a liquidation distribution consists solely of cash and/or
unrealized receivables. The Fund's basis for its interest in the Portfolio
generally will equal the amount of cash and the basis of any property the Fund
invests in the Portfolio, increased by the Fund's share of the Portfolio's net
income and gains and decreased by (i) the amount of any cash and the basis of
any property distributed from the Portfolio to the Fund and (ii) the Fund's
share of the Portfolio's losses, if any.
The Portfolio's use of hedging strategies, such as writing (selling) and
purchasing options and futures contracts, involves complex rules that will
determine for income tax purposes the amount, character and timing of
recognition of the gains and losses it realizes in connection therewith. Gains
from options and futures contracts derived by the Portfolio with respect to its
business of investing in securities will qualify as permissible income for the
Fund under the Income Requirement.
Certain futures and foreign currency contracts in which the Portfolio may invest
may be subject to section 1256 of the Code ("section 1256 contracts"). Any
section 1256 contracts held by the Portfolio at the end of each taxable year,
other than contracts subject to a "mixed straddle" election made by the
Portfolio, must be "marked-to-market" (that is, treated as having been sold at
that time for their fair market value) for federal income tax purposes, with the
result that unrealized gains or losses will be treated as though they were
realized. Sixty percent of any net gain or loss recognized on these deemed
sales, and 60% of any net realized gain or loss from any actual sales of section
1256 contracts, will be treated as long-term capital gain or loss, and the
balance will be treated as short-term capital gain or loss. Section 1256
contracts also may be marked-to-market for purposes of the 4% excise tax
mentioned above.
Code section 1092 (dealing with straddles) also may affect the taxation of
options and futures contracts in which the Portfolio may invest. Section 1092
defines a "straddle" as offsetting positions with respect to personal property;
for these purposes, options and futures contracts are personal property. Under
that section, any loss from the disposition of a position in a straddle
generally may be deducted only to the extent the loss exceeds the unrealized
gain on the offsetting position(s) of the straddle; in addition, these rules may
apply to postpone the recognition of loss that otherwise would be recognized
under the mark-to-market rules discussed above. The regulations under section
1092 also provide certain "wash sale" rules, which apply to transactions where a
position is sold at a loss and a new offsetting position is acquired within a
prescribed period, and "short sale" rules applicable to straddles. If the
Portfolio makes certain elections, the amount, character and timing of
recognition of gains and losses from the affected straddle positions would be
determined under rules that vary according to the elections made. Because only a
few of the regulations implementing the straddle rules have been promulgated,
the tax consequences to the Portfolio of straddle transactions are not entirely
clear.
If the Portfolio has an "appreciated financial position" -- generally, an
interest (including an interest through an option, futures or forward contract,
or short sale) with respect to any debt instrument (other than "straight debt")
or partnership interest the fair market value of which exceeds its adjusted
basis -- and enters into a "constructive sale" of the same or substantially
similar property, the Portfolio will be treated as having made an actual sale
thereof, with the result that gain will be recognized at that time. A
constructive sale generally consists of a short sale, an offsetting notional
principal contract, or a futures or forward contract entered into by the
Portfolio or a related person with respect to the same or substantially similar
property. In addition, if the appreciated financial position is itself a short
sale or such a contract, acquisition of the underlying property or substantially
similar property will be deemed a constructive sale. The foregoing will not
apply, however, to any transaction during any taxable year that otherwise would
be treated as a constructive sale if the transaction is closed within 30 days
after the end of that year and the Portfolio holds the appreciated financial
position unhedged for 60 days after that closing (I.E., at no time during that
60-day period is the Portfolio's risk of loss regarding that position reduced by
reason of certain specified transactions with respect to substantially similar
or related property, such as having an option to sell, being contractually
obligated to sell, making a short sale or granting an option to buy
substantially identical stock or securities).
OTHER TAXATION
The Trust is organized as a Massachusetts business trust and, under current law,
neither the Trust nor the Fund will be liable for any income or franchise tax in
the Commonwealth of Massachusetts, provided that the Fund continues to qualify
as a regulated investment company under Subchapter M of the Code. The investment
by the Fund in the Portfolio should not cause the Fund to be liable for any
income or franchise tax in the State of New York.
The Portfolio is organized as a New York trust. The Portfolio is not subject to
any income or franchise tax in the State of New York or the Commonwealth of
Massachusetts.
FOREIGN WITHHOLDING TAXES
Income received and gains realized by the Portfolio from sources within foreign
countries may be subject to withholding and other taxes imposed by those
countries that would reduce the yield and/or total return on its securities. Tax
conventions between certain countries and the United States may reduce or
eliminate these foreign taxes, however, and many foreign countries do not impose
taxes on capital gains in respect of investments by foreign investors.
<PAGE>
APPENDIX
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS:
Aaa- Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edge."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa securities.
A - Bonds rated A possess many favorable investment attributes and are to be
considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa - Bonds rated Baa are considered as medium-grade obligations, i.e. they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such, bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba - Bonds rated Ba are judged to have speculative elements. Their future cannot
be considered as well assured. Often the protection of interest and principal
payments may be very moderate and thereby not well safeguarded during both (good
and bad times over the future).
