STATEMENT OF
ADDITIONAL INFORMATION
APRIL 1, 1997
(Revised July 18, 1997)
BT INSTITUTIONAL FUNDS
INTERNATIONAL EQUITY FUND
CLASS I SHARES
CLASS II SHARES
BT Institutional Funds (the "Trust") is comprised of several funds.
The Class I Shares and Class II Shares (individually and collectively
referred to as "Shares" as the context may require) of the
International Equity Fund are described herein.
TABLE OF CONTENTS
Investment Objectives, Policies and Restrictions.........................3
Performance Information.................................................22
Valuation of Securities; Redemptions and Purchases in Kind..............25
Management of the Trust and The Portfolios..............................27
Organization of the Trust...............................................34
Taxation................................................................35
Financial Statements....................................................39
Appendix (Bond, Commercial Paper and Municipal Obligations Ratings)....A-1
As described in the Shares' respective Prospectuses, the Trust seeks
to achieve the investment objectives of the Fund by investing all the
investable assets ("Assets") of the Fund in International Equity
Portfolio (the "Portfolio") a diversified open-end management
investment company having the same investment objectives as the Fund.
Since the investment characteristics of the Fund will correspond
directly to the Portfolio in which the Fund invests all of its assets,
the following is a discussion of the various investments of and
techniques employed by the Portfolio.
Shares of the Fund are sold by Edgewood Services, Inc. ("Edgewood"),
the Trust's Distributor, to clients and customers (including
affiliates and correspondents) of Bankers Trust Company ("Bankers
Trust"), the Portfolio's Adviser, and to clients and customers of
other organizations.
The Trust's Prospectus dated April 1, 1997, provides the basic
information investors should know before investing, and may be
obtained without charge by calling the Trust at the telephone number
listed below or by contacting any Service Agent. This Statement of
Additional Information ("SAI"), which is not a Prospectus, is intended
to provide additional information regarding the activities and
operations of the Trust and should be read in conjunction with the
Shares' respective Prospectuses. Capitalized terms not otherwise
defined in this SAI have the meanings accorded to them in the Shares'
respective Prospectuses.
BANKERS TRUST COMPANY
INVESTMENT ADVISER OF THE PORTFOLIO AND ADMINISTRATOR
EDGEWOOD SERVICES, INC.
DISTRIBUTOR
CLEARING OPERATIONS P.O. BOX 897 PITTSBURGH, PENNSYLVANIA 15230-0897
(800) 545-1074
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INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVES
The investment objective of the Fund is described in the Shares'
respective Prospectuses. There can, of course, be no assurance that
the Fund will achieve its investment objective.
INVESTMENT POLICIES
The Fund seeks to achieve its investment objective by investing all of
its Assets in the Portfolio. The Trust may withdraw the Fund's
investment from the Portfolio at any time if the 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 the Fund will correspond
directly to those of the Portfolio, the following is a discussion of
the various investments of and techniques employed by the Portfolio.
CERTIFICATES OF DEPOSIT AND BANKERS' ACCEPTANCES. Certificates of
deposit are receipts issued by a depository institution in exchange
for the deposit of funds. The issuer agrees to pay the amount
deposited plus interest to the bearer of the receipt on the date
specified on the certificate. The certificate usually can be traded in
the secondary market prior to maturity. Bankers' acceptances typically
arise from short-term credit arrangements designed to enable
businesses to obtain funds to finance commercial transactions.
Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for
specific merchandise. The draft is then "accepted" by a bank that, in
effect, unconditionally guarantees to pay the face value of the
instrument on its maturity date. The acceptance may then be held by
the accepting bank as an earning asset or it may be sold in the
secondary market at the going rate of discount for a specific
maturity. Although maturities for acceptances can be as long as 270
days, most acceptances have maturities of six months or less.
COMMERCIAL PAPER. Commercial paper consists of short-term (usually
from 1 to 270 days) unsecured promissory notes issued by corporations
in order to finance their current operations. A variable amount master
demand note (which is a type of commercial paper) represents a direct
borrowing arrangement involving periodically fluctuating rates of
interest under a letter agreement between a commercial paper issuer
and an institutional lender pursuant to which the lender may determine
to invest varying amounts.
For a description of commercial paper ratings, see the Appendix.
