<PAGE>
As filed with the Commission on August 31, 2000
1933 Act File No. 33-07404
1940 Act File No. 811-4760
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Post-Effective Amendment No. 73 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 73 [X]
BT INVESTMENT FUNDS
(Exact Name of Registrant as Specified in Charter)
One South Street, Baltimore, Maryland 21202
(Address of Principal Executive Offices)
(410) 895-3433
(Registrant's Telephone Number)
Daniel O. Hirsch, Esq. Copies to:Burton M. Leibert, Esq.
One South Street Willkie Farr & Gallagher
Baltimore, Maryland 21202 787 Seventh Ave
(Name and Address of Agent New York, New York 10019
for Service)
It is proposed that this filing will become effective (check appropriate box):
[X] Immediately upon filing pursuant to paragraph (b)
[_] On August 31, 2000 pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(1)
[_] On (date)pursuant to paragraph (a)(1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[_] On (date)pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
[_] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Capital Appreciation Portfolio has also executed this Registration Statement.
<PAGE>
Deutsche Asset Management
M u t u a l F u n d
P r o s p e c t u s
August 31, 2000
Institutional Class
Mid Cap
Formerly Equity Appreciation -- Institutional Class
[Like shares of all mutual funds, these securities have not been approved or
disapproved by the Securities and Exchange Commission nor has the Securities and
Exchange Commission passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.]
A Member of the
Deutsche Bank Group [/]
<PAGE>
Overview
--------------------------------------------------------------------------------
of Mid Cap--Institutional Class
Goal: The Fund seeks long-term capital growth.
Core Strategy: The Fund invests primarily in the stocks and other equity
securities of medium-sized U.S. companies with strong growth potential.
INVESTMENT POLICIES AND STRATEGIES
The Fund invests all of its assets in a master portfolio with the same goal as
the Fund. The Fund, through the master portfolio, seeks to achieve that goal by
investing in stocks and other equity securities of medium-sized companies with
strong growth prospects. Companies are selected based on factors such as the
company's business prospects, its record of earnings growth and its stock price
relative to industry peers.
--------------------------------------------------------------------------------
Mid Cap--Institutional Class
Overview of Mid Cap--Institutional Class
<TABLE>
<S> <C>
Goal........................................................................ 3
Core Strategy............................................................... 3
Investment Policies and Strategies.......................................... 3
Principal Risks of Investing in the Fund.................................... 4
Who Should Consider Investing in the Fund................................... 4
Total Returns, After Fees and Expenses...................................... 5
Annual Fund Operating Expenses.............................................. 6
</TABLE>
A Detailed Look at Mid Cap--Institutional Class
<TABLE>
<S> <C>
Objective................................................................... 7
Strategy.................................................................... 7
Principal Investments....................................................... 7
Investment Process.......................................................... 7
Risks....................................................................... 8
Management of the Fund...................................................... 8
Calculating the Fund's Share Price.......................................... 9
Performance Information..................................................... 10
Dividends and Distributions................................................. 10
Tax Considerations.......................................................... 10
Buying and Selling Fund Shares.............................................. 10
Financial Highlights........................................................ 13
</TABLE>
--------------------------------------------------------------------------------
3
<PAGE>
Overview of Mid Cap--Institutional Class
PRINCIPAL RISKS OF INVESTING IN THE FUND
An investment in the Fund could lose money, or the Fund's performance could
trail that of other investments. For example:
. Stocks that we have selected could perform poorly;
. Medium-sized company stock returns could trail stock market returns generally
because of risks specific to medium-sized company investing, i.e., greater
share-price volatility and fewer buyers for medium-sized company shares in
periods of economic or stock market stress. Such risks may hurt the prices of
the stocks in the Fund's portfolio and limit the Fund's ability to exit from
an unsuccessful investment; or
. The stock market could decline or could underperform other investments.
WHO SHOULD CONSIDER INVESTING IN THE FUND
Mid Cap--Institutional Class requires a minimum initial investment of $250,000.
You should consider investing in the Fund if you are seeking long-term capital
growth. There is, of course, no guarantee that the Fund will realize its goal.
Moreover, you should be willing to accept greater short-term fluctuations in
the value of your investment than you would typically experience investing in
bond or money market funds.
You should not consider investing in the Fund if you are pursuing a short-term
financial goal, if you seek regular income or if you cannot tolerate
fluctuations in the value of your investments.
The Fund by itself does not constitute a balanced investment program. It can,
however, afford you exposure to investment opportunities not available to an
investor in large company stocks and small company stocks.
On September 8, 1999, the Board of Trustees voted to recommend the
reorganization of the Equity Appreciation fund into Mid Cap fund (formerly
Capital Appreciation Fund). The Board determined that the proposal was in the
best interests of shareholders because both funds had the same investment
management teams and employed the same investment strategy. The reorganization
received the approval of the Equity Appreciation fund shareholders at a special
meeting held for this purpose on July 28, 2000. At the close of business on
August 31, 2000, shares of Equity Appreciation converted to Institutional Class
shares of Mid Cap. (Mid Cap is a feeder fund in a master-feeder structure. For
more information on the master-feeder structure, please refer to the
"Organizational Structure" section of this prospectus.)
An investment in Mid Cap--Institutional Class is not a bank deposit and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
--------------------------------------------------------------------------------
4
<PAGE>
Overview of Mid Cap--Institutional Class
TOTAL RETURNS, AFTER FEES & EXPENSES
The bar chart and table on this page can help you evaluate the potential risks
and rewards of investing in the Fund by showing changes in the Fund's
performance year to year. The following bar chart and table shows the
performance of Equity Appreciation--Institutional Class shares. In conjunction
with the reorganization discussed above, Equity Appreciation--Institutional
Class became Mid Cap--Institutional Class as of the close of business on August
31, 2000. Equity Appreciation--Institutional Class was managed by the same
investment management team with the same objective, policies and strategies as
Mid Cap fund. The bar chart shows Equity Appreciation--Institutional Class
shares' actual return for each full calendar year since October 12, 1993 (its
inception date). The table compares the Equity Appreciation--Institutional
Class' average annual return with the Standard & Poor's (S&P) Mid-Cap 400 Index
over the last one and five years, and since inception. The Index is a passive
measure of market returns. It does not factor in the costs of buying, selling
and holding stock--costs that are reflected in a Fund's results.
--------------------------------------------------------------------------------
The S&P Mid-Cap 400 Index is a widely accepted benchmark of medium-sized
company stock performance. The Index is a model, not an actual portfolio, that
tracks the performance of 400 publicly held medium-sized U.S. companies.
[HEAD, CHART and FOOTNOTE APPEARS HERE]
YEAR-BY-YEAR RETURNS
(each full calendar year since inception)
1994 3.47%
1995 37.62%
1996 9.60%
1997 15.40%
1998 17.79%
1999 49.70%
The Fund's return for the period January 1, 2000 to June 30, 2000 was 16.28%.
For the period shown in the bar chart, Equity Appreciation -- Institutional
Class shares' highest return in any calendar quarter was 31.08% (fourth
quarter 1999) and its lowest quarterly return was -19.33% (third quarter
1998). Past performance offers no indication of how the Fund will perform in
the future.
PERFORMANCE FOR PERIOD ENDED DECEMBER 31, 1999
Average Annual Returns
Since Inception
1 Year 5 Years (Oct. 12, 1993)/1/
Equity Appreciation--
Institutional Class 49.70% 25.14% 20.03%
--------------------------------------------------------------------
S&P Mid-Cap 400 Index 14.72% 23.05% 18.04%
--------------------------------------------------------------------
/1/The S&P Mid-Cap 400 Index is calculated from September 30, 1993.
--------------------------------------------------------------------------------
5
<PAGE>
Overview of Mid Cap--Institutional Class
ANNUAL FUND OPERATING EXPENSES
(expenses paid from Fund assets)
The Annual Fees and Expenses table to the right describes the fees and expenses
that you may pay if you buy and hold shares of Mid Cap--Institutional Class.
Expense Example. The example illustrates the expenses you would have incurred
on a $10,000 investment in the Fund. It assumes that the Fund earned an annual
return of 5% over the periods shown, that the Fund's operating expenses
remained the same over the periods shown and that you sold your shares at the
end of the period.
You may use this hypothetical example to compare the Fund's expense history
with other funds/1/. Your actual costs may be higher or lower.
--------------------------------------------------------------------------------
/1/Information on the annual operating expenses reflects the expenses of both
the Fund and the Capital Appreciation Portfolio, the master portfolio into
which the Fund invests all of its assets. (A further discussion of the
relationship between the Fund and the master portfolio appears in the
"Organizational Structure" section of this prospectus.)
/2/The investment adviser and administrator have agreed, for the 16-month
period from the Fund's fiscal year end of September 30, 1999, to waive their
fees or reimburse expenses so that total expenses will not exceed 1.00%.
/3/For the first 12 months, the expense example takes into account fee waivers
and reimbursements.
ANNUAL FEES AND EXPENSES
<TABLE>
<CAPTION>
Percentage of Average
Daily Net Assets/1/
<S> <C>
Management Fees 0.65%
----------------------------------------------------------------------
Distribution and
Service (12b-1) Fees None
----------------------------------------------------------------------
Other Expenses 0.55%
----------------------------------------------------------------------
Total Fund Operating
Expenses 1.20%
----------------------------------------------------------------------
Less: Fee Waivers or Expense Reimbursements (0.20%)/2/
----------------------------------------------------------------------
Net Expenses 1.00%
----------------------------------------------------------------------
</TABLE>
EXPENSE EXAMPLE/3/
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C>
$102 $361 $640 $1,437
-----------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
6
<PAGE>
A detailed look
--------------------------------------------------------------------------------
at Mid Cap--Institutional Class
OBJECTIVE
Mid Cap--Institutional Class seeks long-term capital growth. Under normal
circumstances, the Fund invests the majority of its assets in the stock and
other securities with equity characteristics of U.S. companies with market
capitalizations, at the time we first purchase the shares, within the market
capitalization range of the S&P Mid-Cap 400 Index. We believe these companies
contain the greatest concentration of businesses with significant growth
prospects.
The Fund invests for capital growth, not income; any dividend or interest
income is incidental to the pursuit of its goal. While we give priority to
capital growth, we cannot offer any assurance of achieving this goal. The
Fund's goal is not a fundamental policy. We must notify shareholders before we
change it, but we do not require their approval to do so.
STRATEGY
We pursue a flexible investment program to achieve the Fund's objective. We are
not restricted to investments in specific market sectors. We may invest in any
market sector and in any size company if we have identified an opportunity with
attractive long-term prospects for capital growth.
We consider many broad factors in assessing a potential candidate for
investment, including generally:
. competitive position within its industry;
. business prospects;
. management team;
. record of earnings growth;
. underlying asset value relative to industry peers;
. stock price relative to industry peers; and
. whether a reliable and liquid market for its shares exists.
PRINCIPAL INVESTMENTS
The Fund focuses primarily in stock and other securities with equity
characteristics. The Fund focuses principally on companies with market caps, at
the time we purchase the stock, within the market capitalization range of the
S&P Mid-Cap 400 Index. It may also invest in convertible securities when it is
more advantageous than investing in a company's common stock.
The Fund may also invest up to 25% of its assets in stocks and other securities
of companies based outside the United States. Under normal conditions, this
tactic would not comprise a major element of its strategy.
INVESTMENT PROCESS
The Fund's process begins with a methodical search for companies (in any
industry) that show attractive long-term prospects for growth. The research
team relies on information gleaned from a variety of sources and perspectives,
including broad trends such as lifestyle and technological changes, industry
cycles and regulatory changes, quantitative screening and individual company
analysis. Companies are screened to identify those with strong business
fundamentals (i.e., high growth, low debt, high return-on-equity) and technical
strength. Measures of this strength include the extent of management's
ownership of a company's shares, the extent of ownership by mutual funds and
other large professional investors, estimates of future earnings by investment
analysts who follow the stock and the extent that actual earnings have deviated
from analysts' estimates in the recent past. The list of candidates is narrowed
down through meetings with company and industry contacts, attendance at
conferences focusing on emerging growth companies, and reviews of research and
industry publications and investment analyst contacts.
Temporary Defensive Position. We may, from time to time, adopt a temporary
defensive position in response to extraordinary adverse political, economic or
stock market events. We may invest up to 100% of the Fund's assets in the
common stock of larger companies, in fixed-income securities, or short-term
money market securities. To the extent we adopt
--------------------------------------------------------------------------------
"Market capitalization" or "market cap" provides an estimate of a company's
value. It is calculated by multiplying the total number of a company's
outstanding shares by the share's current price.
--------------------------------------------------------------------------------
Convertible securities are bonds or preferred stock that give purchasers the
right of exchange for a specified number of shares of a company's common stock
at specified prices within a certain period of time. Purchasers receive regular
interest payments until they exercise their exchange right.
--------------------------------------------------------------------------------
7
<PAGE>
A Detailed Look at Mid Cap--Institutional Class
such a position and over the course of its duration, the Fund may not meet its
goal of long-term capital growth.
RISKS
Below we set forth some of the prominent risks associated with investing in
medium-sized companies, as well as investing in general. Although we attempt to
assess the likelihood that these risks may actually occur and to limit them, we
make no guarantee that we will succeed.
Primary Risks
Market Risk. Although individual stocks can outperform their local markets,
deteriorating market conditions might cause an overall weakness in the stock
prices of the entire market.
Stock Selection Risk. A risk that pervades all investing is the risk that the
securities an investor has selected will not perform to expectations. The Fund
follows a disciplined selling process to try to lessen this risk. First, we may
sell a security if one or more of the following conditions take place:
. There is a material change in the company's fundamentals;
. The stock underperforms its industry peer group by 15% or more; or
. The stock price reaches our expectations.
Medium-Sized Company Risk. Medium-sized company stocks tend to experience
steeper price fluctuations--down as well as up--than the stocks of larger
companies. A shortage of reliable information--the same information gap that
creates opportunity--can pose added risk. Industrywide reversals have had a
greater impact on medium-sized companies, since they usually lack a large
company's financial resources. Medium-sized company stocks are typically less
liquid than large company stocks: when things are going poorly for a medium-
sized company, it is harder to find a buyer for a medium-sized company's
shares.
Foreign Investment Risk. To the extent that the Fund holds companies based
outside the United States, it faces the risks inherent in foreign investing.
Adverse political, economic or social developments could undermine the value of
the Fund's investments or prevent the Fund from realizing their full value.
Financial reporting standards for companies based in foreign markets differ
from those in the United States. Since the "numbers" themselves sometimes mean
different things, we devote much of our research effort to understanding and
assessing the impact of these differences upon a company's financial condition.
Finally, the currency of the country in which the Fund has invested could
decline relative to the value of the U.S. dollar, which would decrease the
value of the investment to U.S. investors.
Secondary Risk
Pricing Risk. When price quotations for securities are not readily available,
we determine their value by the method that most accurately reflects their
current worth in the judgment of the Board of Trustees. This procedure implies
an unavoidable risk, the risk that our prices are higher or lower than the
prices that the securities might actually command if we sold them. If we have
valued the securities too highly, you may end up paying too much for Fund
shares when you buy. If we underestimate their price, you may not receive the
full market value for your Fund shares when you sell.
MANAGEMENT OF THE FUND
Deutsche Asset Management is the marketing name for the asset management
activities of Deutsche Bank AG, Deutsche Funds Management, Bankers Trust
Company, DB Alex. Brown LLC, Deutsche Asset Management, Inc., and Deutsche
Asset Management Investment Services Limited.
Board of Trustees. The Fund's shareholders, voting in proportion to the number
of shares each owns, elect a Board of Trustees, and the Trustees supervise all
of the Fund's activities on their behalf.
Investment Adviser. Under the supervision of the Board of Trustees, Bankers
Trust Company, with headquarters at 130 Liberty Street, New York, NY 10006,
acts as the Fund's investment adviser. Bankers Trust is an indirect wholly-
owned subsidiary of Deutsche Bank AG. As investment adviser, Bankers Trust
makes the Fund's investment decisions. It buys and sells securities for the
Fund and conducts the research that leads to the purchase and sale decisions.
The investment adviser received a fee of 0.65% of the Fund's (Equity
Appreciation--Institutional Class) average daily net assets for its services in
the last fiscal year. The investment adviser reimbursed a portion of its fee
during the period.
As of March 31, 2000, Bankers Trust had total assets under management of
approximately $239 billion. Bankers Trust is dedicated to servicing the needs
of corporations, governments, financial institutions, and private clients and
has invested retirement assets on behalf of the nation's largest corporations
and institutions for more than 50 years. The scope of the firm's capability is
broad: it is a leader in both the active and passive quantitative investment
disciplines and maintains a major presence in stock and bond markets worldwide.
At a special meeting of shareholders held in 1999, shareholders of the Fund
approved a new investment advisory agreement
--------------------------------------------------------------------------------
Portfolio Turnover. The portfolio turnover rate measures the frequency that the
master portfolio sells and replaces the securities it holds within a given
period. Historically, Equity Appreciation and Mid Cap have had high portfolio
turnover rates. High turnover can increase a Fund's transaction costs, thereby
lowering its returns. It may also increase your tax liability.
--------------------------------------------------------------------------------
8
<PAGE>
A Detailed Look at Mid Cap--Institutional Class
with Deutsche Asset Management, Inc. (formerly Morgan Grenfell Inc.). The new
investment advisory agreement may be implemented within two years of the date
of the special meeting upon approval of a majority of the members of the Board
of Trustees who are not "interested persons," generally referred to as
independent trustees. Shareholders of the Fund also approved a new sub-
investment advisory agreement among the Trust, Deutsche Asset Management, Inc.
and Bankers Trust under which Bankers Trust may perform certain of Deutsche
Asset Management, Inc.'s responsibilities, at Deutsche Asset Management, Inc.'s
expense, upon approval of the independent trustees, within two years of the
date of the special meeting. Under the new investment advisory agreement and
new sub-advisory agreement, the compensation paid and the services provided
would be the same as those under the existing advisory agreement with Bankers
Trust.
Deutsche Asset Management, Inc. is located at 885 Third Avenue, 32nd Floor, New
York, New York 10022. The firm provides a full range of investment advisory
services to institutional clients. It serves as investment adviser to 11 other
investment companies and as sub-adviser to five other investment companies.
Portfolio Manager
The following portfolio manager is responsible for the day-to-day management of
the master portfolio's investments.
Mary P. Dugan, CFA
. Director of Deutsche Asset Management and Portfolio Manager of the master
portfolio since 1999.
. Portfolio Manager in the investment adviser's small cap group from 1996 to
1999.
. Joined the investment adviser in 1994.
. Securities Analyst at Fred Alger Management from 1992 to 1994 and at Dean
Witter Reynolds from 1989 to 1992.
. BA from the University of Rochester and MBA from New York University's Stern
School of Business.
Ms. Dugan is supported by a team of analysts with specific sector
responsibilities in the mid cap asset class.
Other Services. Bankers Trust provides administrative services--such as
portfolio accounting, legal services and others--for the Fund. In addition,
Bankers Trust--or your service agent--performs the functions necessary to
establish and maintain your account. In addition to setting up the account and
processing your purchase and sale orders, these functions include:
. keeping accurate, up-to-date records for your individual Fund account;
. implementing any changes you wish to make in your account information;
. processing your requests for cash dividends and distributions from the Fund;
. answering your questions on the Fund's investment performance or
administration;
. sending proxy reports and updated prospectus information to you; and
. collecting your executed proxies.
Service agents include brokers, financial advisors or any other bank, dealer or
other institution that has a sub-shareholder servicing agreement with Bankers
Trust. Service agents may charge additional fees to investors only for those
services not otherwise included in the Bankers Trust servicing agreement, such
as cash management, or special trust or retirement-investment reporting.
Organizational Structure. The Fund is a "feeder fund" that invests all of its
assets in a "master portfolio," Capital Appreciation Portfolio. The Fund and
the master portfolio have the same investment objective. The master portfolio
is advised by Bankers Trust, an indirect wholly-owned subsidiary of Deutsche
Bank AG.
The master portfolio may accept investments from other feeder funds. The
feeders bear the master portfolio's expenses in proportion to their assets.
Each feeder can set its own transaction minimums, fund-specific expenses, and
other conditions. This arrangement allows the Fund's Trustees to withdraw the
Fund's assets from the master portfolio if they believe doing so is in the
shareholder's best interests. If the Trustees withdraw the Fund's assets they
would then consider whether the Fund should hire its own investment adviser,
invest in a different master portfolio or take other action.
CALCULATING THE FUND'S SHARE PRICE
We calculate the daily price of the Fund's shares (also known as the "Net Asset
Value" or "NAV") in accordance with the standard formula for valuing mutual
fund shares at the close of regular trading on the New York Stock Exchange
every day the Exchange is open for business.
The formula calls for deducting all of the Fund's liabilities from the total
value of its assets--the market value of the securities it holds, plus its cash
reserves--and dividing the result by the number of shares outstanding. (Note
that prices for securities that trade on foreign exchanges can change
significantly on days when the New York Stock Exchange is closed and you cannot
buy or sell Funds. Such price changes in the securities
--------------------------------------------------------------------------------
The Exchange is open every week, Monday through Friday, except when the
following holidays are celebrated: New Year's Day, Martin Luther King, Jr. Day
(the third Monday in January), Presidents' Day (the third Monday in February),
Good Friday, Memorial Day (the last Monday in May), Independence Day, Labor Day
(the first Monday in September), Thanksgiving Day (the fourth Thursday in
November) and Christmas Day.