Uncertainty of position characterizes bonds in this class.
B - Bonds rated B generally lack characteristics of a desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked short-comings.
C - Bonds rated C are the lowest-rated class of bonds and issued so rated can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
Moody's applies numerical modifiers, 1, 2, and 3, in each generic rating
classification from Aa through B in its corporate bond system. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
<PAGE>
DESCRIPTION OF S&P'S CORPORATE BOND RATINGS:
AAA- Debt rated AAA has the highest rating assigned by Standard & Poor's to a
debt obligation. Capacity to pay interest and repay principal is extremely
strong.
AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher-rated issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to weakened capacity to pay interest and repay principal for debt
in this category than in higher-rated categories.
BB - Debt rate BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments.
B - Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB- rating.
CCC - Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal.
CC - Debt rated CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating.
C - The rating C is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC- debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed but debt service
payments are continued.
CI - The rating CI is reserved for income bonds on which no interest is being
paid.
D - Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating will also be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
<PAGE>
DUFF & PHELPS' LONG-TERM DEBT RATINGS:
===============================================================================
===============================================================================
AAA Highest credit quality. The risk factors are negligible, being
only slightly more than for risk-free U.S. Treasury debt.
===============================================================================
AA+ High credit quality. Protection factors are strong. Risk is
AA modest but may vary slightly from time to time because of
AA- economic conditions.
===============================================================================
A+ Protection factors are average but adequate. However, risk
A factors are more variable and greater in periods of economic
A- stress.
===============================================================================
BBB+ Below-average protection factors but still considered BBB sufficient for
prudent investment. Considerable variability in BBB- risk during economic
cycles.
- --------------=================================================================
BB+ Below investment grade but deemed likely to meet obligation
BB when due. Present or prospective financial protection factors
BB- fluctuate according to industry conditions or company
fortunes. Overall quality may move up or down frequently
within this category.
- --------------=================================================================
===============================================================================
B+ Below investment grade and possessing risk that obligations
B will not be met when due. Financial protection factors will
B- fluctuate widely according to economic cycles, industry
conditions and/or company fortunes. Potential exists for frequent
changes in the rating within this category or into a higher or
lower rating grade.
===============================================================================
CCC Well below investment-grade securities. Considerable uncertainty
exists as to timely payment of principal, interest or preferred
dividends. Protection factors are narrow and risk can be
substantial with unfavorable economic/industry conditions, and/or
with unfavorable company developments.
===============================================================================
DD Defaulted debt obligations. Issuer failed to meet scheduled
principal and/or interest payments.
===============================================================================
DP Preferred stock with dividend arrearages.
===============================================================================
DESCRIPTION OF MOODY'S SHORT-TERM DEBT RATINGS:
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics: leasing
market positions in well-established industries; high rates of return on funds
employed; conservative capitalization structures with moderate reliance on debt
and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; well-established access to
a range of financial markets and assured sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rates Prime-3 (or related supporting institutions) have an acceptable
capacity for repayment of short-term promissory obligations. The effect of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
DESCRIPTION OF S&P SHORT-TERM ISSUER CREDIT RATINGS:
A-1 An obligor rated `A-1' has STRONG capacity to meet its financial
commitments. It is rated in the highest category by Standard & Poor's. Within
this category, certain obligors are designated with a plus sign (+). This
indicates that the obligor's capacity to meet its financial commitments is
EXTREMELY STRONG.
A-2 An obligor rated `A-2' has SATISFACTORY capacity to meet its financial
commitments. However, it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligors in the highest
rating category.
A-3 An obligor rated `A-3' has ADEQUATE capacity to meet its financial
obligations. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitments.
DESCRIPTION OF DUFF & PHELPS' COMMERCIAL PAPER RATINGS:
D-1+ Highest certainty of timely payment. Short term liquidity, including
internal operating factors and/or access to alternative sources of funds, is
outstanding, and safety is just below risk free U.S. Treasury short term
obligations.
D-1 Very high certainty of timely payment. Liquidity factors are excellent and
supported by good fundamental protection factors. Risk factors are minor.
D-1- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
D-2 Good certainty of timely payment. Liquidity factors and company fundamentals
are sound. Although ongoing funding needs may enlarge total financing
requirements, access to capital markets is good. Risk factors are small.
D-3 Satisfactory liquidity and other protection factors qualify issues as to
investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
DESCRIPTION OF MOODY'S INSURANCE FINANCIAL STRENGTH RATINGS:
AAA
Insurance companies rated Aaa offer exceptional financial security. While the
financial strength of these companies is likely to change, such changes as can
be visualized are most unlikely to impair their fundamentally strong position.
AA
Insurance companies rated Aa offer excellent financial security. Together with
the Aaa group they constitute what are generally known as high grade companies.
They are rated lower than Aaa companies because long-term risks appear somewhat
larger.
A
Insurance companies rated A offer good financial security. However, elements may
be present which suggest a susceptibility to impairment sometime in the future.
BAA
Insurance companies rated Baa offer adequate financial security. However,
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time.