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SHORT-TERM INSTRUMENTS. When a Portfolio experiences large cash
inflows through the sale of securities and desirable equity
securities, that are consistent with the Portfolio's investment
objective, are unavailable in sufficient quantities or at attractive
prices, the Portfolio may hold short-term investments for a limited
time pending availability of such equity securities. Short-term
instruments consist of foreign and domestic: (i) short-term
obligations of sovereign governments, their agencies,
instrumentalities, authorities or political subdivisions; (ii) other
short-term debt securities rated AA or higher by Standard & Poor's
Ratings Group ("S&P") or Aa or higher by Moody's Investors Service,
Inc. ("Moody's") or, if unrated, of comparable quality in the opinion
of Bankers Trust; (iii) commercial paper; (iv) bank obligations,
including negotiable certificates of deposit, time deposits and
banker's acceptances; and (v) repurchase agreements. At the time the
Portfolio invests in commercial paper, bank obligations or repurchase
agreements, the issuer of the issuer's parent must have outstanding
debt rated AA or higher by S&P or Aa or higher by Moody's or
outstanding commercial paper or bank obligations rated A-1 by S&P or
Prime-1 by Moody's; or, if no such ratings are available, the
instrument must be of comparable quality in the opinion of Bankers
Trust. These instruments may be denominated in U.S. dollars or in
foreign currencies.
ILLIQUID SECURITIES. Historically, illiquid securities have included
securities subject to contractual or legal restrictions on resale
because they have not been registered under the Securities Act of
1933, as amended (the "1933 Act"), securities which are otherwise not
readily marketable and repurchase agreements having a remaining
maturity of longer than seven days. Securities which have not been
registered under the 1933 Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in
the secondary market. Mutual funds do not typically hold a significant
amount of these restricted or other illiquid securities because of the
potential for delays on resale and uncertainty in valuation.
Limitations on resale may have an adverse effect on the marketability
of portfolio securities and a mutual fund might be unable to dispose
of restricted or other illiquid securities promptly or at reasonable
prices and might thereby experience difficulty satisfying redemptions
within seven days. A mutual fund might also have to register such
restricted securities in order to dispose of them resulting in
additional expense and delay. Adverse market conditions could impede
such a public offering of securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the 1933 Act,
including repurchase agreements, commercial paper, foreign securities,
municipal securities and corporate bonds and notes. Institutional
investors depend on an efficient institutional market in which the
unregistered security can be readily resold or on an issuer's ability
to honor a demand for repayment. The fact that there are contractual
or legal restrictions on resale of such investments to the general
public or to certain institutions may not be indicative of their
liquidity.
The Securities and Exchange Commission (the "SEC") has adopted Rule
144A, which allows a broader institutional trading market for
securities otherwise subject to restriction on their resale to the
general public. Rule 144A establishes a "safe harbor" from the
registration requirements of the 1933 Act of resales of certain
securities to qualified institutional buyers. The Adviser anticipates
that the market for certain restricted securities such as
institutional commercial paper will expand further as a result of this
regulation and the development of automated systems for the trading,
clearance and settlement of unregistered securities of domestic and
foreign issuers, such as the PORTAL System sponsored by the National
Association of Securities Dealers, Inc.
The Adviser will monitor the liquidity of Rule 144A securities in The
Portfolio's holdings under the supervision of the Portfolio's Board of
Trustees. In reaching liquidity decisions, the Adviser will consider,
among other things, the following factors: (1) the frequency of trades
and quotes for the security; (2) the number of dealers and other
potential purchasers or sellers of the security; (3) dealer
undertakings to make a market in the security and (4) the nature of
the security and of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the
mechanics of the transfer).
LENDING OF PORTFOLIO SECURITIES. The Portfolio has the authority to
lend portfolio securities to brokers, dealers and other financial
organizations. The Portfolio will not lend securities to Bankers
Trust, Edgewood or their affiliates. By lending its securities, a
Portfolio can increase its income by continuing to receive interest on
the loaned securities as well as by either investing the cash
collateral in short-term securities or obtaining yield in the form of
interest paid by the borrower when U.S. Government obligations are
used as collateral. There may be risks of delay in receiving
additional collateral or risks of delay in recovery of the securities
or even loss of rights in the collateral should the borrower of the
securities fail financially. The Portfolio will adhere to the
following conditions whenever its securities are loaned: (i) the
Portfolio must receive at least 100 percent 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 reasonable interest on the loan, as
well as any dividends, interest or other distributions on the loaned
securities, and any increase in market value; (v) the Portfolio may
pay only reasonable custodian fees in connection with the loan; and
(vi) voting rights on the loaned securities may pass to the borrower;
provided, however, that if a material event adversely affecting the
investment occurs, the Board of Trustees must terminate the loan and
regain the right to vote the securities.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
GENERAL. The successful use of such instruments 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. A Portfolio may enter into contracts for the
purchase or sale for future delivery of fixed-income securities,
foreign currencies, or contracts based on financial indices including
any index of U.S. Government Securities, foreign government securities
or corporate debt securities. U.S. futures contracts have been
designed by exchanges which have been designated "contracts markets"
by the Commodity Futures Trading Commission ("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, through their clearing
corporations, the exchanges guarantee performance of the contracts as
between the clearing members of the exchange. 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 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 entities other
than the U.S. Government.