--------------------------------------------------------------------------------
9
<PAGE>
A Detailed Look at Mid Cap--Institutional Class
the Fund owns may ultimately affect the price of Fund shares the next time the
NAV is calculated.)
We value the securities in the Fund at their stated market value if price
quotations are available. When price quotes for a particular security are not
readily available, we determine their value by the method that most accurately
reflects their current worth in the judgment of the Board of Trustees. You can
find the Fund's daily share price in the mutual fund listings of most major
newspapers.
PERFORMANCE INFORMATION
The Fund's performance can be used in advertisements that appear in various
publications. It may be compared to the performance of various indexes and
investments for which reliable performance data is available. The Fund's
performance may also be compared to averages, performance rankings, or other
information prepared by recognized mutual fund statistical services.
DIVIDENDS AND DISTRIBUTIONS
Dividends and capital gains distributions, if any, are paid at least annually.
We automatically reinvest all dividends and any capital gains, unless you tell
us otherwise.
TAX CONSIDERATIONS
The Fund does not ordinarily pay income taxes. You and other shareholders pay
taxes on the income or capital gains from the Fund's holdings. Your taxes will
vary from year to year, based on the amount of capital gains distributions and
dividends paid out by the Fund. You owe the taxes whether you receive cash or
choose to have distributions and dividends reinvested. Distributions and
dividends usually create the following tax liability:
<TABLE>
<CAPTION>
TRANSACTION TAX STATUS
<S> <C>
Income dividends Ordinary income
--------------------------------------------
Short-term capital gains
distributions Ordinary income
--------------------------------------------
Long-term capital gains
distributions Capital gains
--------------------------------------------
</TABLE>
Every year the Fund will send you information on the distributions for the
previous year. In addition, if you sell your Fund shares you may have a capital
gain or loss.
<TABLE>
<CAPTION>
TRANSACTION TAX STATUS
<S> <C>
Your sale of Capital gains or losses
shares owned more
than one year
---------------------------------------------
Your sale of Gains treated as ordinary
shares owned income; losses subject
for one year or to special rules
less
---------------------------------------------
</TABLE>
The tax considerations for tax deferred accounts or non-taxable entities will
be different.
Because each investor's tax circumstances are unique and because the tax laws
are subject to change, we recommend that you consult your tax advisor about
your investment.
BUYING AND SELLING FUND SHARES
Contacting the Mutual Fund Service Center of Deutsche Asset Management
By Phone 1-800-730-1313
By Mail Deutsche Asset Management
Service Center
P.O. Box 219210
Kansas City, MO 64121-9210
By Overnight Mail Deutsche Asset Management
Service Center
210 West 10th Street, 8th floor
Kansas City, MO 64105-1716
Our representatives are available to assist you personally Monday through
Friday, 9:00 a.m. to 7:00 p.m., Eastern time each day the New York Stock
Exchange is open for business. You can reach the Service Center's automated
assistance line 24 hours a day, 7 days a week.
Minimum Account Investments
<TABLE>
<S> <C>
To open an account $250,000
To add to an account $25,000
Minimum account balance $50,000
</TABLE>
The Fund and its service providers reserve the right to, from time to time and
in their discretion, waive or reduce the investment minimum. Shares of the Fund
may be purchased without regard to the investment minimums by employees of
Deutsche Bank AG, any of its affiliates or subsidiaries, their spouses and
minor children, and Directors or Trustees of any investment company advised or
administered by Deutsche Bank AG or any of its affiliates or subsidiaries,
their spouses and minor children.
How to Open Your Fund Account
By Mail Complete and sign the account application that accompanies this
prospectus. (You may obtain additional applications by calling the
Service Center.) Mail the completed application along with a check
payable to Mid Cap--Institutional Class--1725.
--------------------------------------------------------------------------------
10
<PAGE>
A Detailed Look at Mid Cap--Institutional Class
By Wire Call the Service Center to set up a wire account.
Please note that your account cannot become activated until we receive a
completed application via mail or fax.
Two Ways to Buy and Sell Shares in Your Account
MAIL:
Buying: Send your check, payable to "Mid Cap--Institutional Class--1725," to
the Service Center. The addresses are shown above under "Contacting the Mutual
Fund Service Center of Deutsche Asset Management." Be sure to include the fund
number and your account number (see your account statement) on your check.
Please note that we cannot accept starter checks or third-party checks. If you
are investing in more than one fund, make your check payable to "Deutsche Asset
Management funds," include your account number and the names and numbers of the
funds you have selected, and the dollar amount or percentage you would like
invested in each Fund.
Selling: Send a signed letter to the Service Center with your name, your fund
number and account number, the fund's name, and either the number of shares you
wish to sell or the dollar amount you wish to receive. You must leave at least
$50,000 worth of shares in your account to keep it open. Unless exchanging into
another Deutsche Asset Management mutual fund, you must submit a written
authorization to sell shares in a retirement account.
WIRE:
Buying: You may only buy shares by wire if your account is authorized to do so.
Please note that you or your service agent must call the Service Center at 1-
800-730-1313 to notify us in advance of a wire transfer purchase. Inform the
Service Center representative of the amount of your purchase and receive a
trade confirmation number. Instruct your bank to send payment by wire using the
wire instructions noted below. All wires must be received by 4:00 p.m. Eastern
time the next business day.
Routing No: 021001033
Attn: Deutsche Asset Management/
Mutual Funds
DDA No: 00-226-296
FBO: (Account name)
(Account name)
Credit: Mid Cap--Institutional Class--1725
Refer to your account statement for the account name, number and fund number.
Selling: You may sell shares by wire only if your account is authorized to do
so. For your protection, you may not change the destination bank account over
the phone. To sell by wire, contact your service agent or the Service Center at
1-800-730-1313. Inform the Service Center representative of the amount of your
redemption and receive a trade confirmation number. The minimum redemption by
wire is $1,000. We must receive your order by 4:00 p.m. Eastern time to wire
your account the next business day.
Important Information about Buying and Selling Shares
. You may buy and sell shares of a fund through authorized service agents as
well as directly from us. The same terms and conditions apply. Specifically,
once you place your order with a service agent, it is considered received by
the Service Center. It is then your service agent's responsibility to
transmit the order to the Service Center by the next business day. You should
contact your service agent if you have a dispute as to when your order was
placed with the fund. Your service agent may charge a fee for buying and
selling shares for you.
. You may place orders to buy and sell over the phone by calling your service
agent or the Service Center at 1-800-730-1313. If you pay for shares by check
and the check fails to clear, or if you order shares by phone and fail to pay
for them by 4:00 p.m. Eastern time the next business day, we have the right
to cancel your order, hold you liable or charge you or your account for any
losses or fees a fund or its agents have incurred. To sell shares, you must
state whether you would like to receive the proceeds by wire or check.
. After we or your service agent receives your order, we buy or sell your
shares at the next price calculated on a day the New York Stock Exchange is
open for business.
. We accept payment for shares only in U.S. dollars by check, bank or Federal
Funds wire transfer, or by electronic bank transfer. Please note that we
cannot accept starter checks or third-party checks.
. The payment of redemption proceeds (including exchanges) for shares of a fund
recently purchased by check may be delayed for up to 15 calendar days while
we wait for your check to clear.
. We process all sales orders free of charge.
. Unless otherwise instructed, we normally mail a check for the proceeds from
the sale of your shares to your account address the next business day but no
later than seven days.
. We reserve the right to close your account on 30 days' notice if it fails to
meet minimum balance requirements for any reason other than a change in
market value.
--------------------------------------------------------------------------------
11
<PAGE>
A Detailed Look at Mid Cap--Institutional Class
. If you sell shares by mail or wire, you may be required to obtain a
signature guarantee. Please contact your service agent or the Service Center
for more information.
. We remit proceeds from the sale of shares in U.S. dollars (unless the
redemption is so large it is made "in-kind").
. We do not issue share certificates.
. Selling shares of trust accounts and business or organization accounts may
require additional documentation. Please contact your service agent or the
Service Center for more information.
. During periods of heavy market activity, you may have trouble reaching the
Service Center by telephone. If this occurs, you should make your request by
mail.
. We reserve the right to reject purchases of Fund shares (including
exchanges) for any reason. We will reject purchases if we conclude that the
purchaser may be investing only for the short-term or for the purpose of
profiting from day-to-day fluctuations in the Fund's share price.
. We reserve the right to reject purchases of Fund shares (including
exchanges) or to suspend or postpone redemptions at times when both the New
York Stock Exchange and the Fund's custodian are closed.
. Account Statements and Fund Reports: We or your service agent will furnish
you with a written confirmation of every transaction that affects your
account balance. You will also receive monthly statements reflecting the
balances in your account. We will send you a report every six months on your
fund's overall performance, its current holdings and its investing
strategies.
. Exchange Privilege. You can exchange all or part of your shares for shares
of another Deutsche Asset Management mutual fund up to four times a year
(from the date of the first exchange). When you exchange shares, you are
selling shares in one fund to purchase shares in another. Before buying
shares through an exchange, you should be sure to obtain a copy of that
fund's prospectus and read it carefully. You may only order exchanges over
the phone if your account is authorized to do so. You will receive a written
confirmation of each transaction from the Service Center or your service
agent.
Please note the following conditions:
. The accounts between which the exchange is taking place must have the same
name, address and taxpayer ID number.
. You may make the exchange by phone (if your account has the exchange by
phone feature) or by letter or wire.
. If you are maintaining a taxable account, you may have to pay taxes on the
exchange.
-------------------------------------------------------------------------------
12
<PAGE>
A Detailed Look at Mid Cap--Institutional Class
Equity Appreciation--Institutional Class performance is presented because, in
conjunction with the reorganization discussed above, Equity Appreciation--
Institutional Class became Mid Cap--Institutional Class as of the close of
business on August 31, 2000. The table below provides a picture of Equity
Appreciation--Institutional Class financial performance for the past five
years. The information selected reflects financial results for a single Equity
Appreciation-- Institutional Class share. The total returns in the table
represent the rate of return that an investor would have earned on an
investment in Equity Appreciation--Institutional Class (assuming reinvestment
of all interest income and distributions). This information is included in
Equity Appreciation--Institutional Class' annual and semi-annual reports. The
annual and semi-annual reports are available free of charge by calling the
Service Center at 1-800-730-1313.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
For the Period
For the Six January 1, 1995 For the
Months Ended through Year Ended
March 31, For the Years Ended September 30, September 30, December 31,
2000/5/ 1999 1998 1997 1996 1995/1/ 1994
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating
Performance:
Net Asset Value,
Beginning of Period $20.11 $13.98 $16.70 $15.23 $14.14 $10.14 $9.80
------------------------------------------------------------------------------------------------------------
Income From Investment
Operations
Net Investment (Expenses
in Excess of) Income (0.01) (0.06) (0.07) (0.06) (0.05) (0.02) (0.03)
------------------------------------------------------------------------------------------------------------
Net Realized and
Unrealized Gain (Loss)
on Investments
Transactions 10.30 6.25 (1.68) 2.31 1.72 4.02 0.37
------------------------------------------------------------------------------------------------------------
Total from Investment
Operations 10.29 6.19 (1.75) 2.25 1.67 4.00 0.34
------------------------------------------------------------------------------------------------------------
Distributions to
Shareholders
Net Realized Gains (4.69) (0.06) (0.97) (0.78) (0.58) -- --
------------------------------------------------------------------------------------------------------------
Net Asset Value, End of
Period $25.71 $20.11 $13.98 $16.70 $15.23 $14.14 $10.14
------------------------------------------------------------------------------------------------------------
Total Investment Return 58.60% 44.33% (10.68)% 15.82% 12.45% 39.45% 3.47%
------------------------------------------------------------------------------------------------------------
Supplemental Data and
Ratios:
Net Assets, End of
Period (000s omitted) $352,032 $171,709 $122,077 $170,008 $157,568 $92,033 $29,973
------------------------------------------------------------------------------------------------------------
Ratios to Average Net
Assets:
Net Investment
Income/(Expenses in
Excess of Income) (0.15)% (0.31)% (0.36)% (0.39)% (0.42)% (0.38)%/2/ (0.32)%
------------------------------------------------------------------------------------------------------------
Expenses 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%/2/ 1.00%/2/
------------------------------------------------------------------------------------------------------------
Decrease Reflected in
Above Expense Ratio Due
to Fees Waived/Expenses
Reimbursed by Bankers
Trust 0.16% 0.20% 0.20% 0.20% 0.24% 0.33%/2/ 0.46%
------------------------------------------------------------------------------------------------------------
Portfolio Turnover
Rate/3/ 55% 165% 159% 188% 271%/4/ 125%/4/ 157%/4/
------------------------------------------------------------------------------------------------------------
</TABLE>
/1/The Board of Trustees approved the change of the Fund's year end from
December 31 to September 30.
/2/Annualized
/3/The portfolio turnover rate is the rate for the master portfolio in which
the Fund invests all its assets.
/4/Amounts were previously included in the Capital Appreciation Fund Financial
Highlights.
/5/Unaudited
--------------------------------------------------------------------------------
13
<PAGE>
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<PAGE>
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<PAGE>
Additional information about the Fund's investments and performance is
available in the Fund's annual and semi-annual reports to shareholders. In
the Fund's annual report, you will find a discussion of the market
conditions and investment strategies that significantly affected the Fund's
performance during its last fiscal year.
You can find more detailed information about the Fund in the current
Statement of Additional Information, dated August 31, 2000, which we have
filed electronically with the Securities and Exchange Commission (SEC) and
which is incorporated by reference. To receive your free copy of the
Statement of Additional Information, the annual or semi-annual report, or
if you have questions about investing in the Fund, write to us at:
Deutsche Asset Management
Service Center
P.O. Box 219210
Kansas City, MO 64121-9210
or call our toll-free number: 1-800-730-1313
You can find reports and other information about the Fund on the EDGAR
Database on the SEC's website (http://www.sec.gov), or you can get copies
of this information, after payment of a duplicating fee, by electronic
request at [email protected] or by writing to the Public Reference Section
of the SEC, Washington, D.C. 20549-0102. Information about the Fund,
including its Statement of Additional Information, can be reviewed and
copied at the SEC's Public Reference Room in Washington, D.C. For
information on the Public Reference Room, call the SEC at 202-942-8090.
Mid Cap--Institutional Class
BT Investment Funds
Distributed by:
ICC Distributors, Inc. CUSIP #055922637
Two Portland Square
Portland, ME 04101 1725PRO (08/00)
811-4760
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
August 31, 2000
BT Investment Funds
Mid Cap - Investment Class
formerly Capital Appreciation Fund
Mid Cap - Institutional Class
formerly Equity Appreciation -- Institutional Class
Small Cap - Investment Class
BT Investment Funds (the "Trust") is an open-end, management investment company
(mutual fund) which consists of a number of separate investment funds. The
shares of the following funds Mid Cap and Small Cap (each, a "Fund" and together
the "Funds") - are described herein. Mid Cap currently offers two classes of
shares, Investment Class and Institutional Class. Small Cap currently offers
only one class of shares, Investment Class. Each of the Funds is a separate
series of the Trust.
Unlike other mutual funds, the Trust seeks to achieve the investment objectives
of each Fund by investing all the investable assets ("Assets") of the Fund in a
diversified open-end management investment company having the same investment
objectives as the Fund. These investment companies (or a series thereof) are,
respectively, Capital Appreciation Portfolio and Small Cap Portfolio (each a
"Portfolio" and collectively the "Portfolios"). The Small Cap Portfolio is a
subtrust of BT Investment Portfolios.
Shares of the Funds are sold by ICC Distributors, Inc. ("ICCD"), the Trust's
Distributor, to clients and customers (including affiliates and correspondents)
of Bankers Trust Company ("Bankers Trust"), the Portfolios' investment adviser
(the "Adviser"), and to clients and customers of other organizations.
The Trust's Prospectuses for Mid Cap - Investment Class and Small Cap -
Investment Class are each dated January 31, 2000. The Prospectus for Mid Cap -
Institutional Class is dated August 31, 2000. The Prospectuses provide the basic
information investors should know before investing. This Statement of Additional
Information ("SAI"), which is not a Prospectus, is intended to provide
additional information regarding the activities and operations of the Trust and
should be read in conjunction with that Fund's Prospectus. You may request a
copy of a prospectus or a paper copy of this SAI, if you have received it
electronically, free of charge by calling the Trust at the telephone number
listed below or by contacting any Service Agent (which is any broker, financial
advisor, bank, dealer or other institution or financial intermediary that has a
sub-shareholder servicing agreement with Bankers Trust). This SAI is not an
offer of any Fund for which an investor has not received a Prospectus.
Capitalized terms not otherwise defined in this SAI have the meanings accorded
to them in the Trust's Prospectuses. The financial
<PAGE>
statements for each Fund and the corresponding Portfolio for the fiscal year
ended September 30, 1999, are incorporated herein by reference to the Annual
Report to shareholders for the Fund and Portfolio dated September 30, 1999. The
financial statements for each Fund and the corresponding portfolio for the six
month period ended March 31, 2000, are incorporated herein by reference to the
Semi-Annual Report to shareholders for the Fund and Portfolio dated March 31,
2000. A copy of the Fund's and the Portfolio's Annual Report and Semi-Annual
Report may be obtained without charge by calling the Fund at the telephone
number listed below.
BANKERS TRUST COMPANY
Investment Adviser and Administrator of the Portfolios
ICC DISTRIBUTORS, INC.
Distributor
One South Street
Baltimore, MD 21202
1-800-730-1313
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS........................... 5
Investment Objectives..................................................... 5
Investment Policies....................................................... 5
Futures Contracts and Options on Futures Contracts........................ 18
Additional Risk Factors................................................... 21
Portfolio Turnover........................................................ 25
Investment Restrictions................................................... 25
Portfolio Transactions and Brokerage Commissions.......................... 30
PERFORMANCE INFORMATION.................................................... 32
Standard Performance Information.......................................... 32
Comparison of Fund Performance............................................ 33
Economic and Market Information........................................... 34
VALUATION OF SECURITIES; REDEMPTIONS AND PURCHASES IN-KIND................. 34
Purchase of Shares........................................................ 35
Redemption of Shares...................................................... 36
Redemptions and Purchases In-Kind......................................... 37
Trading in Foreign Securities............................................. 38
MANAGEMENT OF THE TRUST AND THE PORTFOLIOS................................. 39
Trustees of the Trust and Portfolios...................................... 39
Officers of the Trusts and Portfolio...................................... 41
Trustee Compensation Table................................................ 41
Code of Ethics............................................................ 41
Investment Adviser........................................................ 43
Administrator............................................................. 44
Distributor............................................................... 45
Service Agent............................................................. 45
Custodian and Transfer Agent.............................................. 46
Banking Regulatory Matters................................................ 46
Counsel and Independent Auditors.......................................... 46
ORGANIZATION OF THE TRUST.................................................. 46
TAXATION................................................................... 48
Dividends and Distributions............................................... 48
Taxation of the Funds..................................................... 49
Foreign Securities........................................................ 50
Taxation of the Portfolios................................................ 50
Sale of Shares............................................................ 51
Foreign Withholding Taxes................................................. 51
Backup Withholding........................................................ 51
Foreign Shareholders...................................................... 51
Other Taxation............................................................ 52
FINANCIAL STATEMENTS....................................................... 52
APPENDIX................................................................... 53
</TABLE>
3
<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
Investment Objectives
Mid Cap's investment objective is long-term capital growth. Small Cap's
investment objective is long-term capital growth. The production of any current
income is secondary to each Fund's investment objective, and there can, of
course, be no assurance that either Fund will achieve its investment objective.
Investment Policies
Each Fund seeks to achieve its investment objective by investing all of its
assets in the corresponding Portfolio, which has the same investment objective
as the Fund. The Trust may withdraw a Fund's investment from the corresponding
Portfolio at any time if the Board of Trustees of the Trust determines that it
is in the best interests of the Fund to do so.
Since the investment characteristics of each Fund will correspond directly to
those of the corresponding Portfolio, the following is a discussion of the
various investments of and techniques employed by each Portfolio.
Equity Securities. As used herein, "equity securities" are defined as common
stock, preferred stock, trust or limited partnership interests, rights and
warrants to subscribe to or purchase such securities, sponsored or unsponsored
ADRs, EDRs, GDRs, and convertible securities, consisting of debt securities or
preferred stock that may be converted into common stock or that carry the right
to purchase common stock. Common stocks, the most familiar type, represent an
equity (ownership) interest in a corporation. Although equity securities have a
history of long-term growth in value, their prices fluctuate based on changes in
a company's financial condition and on overall market and economic conditions.
Smaller companies are especially sensitive to these factors.
Debt Securities. Although not a principal investment, each Portfolio may invest
in debt securities. Bonds and other debt instruments are used by issuers to
borrow money from investors. The issuer pays the investor a fixed or variable
rate of interest, and must repay the amount borrowed at maturity. Some debt
securities, such as zero coupon bonds, do not pay current interest, but are
purchased at a discount from their face values. Debt securities, loans, and
other direct debt have varying degrees of quality and varying levels of
sensitivity to changes in interest rates. Longer-term bonds are generally more
sensitive to interest rate changes than short-term bonds.