BA
Insurance companies rated Ba offer questionable financial security. Often the
ability of these companies to meet policyholder obligations maybe very moderate
and thereby not well safeguarded in the future.
B
Insurance companies rated B offer poor financial security. Assurance of punctual
payment of policyholder obligations over any long period of time is small.
CAA
Insurance companies rated Caa offer very poor financial security. They may be in
default on their policyholder obligations or there may be present elements of
danger with respect to punctual payment of policyholder obligations and claims.
CA
Insurance companies rated Ca offer extremely poor financial security. Such
companies are often in default on their policyholder obligations or have other
marked shortcomings.
C
Insurance companies rated C are the lowest rated class of insurance company and
can be regarded as having extremely poor prospects of ever offering financial
security.
Numeric modifiers: Numeric modifiers are used to refer to the ranking within the
group -- one being the highest and three being the lowest. However, the
financial strength of companies within a generic rating symbol (Aa, for example)
is broadly the same.
DESCRIPTION OF S&P CLAIMS PAYING ABILITY RATING DEFINITIONS:
Secure Range: AAA to BBB
"AAA" Superior financial security on an absolute and relative basis. Capacity to
meet policyholder obligations is overwhelming under a variety of economic and
underwriting conditions.
"AA" Excellent financial security. Capacity to meet policyholder obligations is
strong under a variety of economic and underwriting conditions.
"A" Good financial security, but capacity to meet policyholder obligations is
somewhat susceptible to adverse economic and underwriting conditions.
"BBB" Adequate financial security, but capacity to meet policyholder obligations
is susceptible to adverse economic and underwriting conditions.
Vulnerable Range: BB to CCC
"BB" Financial security may be adequate, but capacity to meet policyholder
obligations, particularly with respect to long-term or "long-tail" policies, is
vulnerable to adverse economic and underwriting conditions.
"B" Vulnerable financial security. Currently able to meet policyholder
obligations, but capacity to meet policyholder obligations is particularly
vulnerable to adverse economic and underwriting conditions.
"CCC" Extremely vulnerable financial security. Continued capacity to meet
policyholder obligations is highly questionable unless favorable economic and
underwriting conditions prevail.
"R" Regulatory action. As of the date indicated, the insurer is under
supervision of insurance regulators following rehabilitation, receivership,
liquidation, or any other action that reflects regulatory concern about the
insurer's financial condition. Information on this status is provided by the
National Association of Insurance Commissioners and other regulatory bodies.
Although believed to be accurate, this information is not guaranteed. The "R"
rating does not apply to insurers subject only to nonfinancial actions such as
market conduct violations.
Plus (+) or minus (-) Ratings from "AA" to "B" may be modified by the addition
of a plus or minus sign to show relative standing within the major rating
categories.
DUFF & PHELPS' CLAIMS PAYING ABILITY RATINGS:
===============================================================================
AAA Highest claims paying ability. Risk factors are negligible.
===============================================================================
AA+ Very high claims paying ability. Protection factors are strong. AA Risk is
modest, but may vary slightly over time due to economic AA- and/or underwriting
conditions.
===============================================================================
A+ High claims paying ability. Protection factors are average and A there is an
expectation of variability in risk over time due to A- economic and/or
underwriting conditions.
===============================================================================
BBB+ Adequate claims paying ability. Protection factors are
BBB adequate. There is considerable variability in risk over time
BBB- due to economic and/or underwriting conditions.
===============================================================================
BB+ Uncertain claims paying ability and less than investment grade
BB quality. However, the company is deemed likely to meet these
BB- obligations when due. Protection factors will vary widely with
changes in economic and/or underwriting conditions.
===============================================================================
B+ Possessing risk that policyholder and contractholder obligations
B will not be paid when due. Protection factors will vary widely
B- with changes in economic and underwriting conditions or company
fortunes.
===============================================================================
CCC There is substantial risk that policyholder and contractholder
obligations will not be paid when due. Company has been or is likely
to be placed under state insurance department supervision.
===============================================================================
DD Company is under an order of liquidation.
===============================================================================
<PAGE>
DISTRIBUTOR
ICC Distributors, Inc. BT INVESTMENT FUNDS
Two Portland Square
Portland, Maine 04101
INVESTMENT ADVISER BT PRESERVATIONPLUS INCOME FUND
Bankers Trust Company
130 Liberty Street
(One Bankers Trust Plaza)
New York, New York 10006
TRANSFER AGENT
Bankers Trust Company
130 Liberty Street
(One Bankers Trust Plaza)
New York, New York 10006
CUSTODIAN
Bankers Trust Company STATEMENT OF
130 Liberty Street ADDITIONAL INFORMATION
(One Bankers Trust Plaza) OCTOBER 27, 1998
New York, New York 10006
INDEPENDENT ACCOUNTANTS
Ernst & Young LLP
787 Seventh Avenue
New York, NY 10019
LEGAL COUNSEL
Willkie Farr & Gallagher
One Citicorp Center
153 East 53rd Street
New York, NY 10022-4669
STAPRVPLUS (10/98)