Lower-quality foreign government debt securities are often considered to be
speculative and involve greater risk of default or price changes, or they may
already be in default. These risks are in addition to the general risks
associated with foreign securities.
5
<PAGE>
Convertible Securities. A convertible security is a bond or preferred stock
which may be converted at a stated price within a specific period of time into a
specified number of shares of common stock of the same or different issuer.
Convertible securities are senior to common stock in a corporation's capital
structure, but usually are subordinated to non-convertible debt securities.
While providing a fixed income stream--generally higher in yield than in the
income derived from a common stock but lower than that afforded by a non-
convertible debt security--a convertible security also affords an investor the
opportunity, through its conversion feature, to participate in the capital
appreciation of common stock into which it is convertible.
In general, the market value of a convertible security is the higher of its
investment value (its value as a fixed income security) or its conversion value
(the value of the underlying shares of common stock if the security is
converted). As a fixed income security, the market value of a convertible
security generally increases when interest rates decline and generally decreases
when interest rates rise; however, the price of a convertible security generally
increases as the market value of the underlying stock increases, and generally
decreases as the market value of the underlying stock declines. Investments in
convertible securities generally entail less risk than investments in the common
stock of the same issuer.
Preferred Stock. Preferred stock has a preference in liquidation (and, generally
dividends) over common stock but is subordinated in liquidation to debt. As a
general rule the market value of preferred stocks with fixed dividend rates and
no conversion rights varies inversely with interest rates and perceived credit
risk, with the price determined by the dividend rate. Some preferred stocks are
convertible into other securities, for example common stock, at a fixed price
and ratio or upon the occurrence of certain events. The market price of
convertible preferred stocks generally reflects an element of conversion value.
Because many preferred stocks lack a fixed maturity date, these securities
generally fluctuate substantially in value when interest rates change; such
fluctuations often exceed those of long-term bonds of the same issuer. Some
preferred stocks pay an adjustable dividend that may be based on an index,
formula, auction procedure or other dividend rate reset mechanism. In the
absence of credit deterioration, adjustable rate preferred stocks tend to have
more stable market values than fixed rate preferred stocks.
All preferred stocks are also subject to the same types of credit risks of the
issuer as corporate bonds. In addition, because preferred stock is junior to
debt securities and other obligations of an issuer, deterioration in the credit
rating of the issuer will cause greater changes in the value of a preferred
stock than in a more senior debt security with similar yield characteristics.
Preferred stocks may be rated by Standard & Poor's Ratings Group ("S&P") and
Moody's Investors Services, Inc. ("Moody's") although there is no minimum rating
which a preferred stock must have (and a preferred stock may not be rated) to be
an eligible investment for the Portfolio. The Adviser expects, however, that
generally the preferred stocks in which the Portfolio invests will be rated at
least CCC by S&P or Caa by Moody's or, if unrated, of comparable quality in the
opinion of the Adviser. Preferred stocks rated CCC by S&P are regarded as
predominantly speculative with respect to the issuer's capacity to pay preferred
stock obligations and represent
6
<PAGE>
the highest degree of speculation among securities rated between BB and CCC;
preferred stocks rated Caa by Moody's are likely to be in arrears on dividend
payments. Moody's rating with respect to preferred stocks does not purport to
indicate the future status of payments of dividends.
Warrants. Warrants are instruments which entitle the holder to buy underlying
equity securities at a specific price for a specific period of time. A warrant
tends to be more volatile than its underlying securities and ceases to have
value if it is not exercised prior to its expiration date. In addition, changes
in the value of a warrant do not necessarily correspond to changes in the value
of its underlying securities.
U.S. Government Securities. U.S. government securities are high-quality debt
securities issued or guaranteed by the U.S. Treasury or by an agency or
instrumentality of the U.S. government. Not all U.S. government securities are
backed by the full faith and credit of the United States. For example,
securities issued by the Farm Credit Banks or by the Federal National Mortgage
Association are supported by the instrumentality's right to borrow money from
the U.S. Treasury under certain circumstances. However, securities issued by
other agencies or instrumentalities are supported only by the credit of the
entity that issued them.
ADRs, GDRs and EDRs. American Depository Receipts ("ADRs"), Global Depository
Receipts ("GDRs"), and European Depository Receipts ("EDRs") are certificates
evidencing ownership of shares of a foreign-based issuer held in trust by a bank
or similar financial institution. Designed for use in U.S., international and
European securities markets, respectively, ADRs, GDRs and EDRs are alternatives
to the purchase of the underlying securities in their national markets and
currencies. ADRs, GDRs and EDRs are subject to the same risks as the foreign
securities to which they relate.
Zero Coupon Bonds. Zero coupon bonds are the separate income or principal
components of a debt instrument. These involve risks that are similar to those
of other debt securities, although they may be more volatile, and certain zero
coupon bonds move in the same direction as interest rates.
Illiquid Securities. Historically, illiquid securities have included securities
subject to contractual or legal restrictions on resale because they have not
been registered under the Securities Act of 1933, as amended (the "1933 Act"),
securities which are otherwise not readily marketable and repurchase agreements
having a remaining maturity of longer than seven days. Securities which have not
been registered under the 1933 Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and a mutual fund
might be unable to dispose of restricted or other illiquid securities promptly
or at reasonable prices and might thereby experience difficulty satisfying
redemptions within seven days. A mutual fund might also have to register such
restricted securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.
7
<PAGE>
A large institutional market has developed for certain securities that are not
registered under the 1933 Act, including repurchase agreements, commercial
paper, foreign securities, municipal securities and corporate bonds and notes.
Institutional investors depend on an efficient institutional market in which the
unregistered security can be readily resold or on an issuer's ability to honor a
demand for repayment. The fact that there are contractual or legal restrictions
on resale of such investments to the general public or to certain institutions
may not be indicative of their liquidity.
The Securities and Exchange Commission the (the "SEC") has adopted Rule 144A,
which allows a broader institutional trading market for securities otherwise
subject to restriction on their resale to the general public. Rule 144A
establishes a "safe harbor" from the registration requirements of the 1933 Act
of resale of certain securities to qualified institutional buyers. The Adviser
anticipates that the market for certain restricted securities such as
institutional commercial paper will expand further as a result of this
regulation and the development of automated systems for the trading, clearance
and settlement of unregistered securities of domestic and foreign issuers, such
as the PORTAL System sponsored by the National Association of Securities
Dealers, Inc.
Rule 144A Securities are securities in the United States that are not registered
for sale under federal securities laws but which can be resold to institutions
under SEC Rule 144A. Provided that a dealer or institutional trading market in
such securities exists, these restricted securities are treated as exempt from
the 15% limit on illiquid securities. Under the supervision of the Board of
Trustees of the Portfolio, the Adviser determines the liquidity of restricted
securities and, through reports from the Adviser, the Board will monitor trading
activity in restricted securities. If institutional trading in restricted
securities were to decline, the liquidity of the Portfolio could be adversely
affected.
In reaching liquidity decisions, the Adviser will consider, among other things,
the following factors: (1) the frequency of trades and quotes for the security;
(2) the number of dealers and other potential purchasers or sellers of the
security; (3) dealer undertakings to make a market in the security and (4) the
nature of the security and of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
the transfer).
When-Issued and Delayed Delivery Securities. Each Portfolio may purchase
securities on a when-issued or delayed delivery basis. Delivery of and payment
for these securities may take place as long as a month or more after the date of
the purchase commitment. The value of these securities is subject to market
fluctuations during this period and no income accrues to the Portfolio until
settlement takes place. Each Portfolio identifies, as part of a segregated
account, cash or liquid securities in an amount at least equal to these
commitments.
Lending of Portfolio Securities. The Portfolio is permitted to lend up to 30%
of the total value of its securities. The Portfolio will not lend securities to
bankers Trust, ICC Distributors or their affiliates. These loans must be
secured continuously by cash or equivalent collateral or by a letter of credit
at least equal to the market value of the securities loaned plus income. By
lending its securities, the Portfolio may increase its income by continuing to
receive income on the loaned securities as well as by the opportunity to receive
interest on the collateral. During the
8
<PAGE>
term of the loan, the Portfolio continues to bear the risk of fluctuations in
the price of the loaned securities. In lending securities to brokers, dealers
and other financial organizations, the Portfolio is subject to risks, which like
those associated with other extensions of credit, include delays in recovery and
possible loss of rights in the collateral should the borrower fail financially.
Cash collateral may be invested in a money market fund managed by Bankers Trust
(or its affiliates) and Bankers Trust may serve as a Portfolio's lending agent
and may share in revenue received from securities lending transactions as
compensation for this service.
Repurchase Agreements. In a repurchase agreement, a Portfolio buys a security at
one price and simultaneously agrees to sell it back at a higher price at a
future date. Delays or losses could result if the other party to the agreement
defaults or becomes insolvent.
Reverse Repurchase Agreements. In a reverse repurchase agreement, a 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 assets. A reverse repurchase agreement is a form
of borrowing and will be counted toward the Portfolio's borrowing restrictions.
Investment Companies. With respect to certain countries in which capital markets
are either less developed or not easily accessed, investments by the Portfolio
may be made through investment in other registered investment companies that in
turn are authorized to invest in the securities of such countries. Investments
in other investment companies may also be made for other purposes, such as noted
below under "Short-Term Instruments," are limited in amount by the Investment
Company Act of 1940, as amended (the "1940 Act") (except the Portfolio may
exceed the applicable percentage limits to the extent permitted by an exemptive
order of the SEC), and will involve the indirect payment of a portion of the
expenses, including advisory fees, of such other investment companies and may
result in a duplication of fees and expenses.
Short-Term Instruments. Each Portfolio intends to stay invested in the
securities described herein to the extent practical in light of its objective
and long-term investment perspective. However, each Portfolio may invest up to
35% of its total assets in high quality short-term investments with remaining
maturities of 397 days or less, or in money market mutual funds, to meet
anticipated redemptions and expenses for day-to-day operating purposes and up to
100% of its total assets when, in the Adviser's opinion, it is advisable to
adopt a temporary defensive position because of unusual and adverse conditions
affecting the respective markets. When either Portfolio experiences large cash
inflows through the sale of securities and desirable equity securities, that are
consistent with the Portfolio's investment objective, which are unavailable in
sufficient quantities or at attractive prices, the Portfolio may invest in
short-term instruments for a limited time pending availability of such portfolio
securities. Short-term instruments consist of U.S. and non-U.S.: (i) short-term
obligations of sovereign governments, their agencies, instrumentalities,
authorities or political subdivisions; (ii) other short-term debt securities
rated AA or higher by S&P or Aa or higher by Moody's or, if unrated, of
comparable quality in the opinion of the Adviser; (iii) commercial paper; (iv)
bank obligations, including negotiable certificates of deposit, time deposits
and bankers' acceptances; and (v) repurchase agreements. At
9
<PAGE>
the time the Portfolio invests in commercial paper, bank obligations or
repurchase agreements, the issuer or the issuer's parent must have outstanding
debt rated AA or higher by S&P or Aa or higher by Moody's or outstanding
commercial paper or bank obligations rated A-1 by S&P or Prime-1 by Moody's; or,
if no such ratings are available, the instrument must be of comparable quality
in the opinion of Bankers Trust. These instruments may be denominated in U.S.
dollars or in foreign currencies.
Lending of Portfolio Securities. Each Portfolio has the authority to lend up to
30% of the total value of its securities to brokers, dealers and other financial
organizations. These loans must be secured continuously by cash or securities
issued or guaranteed by the United States government, its agencies or
instrumentalities or by a letter of credit at least equal to the market value of
the securities loaned plus accrued income. Neither Portfolio will lend
securities to the Adviser, ICC Distributors or their affiliates. By lending its
securities, each Portfolio may increase its income by continuing to receive
payments in respect of dividends and interest on the loaned securities as well
as by either investing the cash collateral in short-term securities or obtaining
yield in the form of a fee interest paid by the borrower when irrevocable
letters of credit and U.S. government obligations are used as collateral. During
the term of the loan, each Portfolio continues to bear the risk of fluctuations
in the price of the loaned securities. There may be risks of delay in receiving
additional collateral or risks of delay in recovery of the securities or even
loss of rights in the collateral should the borrower of the securities fail
financially. Each Portfolio will adhere to the following conditions whenever its
securities are loaned: (i) the Portfolio must receive at least 100% cash
collateral or equivalent securities from the borrower; (ii) the borrower must
increase this collateral whenever the market value of the securities including
accrued interest rises above the level of the collateral; (iii) the Portfolio
must be able to terminate the loan at any time; (iv) the Portfolio must receive
substitute payments in respect of all dividends, interest or other distributions
on the loaned securities, and (v) voting rights on the loaned securities may
pass to the borrower; provided, however, that if a material event adversely
affecting the investment occurs, the Board of Trustees must retain the right to
terminate the loan and recall and vote the securities. In accordance with
approval received from the SEC, cash collateral may be invested in a money
market fund managed by Bankers Trust (or its affiliates) and Bankers Trust may
serve as each Portfolio's lending agent and may share in revenue received from
the securities lending transactions as compensation for this service.
Derivatives. Each Portfolio may invest in various instruments that are commonly
known as "derivatives." Generally, a derivative is a financial arrangement, the
value of which is based on, or "derived" from, a traditional security, asset, or
market index. Some derivatives such as mortgage-related and other asset-backed
securities are in many respects like any other investment, although they may be
more volatile or less liquid than more traditional debt securities. There are,
in fact, many different types of derivatives and many different ways to use
them. There are a range of risks associated with those uses. Futures and options
are commonly used for traditional hedging purposes to attempt to protect a fund
from exposure to changing interest rates, securities prices, or currency
exchange rates and as a low cost method of gaining exposure to a particular
securities market without investing directly in those securities. However, some
derivatives are used for leverage, which tends to magnify the effects of an
instrument's
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price changes as market conditions change. Leverage involves the use of a small
amount of money to control a large amount of financial assets, and can in some
circumstances, lead to significant losses. The Adviser will use derivatives only
in circumstances where they offer the most efficient means of improving the
risk/reward profile of a Portfolio and when consistent with a Portfolio's
investment objective and policies. The use of derivatives for non-hedging
purposes may be considered speculative.
Currency Exchange Contracts. Because each Portfolio may buy and sell securities
denominated in currencies other than the U.S. dollar and receives interest,
dividends and sale proceeds in currencies other than the U.S. dollar, a
Portfolio from time to time may enter into currency exchange transactions to
convert to and from different foreign currencies and to convert foreign
currencies to and from the U.S. dollar. A Portfolio either enters into these
transactions on a spot (i.e., cash) basis at the spot rate prevailing in the
foreign currency exchange market or uses forward contracts to purchase or sell
foreign currencies.
Forward Currency Exchange Contracts. A forward foreign currency exchange
contract is an obligation by a 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
brokerages) and their customers. A forward foreign currency exchange contract
may not have a deposit requirement and may be traded at a net price without
commission. Each Portfolio maintains with its custodian a segregated account of
cash or liquid securities in an amount at least equal to its obligations under
each forward foreign currency exchange contract. Neither spot transactions nor
forward foreign currency exchange contracts eliminate fluctuations in the prices
of the Portfolio's securities or in foreign exchange rates, or prevent loss if
the prices of these securities should decline.
Each 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 the Adviser's long-term investment
decisions, a Portfolio will not routinely enter into foreign currency hedging
transactions with respect to security transactions; however, the Adviser
believes that it is important to have the flexibility to enter into foreign
currency hedging transactions when it determines that the transactions would be
in the 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.
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While these contracts are not presently regulated by the Commodity Futures
Trading Commission ("CFTC"), the CFTC may in the future assert authority to
regulate forward contracts. In such event the Portfolio's ability to utilize
forward contracts may be restricted. Forward contracts may reduce the potential
gain from a positive change in the relationship between the U.S. dollar and
foreign currencies. Unanticipated changes in currency prices may result in
poorer overall performance for the Portfolio than if it had not entered into
such contracts. The use of foreign currency forward contracts may not eliminate
fluctuations in the underlying U.S. dollar equivalent value of the prices of or
rates of return on a Portfolio's foreign currency denominated portfolio
securities and the use of such techniques will subject a Portfolio to certain
risks.
The matching of the increase in value of a forward contract and the decline in
the U.S. dollar equivalent value of the foreign currency denominated asset that
is the subject of the hedge generally will not be precise. In addition, a
Portfolio may not always be able to enter into foreign currency forward
contracts at attractive prices and this will limit the Portfolio's ability to
use such contract to hedge or cross-hedge its assets. Also, with regard to a
Portfolio's use of cross-hedges, there can be no assurance that historical
correlations between the movement of certain foreign currencies relative to the
U.S. dollar will continue. Thus, at any time poor correlation may exist between
movements in the exchange rates of the foreign currencies underlying a
Portfolio's cross-hedges and the movements in the exchange rates of the foreign
currencies in which the Portfolio's assets that are the subject of such cross-
hedges are denominated.
Options on Foreign Currencies. Each Portfolio may purchase and write options on
foreign currencies for hedging purposes in a manner similar to that in which
futures contracts on foreign currencies, or forward contracts, will be utilized.
For example, a decline in the dollar value of a foreign currency in which
portfolio securities are denominated will reduce the dollar value of such
securities, even if their value in the foreign currency remains constant. In
order to protect against such diminutions in the value of portfolio securities,
the Portfolio may purchase put options on the foreign currency. If the value of
the currency does decline, a Portfolio will have the right to sell such currency
for a fixed amount in dollars and will thereby offset, in whole or in part, the
adverse effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby increasing the cost of such
securities, the Portfolio may purchase call options thereon. The purchase of
such options could offset, at least partially, the effects of the adverse
movements in exchange rates. As in the case of other types of options, however,
the benefit to the Portfolio deriving from purchases of foreign currency options
will be reduced by the amount of the premium and related transaction costs. In
addition, where currency exchange rates do not move in the direction or to the
extent anticipated, the Portfolio could sustain losses on transactions in
foreign currency options which would require it to forego a portion or all of
the benefits of advantageous changes in such rates.
The purchase of an option on foreign currency may be used to hedge against
fluctuations in exchange rates although, in the event of exchange rate movements
adverse to the Portfolio's
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position, it may forfeit the entire amount of the premium plus related
transaction costs. In addition, the Portfolio may purchase call options on a
foreign currency when the Adviser anticipates that the currency will appreciate
in value.
Each Portfolio may write options on foreign currencies for the same types of
hedging purposes. For example, where a Portfolio anticipates a decline in the
dollar value of foreign currency denominated securities due to adverse
fluctuations in exchange rates it could, instead of purchasing a put option,
write a call option on the relevant currency. If the expected decline occurs,
the options will most likely not be exercised, and the diminution in value of
portfolio securities will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, the Portfolio could
write a put option on the relevant currency which, if rates move in the manner
projected, will expire unexercised and allow the Portfolio to hedge such
increased cost up to the amount of the premium. As in the case of other types of
options, however, the writing of a foreign currency option will constitute only
a partial hedge up to the amount of the premium, and only if rates move in the
expected direction. If this does not occur, the option may be exercised and the
Portfolio would be required to purchase or sell the underlying currency at a
loss which may not be offset by the amount of the premium. Through the writing
of options on foreign currencies, the Portfolio also may be required to forego
all or a portion of the benefits which might otherwise have been obtained from
favorable movements in exchange rates.
Each Portfolio may write covered call options on foreign currencies. A call
option written on a foreign currency by a Portfolio is "covered" if the
Portfolio owns the underlying foreign currency covered by the call or has an
absolute and immediate right to acquire that foreign currency without additional
cash consideration (or for additional cash consideration held in a segregated
account by its Custodian) upon conversion or exchange of other foreign currency
held in its portfolio. A call option is also covered if the Portfolio has a call
on the same foreign currency and in the same principal amount as the call
written where the exercise price of the call held (a) is equal to or less than
the exercise price of the call written or (b) is greater than the exercise price
of the call written if the difference is maintained by the Portfolio in cash or
liquid securities in a segregated account with its custodian.
Each Portfolio also may write call options on foreign currencies that are not
covered for cross-hedging purposes. A call option on a foreign currency is for
cross-hedging purposes if it is not covered, but is designed to provide a hedge
against a decline in the U.S. dollar value of a security which the Portfolio
owns or has the right to acquire and which is denominated in the currency
underlying the option due to an adverse change in the exchange rate. In such
circumstances, the Portfolio collateralizes the option by maintaining in a
segregated account with its custodian, cash or liquid securities in an amount
not less than the value of the underlying foreign currency in U.S. dollars
marked to market daily.
There is no assurance that a liquid secondary market will exist for any
particular option, or at any particular time. If a Portfolio is unable to effect
a closing purchase transaction with respect to
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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. Each
Portfolio pays brokerage commissions or spreads in connection with its options
transactions.
Options on Securities. A Portfolio may write and purchase put and call options
on stocks. A call option gives the purchaser of the option the right to buy, and
obligates the writer to sell, the underlying stock at the exercise price at any
time during the option period. Similarly, a put option gives the purchaser of
the option the right to sell, and obligates the writer to buy, the underlying
stock at the exercise price at any time during the option period. Each Portfolio
may also write (sell) covered call and put options to a limited extent on its
portfolio securities ("covered options") in an attempt to increase income.
However, a 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 written by the Portfolio.
When a Portfolio writes a covered call option, it gives the purchaser of the
option the right to buy the underlying security at the price specified in the
option (the "exercise price") by exercising the option at any time during the
option period. If the option expires unexercised, the 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 premium less the commission ("net premium"), the opportunity to profit
during the option period from an increase in the market value of the underlying
security above the exercise price. In addition a Portfolio may continue to hold
a stock which might otherwise have been sold to protect against depreciation in
the market price of the stock.
A put option sold by either portfolio is covered when, among other things, cash
or securities acceptable to the broker are placed in a segregated account to
fulfill the obligations undertaken.
When a 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
specified exercise price at any time during the option period. If the option
expires unexercised, the Portfolio will realize income in the amount of the
premium received for writing the option. If the put option is exercised, a
decision over which the 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 received,
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.
A 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
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transaction is called a "closing purchase transaction." The Portfolio will
realize a profit or loss for a closing purchase transaction if the amount paid
to purchase an option is less or more, as the case may be, than the amount
received from the sale thereof. To close out a position as a purchaser of an
option, the Portfolio, may make 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 a Portfolio writes an option, an amount equal to the net premium received
by the Portfolio is included in the liability section of the Portfolio's
Statement of Assets and Liabilities as a deferred credit. The amount of the
deferred credit will be subsequently marked to market to reflect the current
market value of the option written. The current market value of a traded option
is the last sale price or, in the absence of a sale, the mean between the
closing bid and asked price. If an option expires on its stipulated expiration
date or if the Portfolio enters into a closing purchase transaction, the
Portfolio will realize a gain (or loss if the cost of a closing purchase
transaction exceeds the premium received when the option was sold), and the
deferred credit related to such option will be eliminated. If a call option is
exercised, the 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.
A 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.
A 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 affirmatively benefiting from a decline in the price of securities
which 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.
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The hours of trading for options on securities may not conform to the hours
during which the underlying securities are traded. To the extent that the option
markets close before the markets for the underlying securities, significant
price and rate movements can take place in the underlying securities markets
that cannot be reflected in the option markets. It is impossible to predict the
volume of trading that may exist in such options, and there can be no assurance
that viable exchange markets will develop or continue.
A Portfolio may engage in over-the-counter options transactions with broker-
dealers who make markets in these options. The ability to terminate over-the-
counter option positions is more limited than with exchange-traded option
positions because the predominant market is the issuing broker rather than an
exchange, and may involve the risk that broker-dealers participating in such
transactions will not fulfill their obligations. To reduce this risk, the
Portfolio will purchase such options only from broker-dealers who are primary
government securities dealers recognized by the Federal Reserve Bank of New York
and who agree to (and are expected to be capable of) entering into closing
transactions, although there can be no guarantee that any such option will be
liquidated at a favorable price prior to expiration. The Adviser will monitor
the creditworthiness of dealers with whom the Portfolio enters into such options
transactions under the general supervision of the Portfolios' Trustees. The
Portfolio intends to treat OTC Options purchased and the assets used to "cover"
OTC Options written as not readily marketable and therefore subject to the
limitations described in "Investment Restrictions." Unless the Trustees
conclude otherwise, each Portfolio intends to treat OTC options as not readily
marketable and therefore subject to each Portfolio's 15% limitation on
investment in illiquid securities.
Options on Securities Indices. In addition to options on securities, each
Portfolio may also purchase and write (sell) call and put options on domestic
and foreign stock exchanges, in lieu of direct investment in the underlying
securities for hedging purposes. Such options give the holder the right to
receive a cash settlement during the term of the option based upon the
difference between the exercise price and the value of the index. Such options
will be used for the purposes described above under "Options on Securities."
Options on stock indices are generally similar to options on stock except that
the delivery requirements are different. Instead of giving the right to take or
make delivery of stock at a specified price, an option on a stock index gives
the holder the right to receive a cash "exercise settlement amount" equal to (a)
the amount, if any, by which the fixed exercise price of the option exceeds (in
the case of a put) or is less than (in the case of a call) the closing value of
the underlying index on the date of exercise, multiplied by (b) a fixed "index
multiplier." Receipt of this cash amount will depend upon the closing level of
the stock index upon which the option is based being greater than, in the case
of a call, or less than, in the case of a put, the exercise price of the option.
The amount of cash received will be equal to such difference between the closing
price of the index and the exercise price of the option expressed in dollars or
a foreign currency, as the case may be, times a specified multiple. The writer
of the option is obligated, in return for the premium received, to make delivery
of this amount. The writer may offset its position in stock index options prior
to expiration by entering into a closing transaction on an exchange or the
option may expire unexercised.
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Because the value of an index option depends upon movements in the level of the
index rather than the price of a particular stock, whether the Portfolio will
realize a gain or loss from the purchase or writing of options on an index
depends upon movements in the level of stock prices in the stock market
generally or, in the case of certain indices, in an industry or market segment,
rather than movements in the price of a particular stock. Accordingly,
successful use by the Portfolio of options on stock indices will be subject to
the Adviser's ability to predict correctly movements in the direction of the
stock market generally or of a particular industry. This requires different
skills and techniques than predicting changes in the price of individual stocks.
Options on securities indices entail risks in addition to the risks of options
on securities. The absence of a liquid secondary market to close out options
positions on securities indices is more likely to occur, although the Portfolio
generally will only purchase or write such an option if the Adviser believes the
option can be closed out.
Use of options on securities indices also entails the risk that trading in such
options may be interrupted if trading in certain securities included in the
index is interrupted. The Portfolio will not purchase such options unless the
Adviser believes the market is sufficiently developed such that the risk of
trading in such options is no greater than the risk of trading in options on
securities.
Price movements in a Portfolio's holdings may not correlate precisely with
movements in the level of an index and, therefore, the use of options on indices
cannot serve as a complete hedge. Because options on securities indices require
settlement in cash, the Adviser may be forced to liquidate portfolio securities
to meet settlement obligations.
Certificates of Deposit and Bankers' Acceptances. Certificates of deposit are
receipts issued by a depository institution in exchange for the deposit of
funds. The issuer agrees to pay the amount deposited plus interest to the bearer
of the receipt on the date specified on the certificate. The certificate usually
can be traded in the secondary market prior to maturity. Bankers' acceptances
typically arise from short-term credit arrangements designed to enable
businesses to obtain funds to finance commercial transactions. Generally, an
acceptance is a time draft drawn on a bank by an exporter or an importer to
obtain a stated amount of funds to pay for specific merchandise. The draft is
then "accepted" by a bank that, in effect, unconditionally guarantees to pay the
face value of the instrument on its maturity date. The acceptance may then be
held by the accepting bank as an earning asset or it may be sold in the
secondary market at the going rate of discount for a specific maturity. Although
maturities for acceptances can be as long as 270 days, most acceptances have
maturities of six months or less.
Commercial Paper. Commercial paper consists of short-term (usually from 1 to 270
days) unsecured promissory notes issued by corporations in order to finance
their current operations. A variable amount master demand note (which is a type
of commercial paper) represents a direct borrowing arrangement involving
periodically fluctuating rates of interest under a letter agreement between a
commercial paper issuer and an institutional lender pursuant to which the lender
may determine to invest varying amounts.
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Futures Contracts and Options on Futures Contracts
General. The successful use of futures contracts and options thereon draws upon
the Adviser's skill and experience with respect to such instruments and usually
depends on the Adviser's ability to forecast interest rate and currency exchange
rate movements correctly. Should interest or exchange rates move in an
unexpected manner, a Portfolio may not achieve the anticipated benefits of
futures contracts or options on futures contracts or may realize losses and thus
will be in a worse position than if such strategies had not been used. In
addition, the correlation between movements in the price of futures contracts or
options on futures contracts and movements in the price of the securities and
currencies hedged or used for cover will not be perfect and could produce
unanticipated losses.
Futures Contracts. Futures contracts are contracts to purchase or sell a fixed
amount of an underlying instrument, commodity or index at a fixed time and place
in the future. U.S. futures contracts have been designed by exchanges which
have been designated "contracts markets" by the CFTC, and must be executed
through a futures commission merchant, or brokerage firm, which is a member of
the relevant contract market. Futures contracts trade on a number of exchange
markets and clear through their clearing corporations. A Portfolio may enter
into contracts for the purchase or sale for future delivery of fixed-income
securities, foreign currencies, or financial indices including any index of U.S.
government securities, foreign government securities or corporate debt
securities. A Portfolio may enter into futures contracts which are based on
debt securities that are backed by the full faith and credit of the U.S.
Government, such as long-term U.S. Treasury Bonds, Treasury Notes, Government
National Mortgage Association ("GNMA") modified pass-through mortgage-backed
securities and three-month U.S. Treasury Bills. A Portfolio may also enter into
futures contracts which are based on bonds issued by governments other than the
U.S. government.
Futures contracts on foreign currencies may be used to hedge against securities
that are denominated in foreign currencies.
At the same time a futures contract is entered into, the Portfolio must allocate
cash or securities as a deposit payment. Daily thereafter, the futures contract
is valued and the payment of "variation margin" may be required, since each day
the Portfolio would provide or receive cash that reflects any decline or
increase in the contract's value.
At the time of delivery of securities pursuant to such a contract, adjustments
are made to recognize differences in value arising from the delivery of
securities with a different interest rate from that specified in the contract.
In some (but not many) cases, securities called for by a futures contract may
not have been issued when the contract was written.
Although futures contracts (other than those that settle in cash such as index
futures) by their terms call for the actual delivery or acquisition of the
instrument underlying the contract, in most cases the contractual obligation is
fulfilled by offset before the date of the contract without having to make or
take delivery of the instrument underlying the contract. The offsetting of a
contractual obligation is accomplished by entering into an opposite position in
the identical
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futures contract on the commodities exchange on which the futures contract was
entered into (or a linked exchange). Such a transaction, which is effected
through a member of an exchange, cancels the obligation to make or take delivery
of the instrument underlying the contract. Since all transactions in the futures
market are made, offset or fulfilled through a clearinghouse associated with the
exchange on which the contracts are traded, the Portfolio will incur brokerage
fees when it enters into futures contracts.
The assets in the segregated asset account maintained to cover the Portfolio's
obligations with respect to such futures contracts will consist of cash or
securities acceptable to the broker from its portfolio in an amount equal to the
difference between the fluctuating market value of such futures contracts and
the aggregate value of the initial and variation margin payments made by the
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 which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on most
participants entering into offsetting transactions rather than making or taking
delivery. To the extent that many participants decide to make or take delivery,
liquidity in the futures market could be reduced, thus producing distortion.
Third, from the point of view of speculators, the margin deposit requirements in
the futures market are less onerous than margin lending requirements in the
securities market. Therefore, increased participation by speculators in the
futures market may cause temporary price distortions. Due to the possibility of
distortion, a correct forecast of general interest rate or currency exchange
rate trends by the Adviser may still not result in a successful transaction.
In addition, futures contracts entail risks. Although the Adviser believes that
use of such contracts will benefit the Portfolios, if the Adviser's investment
judgment about the general direction of interest rates is incorrect, a
Portfolio's overall performance would be poorer than if it had not entered into
any such contract. For example, if a Portfolio has hedged against the
possibility of an increase in interest rates which would adversely affect the
price of debt securities held in its portfolio and interest rates decrease
instead, the Portfolio will lose part or all of the benefit of the increased
value of its debt securities which it has hedged because it will have offsetting
losses in its futures positions. In addition, in such situations, if a Portfolio
has insufficient cash, it may have to sell debt securities from its portfolio to
meet daily variation margin requirements. Such sales of bonds may be, but will
not necessarily be, at increased prices which reflect the rising market. A
Portfolio may have to sell securities at a time when it may be disadvantageous
to do so.
Options on Futures Contracts. Each Portfolio may purchase and write options on
futures contracts for hedging purposes. The purchase of a call option on a
futures contract is similar in some respects to the purchase of a call option on
an individual security. Depending on the pricing of the option compared to
either the price of the futures contract upon which it is based or the price of
the underlying debt securities, it may or may not be less risky than ownership
of the
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futures contract or underlying debt securities. For example, when a Portfolio is
not fully invested it may purchase a call option on an interest rate sensitive
futures contract to hedge against a potential price increase on debt securities
due to declining interest rates. The purchase of a put option on a futures
contract is similar in some respects to the purchase of protective put options
on portfolio securities. For example, a Portfolio may purchase a put option on
an interest rate sensitive futures contract to hedge its portfolio against the
risk of a decline in the price of debt securities and to rising interest rates.
The writing of a call option on a futures contract may constitute a partial
hedge against declining prices of portfolio securities which are the same as or
correlate with the security or currency of foreign currency which is deliverable
upon exercise of the futures contract. If the futures price at expiration of the
option is below the exercise price, a Portfolio will retain the full amount of
the option premium which provides a partial hedge against any decline that may
have occurred in the Portfolio's portfolio holdings. The writing of a put option
on a futures contract may constitute a partial hedge against increasing prices
of intended portfolio securities which are the same as or correlate with the
security or foreign currency which is deliverable upon exercise of the futures
contract. If the futures price at expiration of the option is higher than the
exercise price, the Portfolio will retain the full amount of the option premium
which provides a partial hedge against any increase in the price of securities
which the Portfolio intends to purchase. If a put or call option the Portfolio
has written is exercised, the Portfolio will incur a loss which will be reduced
by the amount of the premium it receives. Depending on the degree of correlation
between changes in the value of its portfolio securities and changes in the
value of its futures positions, the Portfolio's losses from existing options on
futures may to some extent be reduced or increased by changes in the value of
portfolio securities.
The amount of risk a 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.
Futures Contracts on Securities Indices. Each Portfolio may enter into futures
contracts providing for cash settlement based upon changes in the value of an
index of domestic or foreign securities. This investment technique is designed
as a low-cost method of gaining exposure to a particular securities market
without investing directly in those securities or to hedge against anticipated
future change in general market prices which otherwise might either adversely
affect the value of securities held by the Portfolio or adversely affect the
prices of securities which are intended to be purchased at a later date for the
Portfolio.
In general, each transaction in futures contracts on a securities index involves
the establishment of a position which the Adviser believes will move in a
direction opposite to that of the investment being hedged. If these hedging
transactions are successful, the futures positions taken for the Portfolio will
rise in value by an amount which approximately offsets the decline in value of
the portion of the Portfolio's investments that are being hedged. Should general
market prices move in an unexpected manner, the full anticipated benefits of
Futures Contracts may not be achieved or a loss may be realized.
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Although futures contracts on securities indices would be entered into for
hedging purposes only, such transactions do involve certain risks. These risks
include a lack of correlation between the futures contract and the foreign
equity market being hedged, and incorrect assessments of the market trends which
may result in poorer overall performance than if a futures contract had not been
entered into. Futures may fail as hedging techniques in cases where the price
movements of the securities underlying the futures do not follow the price
movements of the portfolio securities subject to the hedge. The loss from
investing in futures transactions is potentially unlimited. Gains and losses on
investments in futures depend on the portfolio manager's ability to predict
correctly the direction of stock prices, interest rates, and other economic
factors. The Portfolio will likely be unable to control losses by closing its
position where a liquid secondary market does not exist.
Asset Coverage. To assure that the Portfolio's use of futures and related
options, as well as when-issued and delayed-delivery securities and foreign
currency exchange transactions, are not used to achieve investment leverage, the
Portfolio will cover such transactions, as required under applicable
interpretations of the SEC, either by owning the underlying securities or by
segregating with the Portfolio's Custodian or futures commission merchant liquid
securities in an amount at all times equal to or exceeding the Portfolio's
commitment with respect to these instruments or contracts.
Investment Restriction on Futures Transactions. A Portfolio will not enter into
any futures contracts or options on futures contracts if immediately thereafter
the amount of margin deposits on all the futures contracts of the Portfolio and
premiums paid on outstanding options on futures contracts owned by the Portfolio
(other than those entered into for bona fide hedging purposes) would exceed 5%
of the market value of the net assets of the Portfolio.
Additional Risk Factors
In addition to the risks discussed above, the Portfolio's investments may be
subject to the following risk factors:
Investing in Foreign Securities. Each Portfolio will, under normal market
conditions, invest a significant portion of its assets in foreign securities.
Investors should realize that investing in securities of foreign issuers
involves considerations not typically associated with investing in securities of
companies organized and operated in the United States. Investors should realize
that the value of the Portfolio's foreign investments may be adversely affected
by changes in political or social conditions, diplomatic relations, confiscatory
taxation, expropriation, nationalization, limitation on the removal of funds or
assets, or imposition or (or change in) exchange control or tax regulations in
foreign countries. In addition, changes in government administrations or
economic or monetary policies in the United States or abroad could result in
appreciation or depreciation of portfolio securities and could favorably or
unfavorably affect the Portfolio's operations, Furthermore, the economies of
individual foreign nations may differ from the U.S. economy, whether favorably
or unfavorably, in areas such as growth or gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency or balance of
payments position;
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it may also be more difficult to obtain and enforce a judgment against a foreign
issuer. In general, less information is publicly available with respect to
foreign issuers than is available with respect to U.S. companies. Most foreign
companies are also not subject to the uniform accounting and financial reporting
requirements applicable to issuers in the Untied States. Any foreign investments
made by the Portfolio must be made in compliance with U.S. and foreign currency
restrictions and tax laws restricting the amounts and types of foreign
investments.
Because foreign securities generally are denominated and pay dividends or
interest in foreign currencies, the value of the net assets of the Portfolio as
measured in U.S. dollars will be affected favorably or unfavorably by changes in
exchange rates. In order to protect against uncertainty in the level of future
foreign currency exchange rates, the Portfolio is also authorized to enter into
certain foreign currency exchange transactions. Furthermore, the Portfolio's
foreign investments may be less liquid and their prices may be more volatile
than comparable investments in securities of U.S. companies. The settlement
periods for foreign securities, which are often longer than those for securities
of U.S. issuers, may affect portfolio liquidity. Finally, there may be less
government supervision and regulation of securities exchanges, brokers and
issuers in foreign countries than in the United States.
Medium- and Small-Capitalization Stocks. Historically, medium- and small-
capitalization stocks have been more volatile in price than the larger-
capitalization stocks included in the S&P 500. Among the reasons for the greater
price volatility of these securities are the less certain growth prospects of
smaller firms, the lower degree of liquidity in the markets for such stocks, and
the greater sensitivity of medium- and small-size companies to changing economic
conditions. In addition to exhibiting greater volatility, medium- and small-size
company stocks may fluctuate independently of larger company stocks. Medium- and
small-size company stocks may decline in price as large company stocks rise, or
rise in prices as large company stocks decline.
Options on Futures Contracts, Forward Contracts and Options on Foreign
Currencies. Unlike transactions entered into by a Portfolio in futures
contracts, options on foreign currencies and forward contracts are not traded on
contract markets regulated by the CFTC or (with the exception of certain foreign
currency options) by the SEC. To the contrary, such instruments are traded
through financial institutions acting as principals, although foreign currency
options are also traded on certain national securities exchanges such as the
Philadelphia Stock Exchange and the Chicago Board Options Exchange, subject to
SEC regulation. In an over-the-counter trading environment, many of the
protections afforded to exchange participants will not be available. For
example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of time.
Although the purchaser of an option cannot lose more than the amount of the
premium plus related transaction costs, this entire amount could be lost.
Moreover, the option writer and a trader of forward contracts could lose amounts
substantially in excess of their initial investments.
Forward Contracts and options on foreign currencies traded over-the-counter
involve liquidity and credit risks which may not be present in the case of
exchange-
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traded currency options. A Portfolio's ability to terminate over-the-counter
options will be more limited than with exchange-traded options. It is also
possible that broker-dealers participating in over-the-counter options
transactions will not fulfill their obligations. Until such time as the staff of
the SEC changes its position, each Portfolio will treat purchased over-the-
counter options and assets used to cover written over-the-counter options as
illiquid securities.
Options on foreign currencies traded on national securities exchanges are within
the jurisdiction of the SEC, as are other securities traded on such exchanges.
As a result, many of the protections provided to traders on organized exchanges
will be available with respect to such transactions. In particular, all foreign
currency option positions entered into on a national securities exchange are
cleared and guaranteed by the Options Clearing Corporation ("OCC"), thereby
reducing the risk of counterparty default. Further, a liquid secondary market in
options traded on a national securities exchange may be more readily available
than in the over-the-counter market, potentially permitting a Portfolio to
liquidate open positions at a profit prior to exercise or expiration, or to
limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however, is
subject to the risks of the availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effects of other political and
economic events. In addition, exchange-traded options on foreign currencies
involve certain risks not presented by the over-the-counter market. For example,
exercise and settlement of such options must be made exclusively through the
OCC, which has established banking relationships in applicable foreign countries
for this purpose. As a result, the OCC may, if it determines that foreign
governmental restrictions or taxes would prevent the orderly settlement of
foreign currency option exercises, or would result in undue burdens on the OCC
or its clearing member, impose special procedures on exercise and settlement,
such as technical changes in the mechanics of delivery of currency, the fixing
of dollar settlement prices or prohibitions on exercise.
In addition, futures contracts, options on futures contracts, forward contracts
and options on foreign currencies may be traded on foreign exchanges. Such
transactions are subject to the risk of governmental actions affecting trading
in or the prices of foreign currencies or securities. The value of such
positions also could be adversely affected by: (i) other complex foreign
political and economic factors; (ii) lesser availability than in the United
States of data on which to make trading decisions; (iii) delays in the
Portfolio's ability to act upon economic events occurring in foreign markets
during nonbusiness hours in the United States; (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States; and (v) lesser trading volume.
Special Information Concerning Master-Feeder Fund Structure. Unlike other open-
end management investment companies (mutual funds) which 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 registered
investment company with the same investment objective as the Fund. Therefore, an
investor's interest in the Portfolio's securities is indirect. In addition to
selling a beneficial interest to the Fund, the Portfolio may sell beneficial
interests to
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other mutual funds, investment vehicles 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 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 funds 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 Deutsche Asset Management at 1-800-730-1313.
Smaller funds investing in the Portfolio may be materially affected by the
actions of larger funds investing in the Portfolio. For example, if a large fund
withdraws from the Portfolio, the remaining funds may experience higher pro rata
operating expenses, thereby producing lower returns (however, this possibility
exists as well for traditionally structured funds which have large institutional
investors). Additionally, the Portfolio may become less diverse, resulting in
increased portfolio risk. Also, funds with a greater pro rata ownership in the
Portfolio could have effective voting control of the operations of the
Portfolio. 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 at the Portfolio meeting. The percentage of the
Trust's votes representing the Fund's 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 objectives, 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 securities
(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 determines that it is in the best interests of
the shareholders of the Fund to do so. Upon any such withdrawal, the Board of
Trustees of the Trust 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.
The Fund's investment objective is not a fundamental policy and may be changed
upon notice to, but without the approval of, the Fund's shareholders. If there
is a change in the Fund's investment objective, the Fund's shareholders should
consider whether the Fund remains an appropriate
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investment in light of their then-current needs. The investment objective of the
Portfolio is also 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.
Rating Services. The ratings of rating services represent their opinions as to
the quality of the securities that they undertake to rate. It should be
emphasized, however, that ratings are relative and subjective and are not
absolute standards of quality. Although these ratings are an initial criterion
for selection of portfolio investments, the Adviser also makes its own
evaluation of these securities, subject to review by the Board of Trustees.
After purchase by a 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 a Portfolio to eliminate the obligation from its portfolio,
but the Adviser will consider such an event in its determination of whether a
Portfolio should continue to hold the obligation. A description of the ratings
is included in the Appendix herein.
Portfolio Turnover
The portfolio turnover rates for Portfolios for the fiscal years ended September
30, 1999, 1998 and 1997, respectively, were as follows: Capital Appreciation
Portfolio--155 %, 145% and 167%; Small Cap Portfolio--159%, 182% and 188%. The
portfolio turnover rate for the Mid Cap - Institutional Class (formerly Equity
Appreciation - Institutional Class) for the fiscal years ended September 30,
1999, 1998 and 1997, and the six month period ended March 31, 2000 was 165%,
159%, 188% and 55%, respectively.
These rates will vary from year to year. High turnover rates increase
transaction costs and may increase investable capital gains. The Adviser
considers these effects when evaluating the anticipated benefits of short-term
investing.
Investment Restrictions
Fundamental Policies. The following investment restrictions are "fundamental
policies" of each Fund and each Portfolio and may not be changed with respect to
the Fund or the Portfolio 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, means, with respect to the Fund (or the Portfolio), the lesser of (i) 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
(ii) 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 a Portfolio, the Trust will hold a meeting of
the corresponding Fund's shareholders and will cast its vote as instructed by
that Fund's shareholders. Fund shareholders who do not vote will not affect the
Trust's votes at the Portfolio meeting. The percentage of the Trust's votes
representing Fund shareholders not voting will be voted by the Trustees of the
Trust in the same proportion as the Fund shareholders who do, in fact, vote.
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No Portfolio (or Fund) may (except that no investment restriction of a Fund
shall prevent a Fund from investing all of its Assets in an open-end investment
company with substantially the same investment objectives):
(1) borrow money or mortgage or hypothecate assets of the Portfolio
(Fund), except that in an amount not to exceed 1/3 of the current
value of the Portfolio's (Fund's) net assets, it may borrow money (but
only as a temporary measure for extraordinary or emergency purposes in
the case of the Small Cap Portfolio (Fund) and Capital Appreciation
Portfolio (Fund) and enter into reverse repurchase agreements or
dollar roll transactions, and except that it may pledge, mortgage or
hypothecate not more than 1/3 of such assets to secure such borrowings
(it is intended that money would be borrowed only from banks and only
either to accommodate requests for the withdrawal of beneficial
interests (redemption of shares) while effecting an orderly
liquidation of portfolio securities or to maintain liquidity in the
event of an unanticipated failure to complete a portfolio security
transaction or other similar situations) or reverse repurchase
agreements, provided that collateral arrangements with respect to
options and futures, including deposits of initial deposit and
variation margin, are not considered a pledge of assets for purposes
of this restriction and except that assets may be pledged to secure
letters of credit solely for the purpose of participating in a captive
insurance company sponsored by the Investment Company Institute; for
additional related restrictions, see clause (i) under the caption
"Additional Restrictions" below (as an operating policy, the
Portfolios may not engage in dollar-roll transactions);
(2) underwrite securities issued by other persons except insofar as the
Portfolios (Trust or the Funds) may technically be deemed an
underwriter under the 1933 Act in selling a portfolio security;
(3) make loans to other persons except: (a) through the lending of the
Portfolio's (Fund's) portfolio securities and provided that any such
loans not exceed 30% of the Portfolio's (Fund's) 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 (Fund) may hold and sell, for
the Portfolio's (Fund's) portfolio, real estate acquired as a result
of the Portfolio's (Fund's) ownership of securities);
(5) concentrate its investments in any particular industry (excluding U.S.
government securities), but if it is deemed appropriate for the
achievement of a Portfolio's (Fund's) investment objective(s), up to
25% of its total assets may be invested in any one industry; and
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(6) issue any senior security (as that term is defined in the 1940 Act)
if such issuance is specifically prohibited by the 1940 Act or the
rules and regulations promulgated thereunder, provided that
collateral arrangements with respect to options and futures,
including deposits of initial deposit and variation margin, are not
considered to be the issuance of a senior security for purposes of
this restriction.
(7) with respect to 75% of each (Portfolio's) Fund's total assets,
invest more than 5% of its total assets in the securities of any one
issuer (excluding cash and cash equivalents, U.S. government
securities and the securities of other investments companies) or own
more than 10% of the voting securities of any issuer.
Additional Restrictions. The following are nonfundamental policies of the
Funds and the Portfolios. In order to comply with certain statutes and
policies, each Portfolio (or the Trust, on behalf of each Fund) will not as
a matter of operating policy (except that no operating policy shall prevent
a Fund from investing all of its Assets in an open-end investment company
with substantially the same investment objectives):
(i) borrow money (including through reverse repurchase or forward roll
transactions) for any purpose in excess of 5% of the Portfolio's
(Fund's) total assets (taken at cost), except that the Portfolio
(Fund) may borrow for temporary or emergency purposes up to 1/3 of
its total assets;
(ii) pledge, mortgage or hypothecate for any purpose in excess of 10% of
the Portfolio's (Fund's) total assets (taken at market value),
provided that collateral arrangements with respect to options and
futures, including deposits of initial deposit and variation margin,
and reverse repurchase agreements are not considered a pledge of
assets for purposes of this restriction;
(iii) purchase any security or evidence of interest therein on margin,
except that such short-term credit as may be necessary for the
clearance of purchases and sales of securities may be obtained and
except that deposits of initial deposit and variation margin may be
made in connection with the purchase, ownership, holding or sale of
futures;
(iv) sell securities it does not own (short sales) such that the dollar
amount of such short sales at any one time exceeds 25% of the net
equity of the Portfolio (Fund), and the value of securities of any
one issuer in which the Portfolio (Fund) is short exceeds the lesser
of 2.0% of the value of the Portfolio's (Fund's) net assets or 2.0%
of the securities of any class of any U.S. issuer and, provided that
short sales may be made only in those securities which are fully
listed on a national securities exchange or a foreign exchange (This
provision does not include the sale of securities that the Portfolio
(Fund) contemporaneously owns or where the Portfolio has the right
to obtain securities equivalent in kind and amount to those sold,
i.e., short sales against the box.) (the Portfolios (Funds)
currently do not engage in short selling);
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(v) invest for the purpose of exercising control or management of
another company;
(vi) purchase securities issued by any investment company except by
purchase in the open market where no commission or profit to a
sponsor or dealer results from such purchase other than the
customary broker's commission, or except when such purchase, though
not made in the open market, is part of a plan of merger or
consolidation; provided, however, that securities of any investment
company will not be purchased for the Portfolio (Fund) if such
purchase at the time thereof would cause: (a) more than 10% of the
Portfolio's (Fund's) total assets (taken at the greater of cost or
market value) to be invested in the securities of such issuers; (b)
more than 5% of the Portfolio's (Fund's) total assets (taken at the
greater of cost or market value) to be invested in any one
investment company; or (c) more than 3% of the outstanding voting
securities of any such issuer to be held for the Portfolio (Fund),
unless permitted to exceed these limitations by an exemptive order
of the SEC; provided further that, except in the case of a merger or
consolidation, the Portfolio (Fund) shall not purchase any
securities of any open-end investment company unless (1) the
Portfolio's investment adviser waives the investment advisory fee
with respect to assets invested in other open-end investment
companies and (2) the Portfolio incurs no sales charge in connection
with the investment;
(vii) invest more than 15% of the Portfolio's (Fund's) net assets (taken
at the greater of cost or market value) in securities that are
illiquid or not readily marketable (excluding Rule 144A securities
deemed by the Board of Trustees of the Portfolio (Trust) to be
liquid).
(viii) write puts and calls on securities unless each of the following
conditions are met: (a) the security underlying the put or call is
within the investment policies of the Portfolio (Fund) and the
option is issued by the OCC, except for put and call options issued
by non-U.S. entities or listed on non-U.S. securities or commodities
exchanges; (b) the aggregate value of the obligations underlying the
puts determined as of the date the options are sold shall not exceed
5% of the Portfolio's (Fund's) net assets; (c) the securities
subject to the exercise of the call written by the Portfolio (Fund)
must be owned by the Portfolio (Fund) at the time the call is sold
and must continue to be owned by the Portfolio (Fund) until the call
has been exercised, has lapsed, or the Portfolio (Fund) has
purchased a closing call, and such purchase has been confirmed,
thereby extinguishing the Portfolio's (Fund's) obligation to deliver
securities pursuant to the call it has sold; and (d) at the time a
put is written, the Portfolio (Fund) establishes a segregated
account with its custodian consisting of cash or liquid securities
equal in value to the amount the Portfolio (Fund) will be obligated
to pay upon exercise of the put (this account must be maintained
until the put is exercised, has expired, or the Portfolio (Fund) has
purchased a closing put, which is a put of the same series as the
one previously written);
(ix) buy and sell puts and calls on securities, stock index futures or
options on stock index futures, or financial futures or options on
financial futures unless such options
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are written by other persons and: (a) the options or futures are
offered through the facilities of a national securities association
or are listed on a national securities or commodities exchange,
except for put and call options issued by non-U.S. entities or
listed on non-U.S. securities or commodities exchanges; (b) the
aggregate premiums paid on all such options which are held at any
time do not exceed 20% of the Portfolio's (Fund's) total net assets;
and (c) the aggregate margin deposits required on all such futures
or options thereon held at any time do not exceed 5% of the
Portfolio's (Fund's) total assets.
There will be no violation of any investment restriction (except with
respect to fundamental investment restriction (1) above) if that
restriction is complied with at the time the relevant action is taken,
notwithstanding a later change in the market value of an investment, in net
or total assets or in the change of securities rating of the investment, or
any other later change.
Portfolio Transactions and Brokerage Commissions
The Adviser is responsible for decisions to buy and sell securities, futures
contracts and options on such securities and futures for each 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 and options on futures transactions and the purchase and sale
of underlying securities upon the exercise of options. Orders may be directed to
any broker-dealer or futures commission merchant, including to the extent and in
the manner permitted by applicable law, Bankers Trust or its subsidiaries or
affiliates. Purchases and sales of certain portfolio securities on behalf of a
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 which will include
an underwriting fee paid to the underwriter.
The Adviser seeks to evaluate the overall reasonableness of the brokerage
commissions paid (to the extent applicable) in placing orders for the purchase
and sale of securities for a 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, when placing portfolio transactions for a 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
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the same transaction on account of the receipt of research, market or
statistical information. The term "research, market or statistical information"
includes advice as to the value of securities; the advisability of investing in,
purchasing or selling securities; the availability of securities or purchasers
or sellers of securities; and furnishing analyses and reports concerning
issuers, industries, securities, economic factors and trends, portfolio strategy
and the performance of accounts.
Consistent with the policy stated above, the Conduct Rules of the National
Association of Securities Dealers, Inc. and such other policies as the Trustees
of the Portfolio may determine, the Adviser may consider sales of shares of the
Trust and of other investment company clients of the Adviser as a factor in the
selection of broker-dealers to execute portfolio transactions. The Adviser will
make such allocations if commissions are comparable to those charged by
nonaffiliated, qualified broker-dealers for similar services.
Higher commissions may be paid to firms that provide research services to the
extent permitted by law. The Adviser may use this research information in
managing the Portfolio's assets, as well as the assets of other clients.
Except for implementing the policies stated above, there is no intention to
place portfolio transactions with particular brokers or dealers or groups
thereof. In effecting transactions in over-the-counter securities, orders are
placed with the principal market-makers for the security being traded unless,
after exercising care, it appears that more favorable results are available
otherwise.
Although certain research, market and statistical information from brokers and
dealers can be useful to a Portfolio and to the Adviser, it is the opinion of
the management of the Portfolios 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 Portfolios, and not
all such information is used by the Adviser in connection with the Portfolios.
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 Portfolios.
In certain instances there may be securities which are suitable for a Portfolio
as well as for one or more of the Adviser's other clients. Investment decisions
for a 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 among
clients in a manner believed to be equitable to each. It is recognized that in
some cases this system could have a detrimental effect on the price or volume of
the security as far as a Portfolio is concerned. However, it is believed
31
<PAGE>
that the ability of a Portfolio to participate in volume transactions will
produce better executions for the Portfolio.
For the fiscal years ended September 30, 1999, 1998, and 1997, Capital
Appreciation Portfolio paid brokerage commissions in the amount of $84,395,
$114,917, and $774,242 respectively.
For the fiscal years ended September 30, 1999, 1998 and 1997, Mid Cap -
Institutional Class (formerly Equity Appreciation - Institutional Class) paid
brokerage commissions in the amount of $533,158, $278,607 and $459,197,
respectively.
For the fiscal years ended September 30, 1999, 1998, and 1997, the Small Cap
Portfolio paid brokerage commissions in the amount of $294,222, $657,321,
and$344,478, respectively.
PERFORMANCE INFORMATION
Standard Performance Information
From time to time, quotations of a Fund's performance may be included in
advertisements, sales literature or shareholder reports. For mutual funds
performance is commonly measured as total return. Each Fund's performance is
affected by its expenses. These performance figures are calculated in the
following manner:
Total return: Total return is the change in value of an investment in the
Fund over a given period, assuming reinvestment of any dividends and
capital gains. A cumulative total return reflects actual performance over a
stated period of time. An average annual total return is a hypothetical
rate of return that, if achieved annually, would have produced the same
cumulative total return if performance had been constant over the entire
period. Average annual total return calculations smooth out variations in
performance; they are not the same as actual year-by-year results. Average
annual total returns covering periods of less than one year assume that
performance will remain constant for the rest of the year. A Fund's average
annual total return is calculated for certain periods by determining the
average annual compounded rates of return over those periods that would
cause an investment of $1,000 (made at the maximum public offering price
with all distributions reinvested) to reach the value of that investment at
the end of the periods. A Fund may also calculate total return figures
which represent aggregate performance over a period or year-by-year
performance.
The following table shows the performance of Equity Appreciation - Institutional
Class shares. In conjunction with the reorganization, Equity Appreciation -
Institutional Class became Mid Cap - Institutional Class as of the close of
business on August 31, 2000. Equity Appreciation - Institutional Class was
managed by the same investment management team with the same objective, policies
and strategies as Mid Cap fund.
32
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================================================
Annualized Total Annualized Total Cumulative Total
Annualized Total Return for the Return from Return from
Return for the One Five Year Period Commencement of Commencement of
Year Period ended ended September Operations through Operations through
September 30, 1999 30, 1999 September 30, 1999 September 30, 1999
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mid Cap --
Investment Class (1) 47.05% 19.19% 17.14% 182.35%
---------------------------------------------------------------------------------------------------------------------------
Equity Appreciation-
Institutional Class (2) 44.33% 19.26% 15.60% 137.42%
---------------------------------------------------------------------------------------------------------------------------
Small Cap -
Investment Class (3) 46.52% 20.06% 19.58% 189.31%
===========================================================================================================================
</TABLE>
(1) Fund commenced operations on March 9, 1993.
(2) Fund commenced operations on October 12, 1993.
(3) Fund commenced operations on October 21, 1993.
Performance Results: Total returns are based on past results and are not an
indication of future performance. Any total return quotation provided for a Fund
should not be considered as representative of the performance of the Fund in the
future since the net asset value and public offering price of shares of the Fund
will vary based not only on the type, quality and maturities of the securities
held in the corresponding Portfolio, but also on changes in the current value of
such securities and on changes in the expenses of the Fund and the corresponding
Portfolio. These factors and possible differences in the methods used to
calculate total return should be considered when comparing the total return of a
Fund to total returns published for other investment companies or other
investment vehicles. Total return reflects the performance of both principal and
income.
Comparison of Fund Performance
Comparison of the quoted nonstandardized performance of various investments is
valid only if performance is calculated in the same manner. Since there are
different methods of calculating performance, investors should consider the
effect of the methods used to calculate performance when comparing performance
of a Fund with performance quoted with respect to other investment companies or
types of investments.
33
<PAGE>
In connection with communicating its performance to current or prospective
shareholders, a Fund also may compare these figures to the performance of other
mutual funds tracked by mutual fund rating services or to unmanaged indices
which may assume reinvestment of dividends but generally do not reflect
deductions for administrative and management costs. A Fund's performance may be
compared to the performance of various indices and investments for which
reliable data is available. The Fund's performance may also be compared to
averages, performance rankings, or other information prepared by recognized
mutual fund statistical services. Evaluations of a Fund's performance made by
independent sources may also be used in advertisements concerning the Fund.
Sources for a Fund's performance information could include the following: Asian
-----
Wall Street Journal, 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 a Fund may include discussions of economic,
financial and political developments and their effect on the securities market.
Such discussions may take the form of commentary on these developments by Fund
portfolio managers and their views and analysis on how such developments could
affect the Funds. In addition, advertising and sales literature may quote
statistics and give general information about the mutual fund industry,
including the growth of the industry, from sources such as the Investment
Company Institute ("ICI").
VALUATION OF SECURITIES; REDEMPTIONS AND PURCHASES IN-KIND
The net asset value ("NAV") per share is calculated once on each day the New
York Stock Exchange ("NYSE") is open ("Valuation Day") as of the close of
regular trading on the NYSE, which is currently 4:00 p.m., Eastern time or in
the event that the NYSE closes early, at the time of such early closing (the
"Valuation Time"). 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), less all liabilities attributable to the shares, by the total number of
shares outstanding as of the Valuation Time. 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 which the Portfolio's Board of
Trustees believes accurately reflects fair value.
Equity and debt securities (other than short-term debt obligations maturing in
60 days or less), including listed securities and securities for which price
quotations are available, will normally be valued on the basis of market
valuations furnished by a pricing service. Such market valuations may represent
the last quoted price on the securities major trading exchange or may be
determined through use of matrix pricing. In matrix pricing, pricing services
may use various pricing models, involving comparable securities, historic
relative price movements, economic
34
<PAGE>
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, which approximates
market.
Securities for which market quotations are not readily available are valued by
Bankers Trust pursuant to procedures adopted by each Portfolio's Board of
Trustees. It is generally agreed that securities for which market quotations are
not readily available should not be valued at the same value as that carried by
an equivalent security which is readily marketable.
The problems inherent in making a good faith determination of value are
recognized in the codification effected by SEC Financial Reporting Release No. 1
("FRR 1" (formerly Accounting Series Release No. 113)) which concludes that
there is "no automatic formula" for calculating the value of restricted
securities. It recommends that the best method simply is to consider all
relevant factors before making any calculation. According to FRR 1 such factors
would include consideration of the:
type of security involved, financial statements, cost at date of purchase,
size of holding, discount from market value of unrestricted securities of
the same class at the time of purchase, special reports prepared by
analysts, information as to any transactions or offers with respect to the
security, existence of merger proposals or tender offers affecting the
security, price and extent of public trading in similar securities of the
issuer or comparable companies, and other relevant matters.
To the extent that a Portfolio purchases securities which are restricted as
to resale or for which current market quotations are not readily available,
the Adviser of the Portfolio will value such securities based upon all
relevant factors as outlined in FRR 1.
Purchase of Shares
The Trust accepts purchase orders for shares of the Fund at the NAV per share
next determined after the order is received on each Valuation Day. Shares may be
available through financial intermediaries, such as broker-dealers and
investment advisers (including Service Agents).
Purchase orders for shares (including those purchased through a Service Agent)
that are transmitted to the Trust's Transfer Agent (the "Transfer Agent"), prior
to the Valuation Time on any Valuation Day will be effective at that day's
Valuation Time. The Trust and Transfer Agent reserve the right to reject any
purchase order. Shares must be purchased in accordance with procedures
established by the Transfer Agent and each Service Agent. It is the
responsibility of each Service Agent to transmit to the Transfer Agent purchase
and redemption orders and to transmit to Bankers Trust as the Trust's custodian
(the "Custodian") purchase payments by the following business day (trade date +
1) after an order for shares is placed. A shareholder 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
35
<PAGE>
Trust, funds may be transferred directly from or to a customer's 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.
The Trust and the Adviser have authorized one or more Service Agents to accept
on the Trust's behalf purchase and redemption orders. Such Service Agents are
authorized to designate other intermediaries to accept purchase and redemption
orders on the Trust's behalf. The Transfer Agent will be deemed to have received
a purchase or redemption order when an authorized Service Agent or, if
applicable, a Service Agent's authorized designee, accepts the order. Customer
orders will be priced at the Fund's NAV next computed after they are accepted by
an authorized Service Agent or the Service Agent's authorized designee.
Certificates for shares will not be issued. Each shareholder's account will be
maintained by a Service Agent or Transfer Agent.
If orders are placed through a Service Agent, it is the responsibility of the
Service Agent to transmit the order to buy shares to the Transfer Agent before
4:00 p.m. Eastern time.
The Transfer Agent 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.
Redemption of Shares
You can arrange to take money out of your fund account at any time by selling
(redeeming) some or all of your shares. Your shares shall be sold at the next
NAV calculated after an order is received by the Transfer Agent. Redemption
requests should be transmitted by customers in accordance with procedures
established by the Transfer Agent and the shareholder's Service Agent.
Redemption requests for shares received by the Service Agent and transmitted to
the Transfer Agent prior to the Valuation Time on each Valuation Day will be
effective at that day's Valuation Time and the redemption proceeds normally will
be delivered to the shareholder's account the next day, but in any event within
seven calendar days following receipt of the request.
Service Agents may allow redemptions or exchanges by telephone 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 or exchange privilege. The Transfer Agent and the Service Agent must
employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. If the Service Agent does not do so, it may be liable for
any losses due to unauthorized or fraudulent instructions. 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.
36
<PAGE>
Certain requests must include a signature guarantee to protect you and Bankers
Trust from fraud. Redemption requests in writing must include a signature
guarantee if any of the following situations apply:
. Your account registration has changed within the last 30 days,
. The check is being mailed to a different address than the one on your
account (record address),
. The check is being made payable to someone other than the account
owner,
. The redemption proceeds are being transferred to a Fund account with a
different registration, or
. 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.
Redemptions and Purchases In-Kind
The Trust, on behalf of each Fund, and each Portfolio reserve the right, if
conditions exist which make cash payments undesirable, to honor any request for
redemption or withdrawal by making payment in whole or in part in readily
marketable securities chosen by the Trust, or the Portfolio, as the case may be,
and valued as they are for purposes of computing the Fund's or the Portfolio's
net asset value, as the case may be (a redemption in- kind). If payment is made
to a Fund shareholder in securities, an investor, including the Fund, may incur
transaction expenses in converting these securities into cash. The Trust, on
behalf of each Fund, and each Portfolio have elected, however, to be governed by
Rule 18f-1 under the 1940 Act as a result of which each Fund and each Portfolio
are obligated to redeem shares or beneficial interests, as the case may be, with
respect to any one investor during any 90-day period, solely in cash up to the
lesser of $250,000 or 1% of the net asset value of the Fund or the Portfolio, as
the case may be, at the beginning of the period.
Each Portfolio has agreed to make a redemption in kind to the corresponding Fund
whenever the Fund wishes to make a redemption in-kind and therefore shareholders
of the Fund that receive redemptions in-kind will receive portfolio securities
of the corresponding Portfolio and in no case will they receive a security
issued by the Portfolio. Each 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.
37
<PAGE>
Each investor in a Portfolio, including the corresponding Fund, may add to or
reduce its investment in the Portfolio on each day the Portfolio determines its
net asset value. At the close of each such business day, the value of each
investor's beneficial interest in the Portfolio will be determined by
multiplying the net asset value of the Portfolio by the percentage effective for
that day, which represents that investor's share of the aggregate beneficial
interests in the Portfolio. Any additions or withdrawals which are to be
effected as of the close of business on that day will then be effected. The
investor's percentage of the aggregate beneficial interests in the Portfolio
will then be recomputed as the percentage equal to the fraction (i) the
numerator of which is the value of such investor's investment in the Portfolio
as of the close of business on such day plus or minus, as the case may be, the
amount of net additions to or withdrawals from the investor's investment in the
Portfolio effected as of the close of business on such day, and (ii) the
denominator of which is the aggregate net asset value of the Portfolio as of the
close of business on such day plus or minus, as the case may be, the amount of
net additions to or withdrawals from the aggregate investments in the Portfolio
by all investors in the Portfolio. 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.
Each Fund may, at its own option, accept securities in payment for shares. The
securities delivered in payment for shares are valued by the method described
under "Valuation of Securities" as of the day the Fund receives the securities.
This may be a taxable transaction to the shareholder. (Consult your tax adviser
for future tax guidance.) Securities may be accepted in payment for shares only
if they are, in the judgment of the Adviser, appropriate investments for the
Fund's corresponding Portfolio. In addition, securities accepted in payment for
shares must: (i) meet the investment objective and policies of the acquiring
Fund's corresponding Portfolio; (ii) be acquired by the applicable Fund for
investment and not for resale (other than for resale to the Fund's corresponding
Portfolio); (iii) be liquid securities which are not restricted as to transfer
either by law or liquidity of the market; and (iv) if stock, have a value which
is readily ascertainable as evidenced by a listing on a stock exchange, over-
the-counter market or by readily available market quotations from a dealer in
such securities. Each Fund reserves the right to accept or reject at its own
option any and all securities offered in payment for its shares.
Each Fund and Portfolio reserves the right to redeem all of its shares, if the
Funds' and/or Portfolios' Board of Trustees vote to liquidate and terminate the
Fund or Portfolio.
Trading in Foreign Securities
Trading in foreign cities may be completed at times which vary from the closing
of the NYSE. In computing the net asset values, the Funds value foreign
securities at the latest closing price on the exchange on which they are traded
immediately prior to the closing of the NYSE. Similarly, foreign securities
quoted in foreign currencies are translated into U.S. dollars at the foreign
exchange rates.
Occasionally, events that affect values and exchange rates may occur between the
times at which they are determined and the closing of the NYSE. If such events
materially affect the value of
38
<PAGE>
portfolio securities, these securities may be valued at their fair value as
determined in good faith by the Trustees, although the actual calculation may be
done by others.
MANAGEMENT OF THE TRUST AND THE PORTFOLIOS
The Trust and each Portfolio are governed by a Board of Trustees which 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 the
Trust or the Portfolio, as the case may be, have adopted written procedures
reasonably appropriate to deal with potential conflicts of interest arising from
the fact that some of the same individuals are Trustees of the Trust and the
Portfolios, up to and including creating separate boards of trustees.
Each Board of Trustees is composed of persons experienced in financial matters
who meet throughout the year to oversee the activities of the Funds or
Portfolios they represent. In addition, the Trustees review contractual
arrangements with companies that provide services to the Funds/Portfolios and
review the Funds' performance.
The Trustees and officers of the Trust and Portfolios, their birthdate and their
principal occupations during the past five years are set forth below. Their
titles may have varied during that period.
Trustees of the Trust and Portfolios
CHARLES P. BIGGAR (birth date: October 13, 1930) -- Trustee of the Trusts and
Portfolio; Trustee of each of the other investment companies in the Fund
Complex/1/; Retired; former Vice President, International Business Machines
("IBM") and President, National Services and the Field Engineering Divisions of
IBM. His address is 12 Hitching Post Lane, Chappaqua, New York 10514.
S. LELAND DILL (birth date: March 28, 1930) -- Trustee of the Trusts and
Portfolio; Trustee of each of the other investment companies in the Fund
Complex; Retired; Director, Coutts (U.S.A.) International; Trustee, Phoenix-
Zweig Trust/2/ and Phoenix-Euclid Market Neutral Fund/2/; former Partner, KPMG
Peat Marwick; Director, Vintners International Company Inc.; Director, Coutts
Trust Holdings Ltd., Director, Coutts Group; General Partner, Pemco/2/. His
address is 5070 North Ocean Drive, Singer Island, Florida 33404.
/1/ The "Fund Complex" consists of BT Investment Funds, BT Institutional Funds,
BT Pyramid Mutual Funds, BT Advisor Funds, Cash Management Portfolio,
Intermediate Tax Free Portfolio, Tax Free Money Portfolio, NY Tax Free Money
Portfolio, Treasury Money Portfolio, International Equity Portfolio, Equity 500
Index Portfolio, Capital Appreciation Portfolio, Asset Management Portfolio and
BT Investment Portfolios.
/2/ An investment company registered under the Investment Company Act of 1940,
as amended (the "Act").
39
<PAGE>
MARTIN J. GRUBER (birth date: July 15, 1937) -- Trustee of the Trusts and
Portfolio; Trustee of each of the other investment companies in the Fund
Complex; Nomura Professor of Finance, Leonard N. Stern School of Business, New
York University (since 1964); Trustee, TIAA/2/; Trustee, SG Cowen Mutual
Funds/2/; Trustee, Japan Equity Fund/2/; Trustee, Taiwan Equity Fund/2/. His
address is 229 South Irving Street, Ridgewood, New Jersey 07450.
RICHARD HALE* (birth date: July 17, 1945) -- Trustee of the Trusts and
Portfolio; Trustee of each of the other investment companies in the Fund
Complex; Managing Director, Deutsche Asset Management; Director, Flag Investors
Funds/2/; Managing Director, Deutsche Banc Alex. Brown Incorporated; Director
and President, Investment Company Capital Corp; Executive Vice President, ICCD,
each Fund's principal underwriter, since July 2000. His address is One South
Street, Baltimore, Maryland 21202.
RICHARD J. HERRING (birth date: February 18, 1946) -- Trustee of the Trusts and
Portfolio; Trustee of each of the other investment companies in the Fund
Complex; Jacob Safra Professor of International Banking, Professor of Finance
and Vice Dean, The Wharton School, University of Pennsylvania (since 1972). His
address is 325 South Roberts Road, Bryn Mawr, Pennsylvania 19010.
BRUCE E. LANGTON (birth date: May 10, 1931) -- Trustee of the Trusts and
Portfolio; Trustee of each of the other investment companies in the Fund
Complex; Retired; Trustee, Allmerica Financial Mutual Funds (1992-present);
Member, Pension and Thrift Plans and Investment Committee, Unilever U.S.
Corporation (1989 to present)/3/; Director, TWA Pilots Directed Account Plan and
401(k) Plan (1988 to present)/2/. His address is 99 Jordan Lane, Stamford,
Connecticut 06903.
PHILIP SAUNDERS, JR. (birth date: October 11, 1935) -- Trustee of the Trusts and
Portfolio; Trustee of each of the other investment companies in the Fund
Complex; Principal, Philip Saunders Associates (Economic and Financial
Analysis); former Director, Financial Industry Consulting, Wolf & Company;
President, John Hancock Home Mortgage Corporation; Senior Vice President of
Treasury and Financial Services, John Hancock Mutual Life Insurance Company,
Inc. His address is 445 Glen Road, Weston, Massachusetts 02193.
HARRY VAN BENSCHOTEN (birth date: February 18, 1928) -- Trustee of the Trusts
and Portfolio; Trustee of each of the other investment companies in the Fund
Complex; Retired; Director, Canada Life Insurance Corporation of New York. His
address is 6581 Ridgewood Drive, Naples, Florida 34108.
* "Interested Person" within the meaning of Section 2(a)(19) of the Act. Mr.
Hale is a Managing Director of Deutsche Asset Management, the U.S. asset
management unit of Deutsche
____________________
/3/ A publicly held company with securities registered pursuant to Section 12
of the Securities Exchange Act of 1934, as amended.
40
<PAGE>
Bank and its affiliates. Mr. Hale is also Executive Vice President of ICCD, the
Fund's principal underwriter.
The Board has an Audit Committee that meets with the Trusts' and Portfolio's
independent accountants to review the financial statements of the Trust, the
adequacy of internal controls and the accounting procedures and policies of the
Trust. Each member of the Board except Mr. Hale also is a member of the Audit
Committee.
Officers of the Trusts and Portfolio
DANIEL O. HIRSCH (birth date: March 27, 1954) -- Secretary, ICCD since July
2000; Director, Deutsche Asset Management since 1999; Director, Deutsche Banc
Alex.Brown LLC since July 1998; Secretary of the Trusts and Portfolio since
1998; Associate General Counsel, Office of the General Counsel, United States
Securities and Exchange Commission, 1993 to 1998. His address is One South
Street, Baltimore, Maryland 21202.
CHARLES A. RIZZO (birth date: August 5, 1958) Treasurer of the Trusts and
Portfolio; Vice President and Department Head, Deutsche Asset Management since
1998; Senior Manager, PricewaterhouseCoopers LLP from 1993 to 1998. His address
is One South Street, Baltimore, MD 21202.
Messrs. Hirsch and Rizzo also hold similar positions for other investment
companies for which ICC Distributors, or an affiliate serves as the principal
underwriter.
No person who is an officer or director of Bankers Trust is an officer or
Trustee of the Trust. No director, officer or employee of ICC Distributors,
Inc. or any of its affiliates will receive any compensation from the Trust for
serving as an officer or Trustee of the Trust.
Trustee Compensation Table/4/
<TABLE>
<CAPTION>
===================================================================================================
Trustee Aggregate Aggregate Total Compensation
Compensation Compensation from
from Trust* from Portfolios** Fund Complex***
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Charles P. Biggar N/A $1,288 $43,750
---------------------------------------------------------------------------------------------------
S. Leland Dill $17,104 $1,086 $43,750
---------------------------------------------------------------------------------------------------
Martin J. Gruber N/A N/A $45,000
---------------------------------------------------------------------------------------------------
Richard J. Herring N/A N/A $43,750
---------------------------------------------------------------------------------------------------
Kevin Lancaster $18,567 N/A $27,500
---------------------------------------------------------------------------------------------------
Bruce E. Langton N/A N/A $43,750
---------------------------------------------------------------------------------------------------
</TABLE>
/4/ Mssrs. Gruber, Herring, Langton and Van Benschoten were elected to the
Board of Trustees on October 8, 1999; therefore, they did not receive any
compensation from the Trust in the last fiscal year.
41
<PAGE>
<TABLE>
<S> <C> <C> <C>
===================================================================================================
Philip Saunders, Jr. $17,645 $1,120 $45,000
---------------------------------------------------------------------------------------------------
Harry Van Benschoten N/A N/A $45,000
===================================================================================================
</TABLE>
*The provided information is for the BT Investment Funds, which is comprised of
17 funds, for the year ended September 30, 1999.
**Information provided is for the Capital Appreciation Portfolio and BT
Investment Portfolios, which is comprised of 13 funds, for the year ended
September 30, 1999.
***Aggregated information is furnished for the Fund Complex which consists of
the following: BT Investment Funds, BT Institutional Funds, BT Pyramid Mutual
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, Intermediate Tax Free Portfolio, Asset
Management Portfolio, Equity 500 Index Portfolio and Capital Appreciation
Portfolio for the year ended December 31, 1999.
Bankers Trust reimbursed the Funds and Portfolios for a portion of their
Trustees fees for the period above. See "Investment Adviser" and "Administrator"
below.
As of July 31, 2000 the Trustees and Officers of the Trust and the Portfolios
owned in the aggregate less than 1% of the shares of any Fund or the Trust (all
series taken together).
As of July 31, 2000 the following shareholder of record owned 5% or more of the
outstanding voting shares of Small Cap -- Investment Class: Bankers Trust
Company as Trustee for Westinghouse Savannah River/Betchel, Savannah River Inc.
Savings and Investment Plan, 34 Exchange Place MS 3064, Jersey City, NJ 07302-
3885 (32%).
As of July 31, 2000 the following shareholder of record owned 5% or more of the
outstanding voting shares of Mid Cap -- Investment Class: FTC & Co., Attn.
Datalynx-House Account, PO Box 173736, Denver, CO 80217-3736 (5.9%).
As of July 31, 2000 the following shareholders of record owned 5% or more of the
outstanding voting share of Mid Cap - Institutional Class (formerly the Equity
Appreciation Fund): Northern Telecom Omnibus Account, C/O Bankers Trust Company,
Attn: John Sawicki, Mailstop 3064, 34 Exchange Place 6/th/ Floor, Jersey City,
NJ 07302-3885 (63%); Bankers Trust Company as Trustee for Westinghouse Savannah
River/Bechtel Savannah River Inc. Savings Investment Plan, 34 Exchange Place, MS
3064, Jersey City, NJ 07302-3885; Charles Schwab & Company, Omnibus Account,
Attn: Mutual Fund Account Mgmt. Team, 101 Montegomery Street, 333-8, San
Francisco, CA 94104.
Code of Ethics
The Board of Trustees of each Fund and Portfolio has adopted a Code of Ethics
pursuant to Rule 17j-1 under the Investment Company Act of 1940, as amended. The
Funds and Portfolios' Code of Ethics specifies that Access Persons of the Funds
and Portfolios who are subject to Codes of
42
<PAGE>
Ethics adopted by their employers may comply with their employer's Code in lieu
of the Funds and Portfolio's Code if such code has been approved by the Board of
Trustees. As a result, the Funds and Portfolios' Code permits Fund and Portfolio
personnel to invest in securities for their own accounts, but requires
compliance with pre-clearance requirements, trading "blackout periods" that
prohibit trading by personnel within periods of trading by a Fund or Portfolio
in the same security, and other restrictions which are imposed by the Code of
Ethics of the adviser and distributor.
Each Fund and Portfolio's adviser, Bankers Trust, and each Fund and Portfolio's
underwriter, ICCD, each have also adopted a Code of Ethics. The Codes of Ethics
allow personnel to invest in securities for their own accounts, but require
compliance with the Codes' pre-clearance requirements and other restrictions,
including "blackout periods" and minimum holding periods, subject to limited
exceptions. The Codes prohibit purchases of securities in initial public
offerings and require prior approval for purchases of securities in private
placements.
Investment Adviser
Bankers Trust is the Portfolio's investment adviser. Bankers Trust is a wholly
owned subsidiary of Deutsche Bank. Deutsche Bank is a banking company with
limited liability organized under the laws of the Federal Republic of Germany.
Deutsche Bank is the parent company of a group of a group consisting of banks,
capital markets companies, fund management companies, mortgage banks, a property
finance company, installments financing and leasing companies, insurance
companies, research and consultancy companies and other domestic and foreign
companies.
Bankers Trust Company, 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 of sale by the Portfolio is a
customer of Bankers Trust, its parent or its subsidiaries or affiliates. Also,
in dealing with its customers, Bankers Trust, its parent , subsidiaries, and
affiliates will not inquire or take into consideration whether securities of
such customers are held by any fund managed by Bankers Trust or any such
affiliate.
For the fiscal years ended September 30, 1999, 1998, and 1997, Bankers Trust
accrued $158,218, $252,946, and $340,261, respectively, in compensation for
investment advisory services provided to Capital Appreciation Portfolio. During
the same periods, Bankers Trust reimbursed $75,800, $101,826, and $109,433,
respectively, to the Portfolio to cover expenses.
For the fiscal years ended September 30, 1999, 1998, and 1997, Bankers Trust
accrued $981,463
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$1,059,224 and $971,676, respectively, in compensation for investment advisory
services provided to Mid Cap--Institutional Class (formerly Equity
Appreciation--Institutional Class). During the same periods, Bankers Trust
reimbursed $169,645, $179,683 and $172,098, respectively to the Fund to cover
expenses.
For the fiscal years ended September 30, 1999, 1998 and 1997, Bankers Trust
accrued $1,290,625, $1,520,784, and $1,278,294, respectively, in compensation
for investment advisory services provided to Small Cap Portfolio. During the
same periods, Bankers Trust reimbursed $309,133, $387,616, and $325,723,
respectively, to the Portfolio to cover expenses.
Administrator
Under its Administration and Services Agreement with the Trust, the Adviser
calculates the net asset value of the Funds and generally assists the Board of
Trustees of the Trust in all aspects of the administration and operation of the
Trust. The Administration and Services Agreement provides for the Trust to pay
the Adviser a fee, accrued daily and paid monthly, equal on an annual basis to
0.65% of the average daily net assets of each Fund for its then-current fiscal
year.
Under an Administration and Services Agreement with the Portfolio, the Adviser
calculates the value of the assets of the Portfolio and generally assists the
Board of Trustees of the Portfolio in all aspects of the administration and
operation of the Portfolio. The Administration and Services Agreement provides
for the Portfolio to pay the Adviser a fee, computed daily and paid monthly,
equal on an annual basis to 0.10% of each Portfolio's average daily net assets
for its then-current fiscal year. Under the Administration and Services
Agreement, the Adviser may delegate one or more of its responsibilities to
others, including affiliates of ICC Distributors, at the Adviser's expense.
Under the administration and services agreements, the Adviser is obligated on a
continuous basis to provide such administrative services as the Board of
Trustees of the Trust and each Portfolio reasonably deem necessary for the
proper administration of the Trust or a Portfolio. The Adviser will generally
assist in all aspects of the Funds' and Portfolios' 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 recordkeeping services (including without limitation the
maintenance of such books and records as are required under the 1940 Act and the
rules thereunder, except as maintained by other agents), 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.
For the fiscal years ended September 30, 1999, 1998, and 1997, Bankers Trust
accrued $162,423,
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$252,297, and $338,831, respectively, in compensation for administrative and
other services provided to Mid Cap. During the same periods, Bankers Trust
reimbursed $79,572, $48,662, and $41,894, respectively, to cover expenses. For
the same periods, Bankers Trust received $24,963, $38,915, and $52,348,
respectively, in compensation for administrative and other services provided to
Capital Appreciation Portfolio.
For the fiscal years ended September 30, 1999, 1998, and 1997, Bankers Trust
accrued $768,495, $814,788 and $747,443, respectively, in compensation for
administrative and other services provided to Mid Cap--Institutional Class
(formerly Equity Appreciation--Institutional Class). During the same periods,
Bankers Trust reimbursed $132,860, $143,139 and $132,393, respectively, to cover
expenses.
For the fiscal years ended September 30, 1999, 1998, and 1997, Bankers Trust
accrued $1,327,846, $1,518,290, and $1,273,452, respectively, in compensation
for administrative and other services provided to Small Cap. During the same
periods, Bankers Trust reimbursed $105,550, $61,829, and $50,637, respectively,
to cover expenses. For the same periods, Bankers Trust received $204,425,
$233,967, and $196,661, respectively, in compensation for administrative and
other services provided to Small Cap Portfolio.
Distributor
ICCD is the principal distributor for shares of each Fund. ICCD is a registered
broker/dealer. It is an indirect wholly-owned subsidiary of Deutsche Bank AG
and, therefore, is an affiliate of Bankers Trust Company. The principal business
address of ICCD is One South Street, Baltimore, Maryland 21202. Richard T. Hale
is a Trustee of each Trust and Portfolio Trust and the Executive Vice President
of ICCD. Daniel O. Hirsch is the Secretary of each Trust, Portfolio Trust and
ICCD.
Service Agent
The Adviser acts as a Service Agent pursuant to its Administration and Services
Agreement with the Trust and receives no additional compensation from the Fund
for such shareholder services. The service fees of any other Service Agents,
including broker-dealers, will be paid by the Adviser from its fees. The
services provided by a Service Agent may include establishing and maintaining
shareholder accounts, processing purchase and redemption transactions, arranging
for bank wires, performing shareholder sub-accounting, answering client
inquiries regarding the Trust, assisting clients in changing dividend options,
account designations and addresses, 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. Service Agents may separately
charge their clients additional fees only to cover provision of additional or
more comprehensive services not already provided under the Administration and
Services Agreement with the Adviser, or of the type or scope not generally
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offered by a mutual fund, such as cash management services or enhanced
retirement or trust reporting. In addition, investors may be charged a
transaction fee if they effect transactions in Fund shares through a Service
Agent. Each Service Agent has agreed to transmit to shareholders, who are its
customers, appropriate disclosures of any fees that it may charge them directly.
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 each Portfolio pursuant to the
administration and services agreements. As Custodian, it holds the Funds' and
each Portfolio's assets. Bankers Trust also serves as transfer agent of the
Trust and of each 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 each 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 Funds or the Portfolios for its out-of-pocket expenses.
Bankers Trust will comply with the self-custodian provisions of Rule 17f-2 under
the 1940 Act.
Banking Regulatory Matters
Bankers Trust has been advised by its counsel that in its opinion Bankers Trust
may perform the services for the Portfolios contemplated by the Advisory
Agreements and other activities for the Funds and the Portfolios described in
the Prospectuses and this SAI without violation of the Glass-Steagall Act or
other applicable banking laws or regulations. However, counsel has pointed out
that future changes in either Federal or state statutes and regulations
concerning the permissible activities of banks or trust companies, as well as
future judicial or administrative decisions or interpretations of present and
future statutes and regulations, might prevent Bankers Trust from continuing to
perform those services for the Trust and the Portfolios. State laws on this
issue may differ from the interpretations of relevant Federal law and banks and
financial institutions may be required to register as dealers pursuant to state
securities law. If the circumstances described above should change, the Boards
of Trustees would review the relationships with Bankers Trust and consider
taking all actions necessary in the circumstances.
Counsel and Independent Accountants
Willkie Farr & Gallagher, 787 Seventh Avenue, New York, New York 10019, serves
as Counsel to the Trust and each Portfolio. PricewaterhouseCoopers LLP, 250 West
Pratt Street, Baltimore, MD 21201 acts as Independent Accountants of the Trust
and each Portfolio.
ORGANIZATION OF THE TRUST
The Trust was organized on July 21, 1986 under the laws of the Commonwealth of
Massachusetts. Each Fund is a mutual fund: an investment that pools
shareholders' money and invests it toward a specified goal. BT Investment
Portfolios is a New York master trust fund. The Capital Appreciation Portfolio
is a New York trust. The Trust offers shares of beneficial
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interest of separate series, par value $0.001 per share. The Trust currently
consists of 20 separate series, including the Funds, and BT Investment
Portfolios currently consist of 16 separate subtrusts, including the Portfolios.
The shares of the other series of the Trust are offered through separate
prospectuses and SAIs. No series of shares has any preference over any other
series. The Trust and BT Investment Portfolios reserve the right to add
additional series in the future. The Trust also reserves the right to issue more
than one class of shares of each Fund.
The Trust is an entity commonly known as a "Massachusetts business trust." Under
Massachusetts law, shareholders of such a business trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which both inadequate
insurance existed and the Trust itself was unable to meet its obligations.
When matters are submitted for shareholder vote, shareholders of each Fund will
have one vote for each full share held and proportionate, fractional votes for
fractional shares held. A separate vote of each Fund is required on any matter
affecting the Fund on which shareholders are entitled to vote. Shareholders of
each Fund are not entitled to vote on trust matters that do not affect the Fund.
All series of the Trust will vote together on certain matters, such as electing
trustees. 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 have 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.
The Declaration of Trust of BT Investment Portfolios provide that each Fund and
other entities investing in the Portfolio (e.g., other investment companies,
insurance company separate accounts and common and commingled trust funds) will
each be liable for all obligations of the Portfolio. However, the risk of the
Fund incurring financial loss on account of such liability is limited to
circumstances in which both inadequate insurance existed and the Portfolio
itself was unable to meet its obligations. Accordingly, the 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 corresponding Portfolio.
Each series in the Trust will not be involved in any vote involving a Portfolio
in which it does not invest its Assets. Shareholders of all of the series of the
Trust will, however, vote together to elect Trustees of the Trust and for
certain other matters. Under certain circumstances, the shareholders of one or
more series could control the outcome of these votes.
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.
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Shareholders generally vote by Fund, except with respect to the election of
Trustees.
Massachusetts law provides that shareholders could under certain circumstances
be held personally liable for the obligations of the Trust. However, the Trust's
Declaration of Trust disclaims shareholder liability for acts or obligations of
the Trust and requires that notice of this disclaimer be given in each
agreement, obligation or instrument entered into or executed by the Trust or a
Trustee. The Declaration of Trust provides for indemnification from the Trust's
property for all losses and expenses of any shareholder held personally liable
for the obligations of the Trust. Thus, the risk of a shareholder's incurring
financial loss on account of shareholder liability is limited to circumstances
in which the Trust itself would be unable to meet its obligations, a possibility
that the Trust believes is remote. Upon payment of any liability incurred by the
Trust, the shareholder paying the liability will be entitled to reimbursement
from the general assets of the Trust. The Trustees intend to conduct the
operations of the Trust in a manner so as to avoid, as far as possible, ultimate
liability of the shareholders for liabilities of the Trust.
The Trust was organized under the name BT Tax-Free Investment Trust and assumed
its current name of BT Investment Funds on May 16, 1988.
Except as described below, 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 the Fund's shareholders.
Fund shareholders who do not vote will not affect the Trust's votes at the
Portfolio meeting. The percentage of the Trust's votes representing Fund
shareholders not voting will be voted by the Trustees of the Trust in the same
proportion as the Fund shareholders who do, in fact, vote.
Except as described below, whenever the Fund is requested to vote on matters
pertaining to the Portfolio, the Fund will hold a meeting of its shareholders
and will cast its votes proportionately as instructed by Fund shareholders.
However, subject to applicable statutory and regulatory requirements, the Fund
would not request a vote of its shareholders with respect to (a) any proposal
relating to the Portfolio, which proposal, if made with respect to the Fund,
would not require the vote of the shareholders of the Fund, or (b) any proposal
with respect to the Portfolio that is identical in all material respects to a
proposal that has previously been approved by shareholders of the Fund. Any
proposal submitted to holders in the Portfolio, and that is not required to be
voted on by shareholders of the Fund, would nonetheless be voted on by the
Trustees of the Trust.
TAXATION
Dividends and Distributions
Each Fund distributes substantially all of its net income and capital gains to
shareholders each year. Each Fund distributes capital gains annually. Unless a
shareholder instructs the Trust to pay such dividends and distributions in cash,
they will be automatically reinvested in additional shares of the Fund.
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The Trust intends to qualify annually and to elect each Fund to be treated as a
regulated investment company under Subchapter M of the Code. Provided each Fund
meets the requirements imposed by the Code and distributes all of its income and
gains, a Fund will not pay any federal income or excise taxes.
Distributions from each Fund's income and short-term capital gains are taxed as
dividends, and long-term capital gain distributions are taxed as long-term
capital gains. Each Fund's capital gain distributions are taxable when they are
paid, whether you take them in cash or reinvest them in additional shares.
Distributions declared to shareholders of record in October, November or
December and paid in January are taxable on December 31. Each Fund will send
each shareholder a tax statement by January 31 showing the tax status of the
distributions received during the past year.
On the ex-date for a distribution from capital gains, each Fund's share value is
reduced by the amount of the distribution. If you buy shares just before the ex-
date ("buying a dividend"), you will pay the full price for the shares and then
receive a portion of the price back as a taxable distribution.
Taxation of the Funds
As a regulated investment company, each Fund will not be subject to U.S. Federal
income tax on its investment company taxable income and net capital gains (the
excess of net long-term capital gains over net short-term capital losses), if
any, that it distributes to shareholders. The Funds intend to distribute to
their shareholders, at least annually, substantially all of their investment
company taxable income and net capital gains, and therefore do not anticipate
incurring Federal income tax liability.
If for any taxable year a Fund does not qualify for the special federal income
tax treatment afforded regulated investment companies, all of its taxable income
will be subject to federal income tax at regular corporate rates (without any
deduction for distributions to its shareholders). In such event, dividend
distributions would be taxable to shareholders to the extent of current
accumulated earnings and profits, and would be eligible for the dividends
received deduction for corporations in the case of corporate shareholders.
A Fund's investment in Section 1256 contracts, such as regulated futures
contracts, most forward currency forward contracts traded in the interbank
market and options on most stock indices, are subject to special tax rules. All
section 1256 contracts held by a Fund at the end of its taxable year are
required to be marked to their market value, and any unrealized gain or loss on
those positions will be included in the Fund's income as if each position had
been sold for its fair market value at the end of the taxable year. The
resulting gain or loss will be combined with any gain or loss realized by the
Fund from positions in section 1256 contracts closed during the taxable year.
Provided such positions were held as capital assets and were not part of a
"hedging transaction" nor part of a "straddle," 60% of the resulting net gain or
loss will be treated as long-
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term capital gain or loss, and 40% of such net gain or loss will be treated as
short-term capital gain or loss, regardless of the period of time the positions
were actually held by the Fund. Each Fund shareholder will receive, if
appropriate, various written notices after the close of the Fund's prior taxable
year as to the Federal income status of his dividends and distributions which
were received from the Fund during the Fund's prior taxable year. Shareholders
should consult their tax advisers as to any state and local taxes that may apply
to these dividends and distributions.
Foreign Securities
Income from investments in foreign stocks or securities may be subject to
foreign taxes. Tax conventions between certain countries and the United States
may reduce or eliminate such taxes. It is impossible to determine the effective
rate of foreign tax in advance since the amount of the Portfolio's assets to be
invested in various countries will vary.
If the Portfolio is liable for foreign taxes, and if more than 50% of the value
of the Portfolio's total assets at the close of its taxable year consists of
stocks or securities of foreign corporations (including foreign governments),
the corresponding Fund may make an election pursuant to which certain foreign
taxes paid by the Portfolio would be treated as having been paid directly by
shareholders of the corresponding Fund. Pursuant to such election, the amount of
foreign taxes paid will be included in the income of the corresponding Fund's
shareholders, and such Fund shareholders (except tax-exempt shareholders) may,
subject to certain limitations, claim either a credit or deduction for the
taxes. Each such Fund shareholder will be notified after the close of the
Portfolio's taxable year whether the foreign taxes paid will "pass through" for
that year and, if so, such notification will designate (a) the shareholder's
portion of the foreign taxes paid to each such country and (b) the amount which
represents income derived from sources within each such country.
The amount of foreign taxes for which a shareholder may claim a credit in any
year will generally be subject to a separate limitation for "passive income,"
which includes, among other items of income, dividends, interest and certain
foreign currency gains. Because capital gains realized by the Portfolio on the
sale of foreign securities will be treated as U.S. source income, the available
credit of foreign taxes paid with respect to such gains may be restricted by
this limitation.
Taxation of the Portfolios
The Portfolios are not subject to Federal income taxation. Instead, the Fund and
other investors investing in a Portfolio must take into account, in computing
their Federal income tax liability, their share of the Portfolio's income,
gains, losses, deductions, credits and tax preference items, without regard to
whether they have received any cash distributions from the Portfolio.
Distributions received by a Fund from the corresponding Portfolio generally will
not result in the Fund recognizing any gain or loss for Federal income tax
purposes, except that: (1) gain will be recognized to the extent that any cash
distributed exceeds the Fund's basis in its interest in the
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Portfolio prior to the distribution; (2) income or gain may be realized if the
distribution is made 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 (3) loss may be recognized if the distribution is
made in liquidation of the Fund's entire interest in the Portfolio and consists
solely of cash and/or unrealized receivables. A Fund's basis in its interest in
the corresponding Portfolio generally will equal the amount of cash and the
basis of any property which the Fund invests in the Portfolio, increased by the
Fund's share of income from the Portfolio, and decreased by the amount of any
cash distributions and the basis of any property distributed from the Portfolio.
Sale of Shares
Any gain or loss realized by a shareholder upon the sale or other disposition of
shares of the Fund, or upon receipt of a distribution in complete liquidation of
the Fund, generally will be a capital gain or loss which will be long-term or
short-term, generally depending upon the shareholder's holding period for the
shares. Any loss realized on a sale or exchange will be disallowed to the extent
the shares disposed of are replaced (including shares acquired pursuant to a
dividend reinvestment plan) within a period of 61 days beginning 30 days before
and ending 30 days after disposition of the shares. In such a case, the basis of
the shares acquired will be adjusted to reflect the disallowed loss. Any loss
realized by a shareholder on a disposition of Fund shares held by the
shareholder for six months or less will be treated as a long-term capital loss
to the extent of any distributions of net capital gains received by the
shareholder with respect to such shares.
Because the tax treatment also depends on your purchase price and your personal
tax position, you should keep your regular account statements to use in
determining your tax.
Foreign Withholding Taxes
Income received by a Portfolio from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries.
Backup Withholding
The Fund may be required to withhold U.S. Federal income tax at the rate of 31%
of all taxable distributions payable to shareholders who fail to provide the
Fund with their correct taxpayer identification number or to make required
certifications, or who have been notified by the Internal Revenue Service that
they are subject to backup withholding. Corporate shareholders and certain other
shareholders specified in the Code generally are exempt from such backup
withholding. Backup withholding is not an additional tax. Any amounts withheld
may be credited against the shareholder's U.S. Federal income tax liability.
Foreign Shareholders
The tax consequences to a foreign shareholder of an investment in the Fund may
be different from those described herein. Foreign shareholders are advised to
consult their own tax advisers
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with respect to the particular tax consequences to them of an investment in the
Fund.
Other Taxation
The Trust is organized as a Massachusetts business trust and, under current law,
neither the Trust nor any Fund is liable for any income or franchise tax in the
Commonwealth of Massachusetts, provided that the Fund continues to qualify as a
regulated investment company under Subchapter M of the Code. The investment by
each Fund in the corresponding Portfolio does not cause the Fund to be liable
for any income or franchise tax in the State of New York.
Each Portfolio is a subtrust of BT Investment Portfolios, which is organized as
a New York master trust fund. No Portfolio is subject to any income or
franchise tax in the State of New York or the Commonwealth of Massachusetts.
Fund shareholders may be subject to state and local taxes on their Fund
distributions. Shareholders are advised to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in a Fund.
FINANCIAL STATEMENTS
The financial statements for each Fund and Portfolio for the period ended
September 30, 1999, are incorporated herein by reference to the Annual Report to
shareholders for each Fund and Portfolio dated September 30, 1999. The financial
statements for each Fund and Portfolio for the six month period ended March 31,
2000 are incorporated herein by reference to the semi-annual report to
shareholders for that Fund. A copy of a Fund's and corresponding Portfolio's
Annual Report may be obtained without charge by contacting the respective Fund.
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APPENDIX
Description of Moody's Corporate Bond Ratings:
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edge."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the long-
term risks appear somewhat larger than in Aaa securities.
A - Bonds rated A possess many favorable investment attributes and are to be
considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa - Bonds rated Baa are considered as medium-grade obligations, i.e. they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such, bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba - Bonds rated Ba are judged to have speculative elements. Their future cannot
be considered as well assured. Often the protection of interest and principal
payments may be very moderate and thereby not well safeguarded during both (good
and bad times over the future). Uncertainty of position characterizes bonds in
this class.
B - Bonds rated B generally lack characteristics of a desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked short-comings.
C - Bonds rated C are the lowest-rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
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Moody's applies numerical modifiers, 1, 2, and 3, in each generic rating
classification from Aa through B in its corporate bond system. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
Description of S&P Corporate Bond Ratings:
AAA - Debt rated AAA has the highest rating assigned by Standard & Poor's to a
debt obligation. Capacity to pay interest and repay principal is extremely
strong.
AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher-rated issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to weakened capacity to pay interest and repay principal for debt
in this category than in higher-rated categories.
BB - Debt rate BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments.
B - Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB- rating.
CCC - Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal.
CC - Debt rated CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating.
C - The rating C is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC- debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed but debt service
payments are continued.
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CI - The rating CI is reserved for income bonds on which no interest is being
paid.
D - Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating will also be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
Description of S&P commercial paper ratings:
Commercial paper rated A-1 by S&P indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted A-1+.
Description of Moody's commercial paper ratings:
The rating Prime-1 is the highest commercial paper rating assigned by Moody's.
Issuers rated Prime-1 (or related supporting institutions) are considered to
have a superior capacity for repayment of short-term promissory obligations.
Description of S&P Municipal Bond Ratings:
AAA - Prime - These are obligations of the highest quality. They have the
strongest capacity for timely payment of debt service.
General Obligations Bonds - In a period of economic stress, the issuers will
suffer the smallest declines in income and will be least susceptible to
autonomous decline. Debt burden is moderate. A strong revenue structure appears
more than adequate to meet future expenditure requirements. Quality of
management appears superior.
Revenue Bonds - Debt service coverage has been, and is expected to remain,
substantial, stability of the pledged revenues is also exceptionally strong due
to the competitive position of the municipal enterprise or to the nature of the
revenues. Basic security provisions (including rate covenant, earnings test for
issuance of additional bonds and debt service reserve requirements) are
rigorous. There is evidence of superior management.
AA - High Grade - The investment characteristics of bonds in this group are only
slightly less marked than those of the prime quality issues. Bonds rated AA have
the second strongest capacity for payment of debt service.
A - Good Grade - Principal and interest payments on bonds in this category are
regarded as safe although the bonds are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than bonds in higher
rated categories. This rating describes the third strongest capacity for payment
of debt service. Regarding municipal bonds, the rating differs from the two
higher ratings because:
55
<PAGE>
General Obligation Bonds - There is some weakness, either in the local economic
base, in debt burden, in the balance between revenues and expenditures, or in
quality of management. Under certain adverse circumstances, any one such
weakness might impair the ability of the issuer to meet debt obligations at some
future date.
Revenue Bonds - Debt service coverage is good, but not exceptional. Stability of
the pledged revenues could show some variations because of increased competition
or economic influences on revenues. Basic security provisions, while
satisfactory, are less stringent. Management performance appearance appears
adequate.
S&P's letter ratings may be modified by the addition of a plus or a minus sign,
which is used to show relative standing within the major rating categories,
except in the AAA rating category.
Description of Moody's Municipal Bond Ratings:
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge". Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities, or fluctuation of protective elements
may be of greater amplitude, or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Moody's may apply the numerical modifier in each generic rating classification
from Aa through B. The modifier 1 indicates that the security within its generic
rating classification possesses the strongest investment attributes.
Description of S&P Municipal Note Ratings:
Municipal notes with maturities of three years or less are usually given note
ratings (designated SP-1, or -2) to distinguish more clearly the credit quality
of notes as compared to bonds. Notes rated SP-1 have a very strong or strong
capacity to pay principal and interest. Those issues determined to possess
overwhelming safety characteristics are given the designation of SP-1. Notes
rates SP-2 have a satisfactory capacity to pay principal and interest.
56
<PAGE>
Description of Moody's Municipal Note Ratings:
Moody's ratings for state and municipal notes and other short-term loans are
designated Moody's Investment Grade (MIG) and for variable rate demand
obligations are designated Variable Moody's Investment Grade (VMIG). This
distinction recognizes the differences between short-term credit risk and long-
term risk. Loans bearing the designation MIG 1/VMIG 1 are of the best quality,
enjoying strong protection from established cash flows of funds for their
servicing or from established cash flows of funds for their servicing or from
established and broad-based access to the market for refinancing, or both. Loans
bearing the designation MIG2/VMIG2 are of high quality, with ample margins of
protection, although not as large as the preceding group.
S&P's Commercial Paper Ratings:
A is the highest commercial paper rating category utilized by S&P, which uses
the numbers 1, 1, 2 and 3 to denote relative strength within its A
classification. Commercial paper issues rated A by S&P have the following
characteristics: Liquidity ratios are better than industry average. Long-term
debt ratings is A or better. The issuer has access to at least two additional
channels of borrowing. Basic earnings and cash flow are in an upward tread.
Typically, the issuer is a strong company in a well-established industry and has
superior management.
Moody's Commercial Paper Ratings:
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics: leasing
market positions in well-established industries; high rates of return on funds
employed; conservative capitalization structures with moderate reliance on debt
and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; well-established access to
a range of financial markets and assured sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rates Prime-3 (or related supporting institutions) have an acceptable
capacity for repayment of short-term promissory obligations. The effect of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
57
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
August 31, 2000
Investment Adviser and Administrator of each Portfolio
BANKERS TRUST COMPANY
130 Liberty Street
(One Bankers Trust Plaza)
New York, NY 10006
Distributor
ICC DISTRIBUTORS, INC.
One South Street
Baltimore, MD 21202
Custodian and Transfer Agent
BANKERS TRUST COMPANY
130 Liberty Street
(One Bankers Trust Plaza)
New York, NY 10006
Independent Accountants
PRICEWATERHOUSECOOPERS LLP
250 West Pratt Street
Baltimore, MD 21201
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 the Trust's Prospectuses, its
Statements of Additional Information or the Trust's official sales literature in
connection with the offering of the Trust's shares and, if given or made, such
other information or representations must not be relied on as having been
authorized by the Trust. Neither the Prospectuses nor this Statement of
Additional Information constitutes an offer in any state in which, or to any
person to whom, such offer may not lawfully be made.
CUSIPs: 055922819
055922637
055922769
1725 (8/00)
58
<PAGE>
PART C - OTHER INFORMATION
ITEM 23. Exhibits.
(a) Declaration of Trust dated July 21, 1986; 1
(i) Supplement to Declaration of Trust dated October 20, 1986; 1
(ii) Second Supplement to Declaration of Trust dated May 16, 1988; 1
(b) By-Laws; 1
(c) Incorporated by reference to Exhibit (b) above;
(d) Not applicable
(e) Distribution Agreement dated August 11, 1998; 5
(ii) Appendix A dated December 9, 1998 to Distribution Agreement; 7
(iii) Appendix A dated December 23, 1999 to Distribution Agreement; 12
(f) Bonus or Profit Sharing Contracts - Not applicable;
(g) Custodian Agreement dated July 1, 1996; 2
(i) Amendment No. 2 to Exhibit A of the Custodian Agreement dated
October 8, 1997; 3
(ii) Amendment No. 3 to Exhibit A of the Custodian Agreement dated
June 10, 1998; 7
(iii) Amendment No. 4 to Exhibit A of the Custodian Agreement dated
December 9, 1998; 7
(iv) Cash Services Addendum to Custodian Agreement dated December 18,
1997; 4
(v) Amendment No. 5 to Exhibit A of the Custodian Agreement dated
December 23, 1999; 12
(h) Administration and Services Agreement dated Oct. 28, 1992; 8
(i) Exhibit D to the Administration and Services Agreement as of
October 28, 1992, as revised December 23,1999; 12
(ii) Agreement to Provide Shareholder Services for BT Preservation
Plus Income Fund as of June 10, 1998; 5
(iii) Shareholder Services Plan for BT Preservation Plus Income Fund as
of June 10, 1998; 5
(iv) Expense Limitation Agreement dated September 30, 1999 on behalf
of Intermediate Tax Free Fund, Capital Appreciation Fund, Small
Cap Fund; 13
(v) Expense Limitation Agreement dated October 31, 1999 on behalf of
International Equity Fund, Latin American Equity Fund and Pacific
Basin Equity Fund; 13
(vi) Expense Limitation Agreement dated March 31, 2000, on behalf of
BT Investment Lifecycle Long Range Fund, BT Investment Lifecycle
Mid Range Fund, and BT Investment Lifecycle Short Range Fund; 15
<PAGE>
(vii) Expense Limitation Agreement dated December 31, 1999 on behalf of
Cash Management Fund, Tax Free Money Fund, NY Tax Free Money
Fund, Treasury Money Fund and Quantitative Equity Fund; 14
(viii) Expense Limitation Agreement dated September 30, 1999 on behalf
of Preservation Plus Income Fund; 13
(ix) Expense Limitation Agreement on behalf of Mid Cap for the period
August 31, 2000 through January 31, 2001 - filed herewith;
(i) Legal Opinion - Not applicable;
(j) Consent of Independent Accountants - filed herewith;
(k) Omitted Financial Statements - Not applicable;
(l) Initial Capital Agreements - Not applicable;
(m) Rule 12b-1 Plans - Not applicable;
(n) Not applicable.
(o) Rule 18f-3 Plan; 13
(p) Codes of Ethics for Funds, Adviser and Distributor; 16
__________________________________
1. Incorporated by reference to Post-Effective Amendment No. 34 to Registrant's
Registration Statement on Form N-1A ("Registration Statement") as filed
with the Securities and Exchange Commission ("Commission") on July 31,
1995.
2. Incorporated by reference to Post-Effective Amendment No. 44 to Registrant's
Registration Statement as filed with the Commission on July 1, 1997.
3. Incorporated by reference to Post-Effective Amendment No. 46 to Registrant's
Registration Statement as filed with the Commission on January 28, 1998.
4. Incorporated by reference to Post-Effective Amendment No. 50 to Registrant's
Registration Statement as filed with the Commission on June 30, 1998.
5. Incorporated by reference to Post-Effective Amendment No. 55 to Registrant's
Registration Statement as filed with the Commission on November 25, 1998.
6. Incorporated by reference to Post-Effective Amendment No. 56 to Registrant's
Registration Statement as filed with the Commission on January 28, 1999.
7. Incorporated by reference to Post-Effective Amendment No. 57 to Registrant's
Registration Statement as filed with the Commission on February 8, 1999.
8. Incorporated by reference to Post-Effective Amendment No. 29 to
Registrant's Registration Statement as filed with the Commission on
November 8, 1993.
9. Incorporated by reference to Post-Effective Amendment No. 60 to
Registrant's Registration Statement as filed with the Commission on March
15, 1999.
<PAGE>
10. Incorporated by reference to Post-Effective Amendment No. 63 to
Registrant's Registration Statement as filed with the Commission on July
29, 1999.
11. Incorporated by reference to Post-Effective Amendment No. 64 to
Registrant's Registration Statement as filed with the Commission on October
22, 1999.
12. Incorporated by reference to Post-Effective Amendment to No. 66 to
Registrant's Registration Statement as filed with the Commission on
December 23, 1999.
13. Incorporated by reference to Post-Effective Amendment to No. 67 to
Registrant's Registration Statement as filed with the Commission on January
28, 2000.
14. Incorporated by reference to Post-Effective Amendment to No. 68 to
Registrant's Registration Statement as filed with the Commission on April
28, 2000.
15. Incorporated by reference to Post-Effective Amendment to No. 69 to
Registrant's Registration Statement as filed with the Commission on May 1,
2000.
16. Incorporated by reference to Post -Effective Amendment No. 70 to
Registrant's Registration Statement as filed with the Commission on June
26, 2000.
ITEM 24. Persons Controlled by or Under Common Control with Registrant.
Not applicable.
ITEM 25. Indemnification.
Incorporated by reference to Post-Effective Amendment No. 38 to Registrant's
Registration Statement as filed with the Commission on April 29, 1996.
ITEM 26. Business and Other Connections of Investment Adviser.
Bankers Trust Company ("Bankers Trust") serves as investment adviser to the
Portfolios. Bankers Trust, a New York banking corporation, is a wholly owned
subsidiary of Deutsche Bank AG. Bankers Trust conducts a variety of commercial
banking and trust activities and is a major wholesale supplier of financial
services to the international institutional market.
To the knowledge of the Trust, none of the directors or officers of Bankers
Trust, except those set forth below, is engaged in any other business,
profession, vocation or employment of a substantial nature, except that certain
directors and officers also hold various positions with and engage in business
for
<PAGE>
Deutsche Bank AG and its affiliates or subsidiaries. Set forth below are the
names and principal businesses of the directors and officers of Bankers Trust
who, to our knowledge as of June 20, 2000, are engaged in any other business,
profession, vocation or employment of a substantial nature.
Josef Ackermann
Member, Board of Managing Directors, Deutsche Bank AG; Chairman of the Board and
Chief Executive Officer, Bankers Trust Corporation; Chairman of the Board and
Chief Executive Officer, Bankers Trust Company; Chairman of the Supervisory
Board, Deutsche Bank Luxembourg, S.A.; Supervisory Board Memberships in: EUREX
Frankfurt AG; EUREX Zurich AG; Linde AG, Stora Enso Oyj and Mannesmann AG;
Director, Deutsche Bank Americas Holding Corp. Address: Deutsche Bank AG,
Taunusanlage 12, 60325 Frankfurt am Main, Germany.
Hans Angermueller
"Of Counsel", Shearman & Sterling; Director, Bankers Trust Corporation;
Director, Bankers Trust Company. Address: Shearman & Sterling, 599 Lexington
Avenue, Suite 1414, New York, New York 10022-6069.
George B. Beitzel
Private Investor; Director, Bankers Trust Corporation; Director, Bankers Trust
Company; Directorships in: Bitstream, Inc.; Computer Task Group, Inc.; and Staff
Leasing Inc. Address: 29 King Street, Chappaqua, New York 10514-3432.
Yves de Balman
Co-Chairman and Co-Chief Executive Officer, DB Alex. Brown LLC; Vice Chairman,
Bankers Trust Corporation; Director, Bankers Trust International, plc; Director,
Aerospatiale Matra; Co-Chairman and Co-Chief Executive Officer, Deutsche Bank
Securities Inc. Address: 130 Liberty Street, New York, New York 10006.
William R. Howell
Chairman Emeritus, J.C. Penney Company, Inc.; Director, Bankers Trust
Corporation; Director, Bankers Trust Company; Director, Exxon Mobil Corporation;
Warner-Lambert Company; Halliburton Company; Williams, Inc.; Central and South
West Corporation. Adddress: 6501 Legacy Drive, Plano, Texas 75054-3698.
Hermann-Josef Lamberti
Executive Vice President, Deutsche Bank AG; Director and Vice Chairman, Bankers
Trust Corporation; Director, Bankers Trust Company; Board memberships: Euroclear
plc (London); Euroclear sc.
<PAGE>
(Brussels); and The Clearinghouse Interbank Payments Co. L.L.C. Supervisory
Board Memberships in: GZS (Frankfurt) and the European Transaction Bank
(e.t.b.). Director, Deutsche Bank Americas Holding Corp. Address: Deutsche Bank
AG, Taunusanlage 12, 60325 Frankfurt am Main, Germany.
Troland S. Link
General Counsel of Deutsche Bank North America; General Counsel, Bankers Trust
Corporation; Managing Director and General Counsel, Bankers Trust Company.
Address: 1301 Sixth Avenue - Fl.8, New York, NY 10019.
Rodney A. McLauchlan
Executive Vice President, Bankers Trust Company; Executive Vice President,
Bankers Trust Corporation. Address: 31 West 52nd Street, Fl.28, New York, NY
10019.
John A. Ross
Chief Executive Officer of the Americas, Deutsche Bank AG; President and
Director, Bankers Trust Corporation; President and Director, Bankers Trust
Company; President, Director and Chief Executive Officer, Taunus Corporation and
DB U.S. Financial Markets Holding Corporation; President and Chief Executive
Officer, Deutsche Bank Americas Holding Corp.; Director, Deutsche Bank
Securities Inc.and DB Alex. Brown LLC. Address: Deutsche Bank, 31 West 52/nd/
Street, FL. 28, New York, New York 10019.
Ronaldo H. Schmitz
Member of the Group Board, Deutsche Bank AG, Director, Bankers Trust
Corporation; Director, Bankers Trust Company; Non-executive Director,
Bertelsmann AG, Glaxo Wellcome plc, Rohm & Haas Co. and INSEAD - Paris, France;
Director, Deutsche Bank Americas Holding Corp. Address: Deutsche Bank AG,
Taunusanlage 12, 60325 Frankfurt am Main, Germany.
Mayo A. Shattuck III
Co-Chairman and Co-Chief Executive Officer, DB Alex. Brown LLC; Vice Chairman,
Bankers Trust Corporation; Director, Bankers Trust International, plc, Alex.
Brown & Sons Holdings Limited, Alex. Brown & Sons Limited, Alex. Brown Asset
Management, Inc., Alex. Brown Capital Advisory, Incorporated and Investment
Company Capital Corporation; Co-Chairman and Co-Chief Executive Officer,
Deutsche Bank Securities Inc.; Director and President - AB Administrative
Partner, Inc., ABFS I Incorporated, ABS Leasing Services Company, ABS MB Ltd.,
Alex. Brown Financial Corporation, Alex. Brown Financial Services Incorporated,
Alex. Brown Investments Incorporated, Alex. Brown Management Services Inc. and
<PAGE>
Alex. Brown Mortgage Capital Corporation; and Director and Vice President, Alex.
Brown & Sons Holdings Limited; Director, Constellation Holdings; President,
South Street Aviation; Co-Chairman and Co-Chief Executive Officer, Deutsche Bank
Securities Inc. Address: One South Street, Fl.30 Baltimore, MD 21202.
Item 27. Principal Underwriters.
(a) ICC Distributors, Inc., the Distributor for shares of the Registrant, also
acts as principal underwriter for the following open-end investment companies:
BT Advisor Funds, BT Institutional Funds, BT Pyramid Mutual Funds, Cash
Management Portfolio, Intermediate Tax Free Portfolio, NY Tax Free Money
Portfolio, Treasury Money Portfolio, International Equity Portfolio, Equity 500
Index Portfolio, Capital Appreciation Portfolio, Asset Management Portfolio, BT
Investment Portfolios, Deutsche Banc Alex. Brown Cash Reserve Fund, Inc., Flag
Investors Communications Fund, Inc., Flag Investors Emerging Growth Fund, Inc.,
the Flag Investors Total Return U.S. Treasury Fund Shares of Total Return U.S.
Treasury Fund, Inc., the Flag Investors Managed Municipal Fund Shares of Managed
Municipal Fund, Inc., Flag Investors Short-Intermediate Income Fund, Inc., Flag
Investors Value Builder Fund, Inc., Flag Investors Real Estate Securities Fund,
Inc., Flag (formerly known as Deutsche Funds, Inc.), Flag Investors Portfolios
Trust (formerly known as Deutsche Portfolios), Morgan Grenfell Investment Trust,
DP Trust, The Glenmede Funds, Inc. and The Glenmede Portfolios.
(b) Unless otherwise stated, the principal business address for the following
persons is Two Portland Square, Portland, Maine 04101.
Name and Positions and Positions and
Principal Business Offices with Offices with
Address Distributor Registrant
John A. Keffer President None
Ronald H. Hirsch Treasurer None
Nanette K. Chern Chief Compliance Officer None
David I. Goldstein Secretary None
Benjamin L. Niles Vice President None
Frederick Skillin Assistant Treasurer None
Marc D. Keffer Assistant Secretary None
(c) None
<PAGE>
ITEM 28. Location of Accounts and Records.
BT Investment Funds: Deutsche Asset Management
(Registrant) One South Street
Baltimore, MD 21202
Bankers Trust Company: 130 Liberty Street
(Custodian, Investment Adviser New York, NY 10006
and Administrator)
DST: 210 West 10/th/ Street
Kansas City, MO 64105.
ICC Distributors, Inc.: Two Portland Square
(Distributor) Portland, ME 04101
ITEM 29. Management Services.
Not Applicable
ITEM 30. Undertakings.
Not Applicable
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and
the Investment Company Act of 1940, as amended, the Registrant, BT INVESTMENT
FUNDS, certifies that it meets all of the requirements for effectiveness of this
Amendment to its Registration Statement pursuant to Rule 485(b) under the
Securities Act of 1933, as amended, and has duly caused this Post-Effective
Amendment No. 73 to its Registration Statement to be signed on its behalf by the
undersigned, duly authorized, in the City of Baltimore and the State of Maryland
on this 31st day of August, 2000.
BT INVESTMENT FUNDS
By: /s/Daniel O. Hirsch
-------------------------
Daniel O. Hirsch, Secretary
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to its Registration Statement has been signed below by the following persons in
the capacity and on the date indicated:
NAME TITLE DATE
By: /s/Daniel O. Hirsch Secretary August 31, 2000
--------------------
Daniel O. Hirsch (Attorney in Fact
For the Persons Listed Below)
/s/ John Y. Keffer* President and
John Y. Keffer Chief Executive Officer
/s/ Charles A. RIZZO* Treasurer (Principal
Charles A. Rizzo Financial and Accounting Officer)
/s/ CHARLES P. BIGGAR* Trustee
Charles P. Biggar
/s/ S. LELAND DILL* Trustee
S. Leland Dill
/s/ MARTIN J. GRUBER* Trustee
Martin J. Gruber
/s/ RICHARD T. HALE* Trustee
Richard T. Hale
/s/ RICHARD J. HERRING* Trustee
<PAGE>
Richard J. Herring
/s/ BRUCE T. LANGTON* Trustee
Bruce T. Langton
/s/ PHILIP SAUNDERS, JR.* Trustee
Philip Saunders, Jr.
/s/ HARRY VAN BENSCHOTEN* Trustee
Harry Van Benschoten
* By Power of Attorney. Incorporated by reference to Post-Effective Amendment
No. 64 of BT Investment Funds as filed with the Commission on October 22, 1999.
<PAGE>
SIGNATURES
CAPITAL APPRECIATION PORTFOLIO has duly caused this Post-Effective
Amendment No. 73 to the Registration Statement on Form N-1A of BT Investment
Funds to be signed on its behalf by the undersigned, thereto duly authorized, in
the City of Baltimore and the State of Maryland on the 31st day of August, 2000.
CAPITAL APPRECIATION PORTFOLIO
By: /s/Daniel O. Hirsch
-------------------
Daniel O. Hirsch, Secretary
This Post-Effective Amendment No. 73 to the Registration Statement of BT
Investment Funds has been signed below by the following persons in the
capacities indicated with respect to CAPITAL APPRECIATION PORTFOLIO.
NAME TITLE DATE
By: /s/Daniel O. Hirsch Secretary August 31, 2000
---------------------
Daniel O. Hirsch (Attorney in Fact
For the Persons Listed Below)
/s/ John Y. Keffer* President and
John Y. Keffer Chief Executive Officer
/s/ Charles A. RIZZO* Treasurer (Principal
Charles A. Rizzo Financial and Accounting Officer)
/s/ CHARLES P. BIGGAR* Trustee
Charles P. Biggar
/s/ S. LELAND DILL* Trustee
S. Leland Dill
/s/ MARTIN J. GRUBER* Trustee
Martin J. Gruber
/s/ RICHARD T. HALE* Trustee
Richard T. Hale
/s/ RICHARD J. HERRING* Trustee
Richard J. Herring
/s/ BRUCE T. LANGTON* Trustee
<PAGE>
Bruce T. Langton
/s/ PHILIP SAUNDERS, JR.* Trustee
Philip Saunders, Jr.
/s/ HARRY VAN BENSCHOTEN* Trustee
Harry Van Benschoten
* By Power of Attorney. Incorporated by reference to Post-Effective Amendment
No. 64 of BT Investment Funds as filed with the Commission on October 22, 1999.
<PAGE>
RESOLUTION RELATING TO THE ORGANIZATION OF
CLASSES FOR CAPITAL APPRECIATION FUND
(To be voted on by the Board of BT INVESTMENT FUNDS)
FURTHER RESOLVED: That the officers of the Trust are hereby authorized and
directed to prepare and file with the appropriate regulatory bodies
the appropriate amendments to the registration statements of the BT
Investment Funds, with respect to the Capital Appreciation Fund and
its Classes, on Form N-1A.