At the same time a futures contract is purchased or sold, the
Portfolio must allocate cash or securities as a deposit payment
("initial deposit"). It is expected that the initial deposit would be
approximately 1 1/2% to 5% of a contract's face value. Daily
thereafter, the futures contract is valued and the payment of
"variation margin" may be required, since each day the 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 by their terms call for the actual delivery
or acquisition of securities, in most cases the contractual obligation
is fulfilled before the date of the contract without having to make or
take delivery of the securities. The offsetting of a contractual
obligation is accomplished by buying (or selling, as the case may be)
on a commodities exchange an identical futures contract calling for
delivery in the same month. Such a transaction, which is effected
through a member of an exchange, cancels the obligation to make or
take delivery of the securities. Since all transactions in the futures
market are made, offset or fulfilled through a clearinghouse
associated with the exchange on which the contracts are traded, the
Portfolio will incur brokerage fees when it purchases or sells futures
contracts.
The purpose of the acquisition or sale of a futures contract, in the
case of a Portfolio which holds or intends to acquire fixed-income
securities, is to attempt to protect the Portfolio from fluctuations
in interest or foreign exchange rates without actually buying or
selling fixed-income securities or foreign currencies. For example, if
interest rates were expected to increase, the Portfolio might enter
into futures contracts for the sale of debt securities. Such a sale
would have much the same effect as selling an equivalent value of the
debt securities owned by the Portfolio. If interest rates did
increase, the value of the debt security in the Portfolio would
decline, but the value of the futures contracts to the Portfolio would
increase at approximately the same rate, thereby keeping the net asset
value of the Portfolio from declining as much as it otherwise would
have. The Portfolio could accomplish similar results by selling debt
securities and investing in bonds with short maturities when interest
rates are expected to increase. However, since the futures market is
more liquid than the cash market, the use of futures contracts as an
investment technique allows the Portfolio to maintain a defensive
position without having to sell its portfolio securities.
Similarly, when it is expected that interest rates may decline,
futures contracts may be purchased to attempt to hedge against
anticipated purchases of debt securities at higher prices. Since the
fluctuations in the value of futures contracts should be similar to
those of debt securities, a Portfolio could take advantage of the
anticipated rise in the value of debt securities without actually
buying them until the market had stabilized. At that time, the futures
contracts could be liquidated and the Portfolio could then buy debt
securities on the cash market. To the extent a Portfolio enters into
futures contracts for this purpose, the assets in the segregated asset
account maintained to cover the Portfolio's obligations with respect
to such futures contracts will consist of cash, cash equivalents or
high quality liquid debt securities from its portfolio in an amount
equal to the difference between the fluctuating market value of such
futures contracts and the aggregate value of the initial and variation
margin payments made by the Portfolio with respect to such futures
contracts.
The ordinary spreads between prices in the cash and futures market,
due to differences in the nature of those markets, are subject to
distortions. First, all participants in the futures market are subject
to initial deposit and variation margin requirements. Rather than
meeting additional variation margin requirements, investors may close
futures contracts through offsetting transactions which could distort
the normal relationship between the cash and futures markets. Second,
the liquidity of the futures market depends on participants entering
into offsetting transactions rather than making or taking delivery. To
the extent participants decide to make or take delivery, liquidity in
the futures market could be reduced, thus producing distortion. Third,
from the point of view of speculators, the margin deposit requirements
in the futures market are less onerous than margin requirements in the
securities market. Therefore, increased participation by speculators
in the futures market may cause temporary price distortions. Due to
the possibility of distortion, a correct forecast of general interest
rate trends by 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 Portfolio, 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. The 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
futures contract or underlying debt securities. As with the purchase
of futures contracts, when a Portfolio is not fully invested it may
purchase a call option on a futures contract to hedge against a market
advance due to declining interest rates.
The writing of a call option on a futures contract constitutes a
partial hedge against declining prices of the security or foreign
currency which is deliverable upon exercise of the futures contract.
If the futures price at expiration of the option is below the exercise
price, a 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 holdings. The writing of a put option on a
futures contract constitutes a partial hedge against increasing prices
of the security or foreign currency which is deliverable upon exercise
of the futures contract. If the futures price at expiration of the
option is higher than the exercise price, the 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 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 a
futures contract to hedge its portfolio against the risk of rising
interest rates.
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.
The Board of Trustees of the Portfolio has adopted the requirement
that futures contracts and options on futures contracts be used only
as a hedge and not for speculation. In addition to this requirement,
the Board of Trustees of the Portfolio has also adopted a restriction
that the 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 total assets of
the Portfolio.
OPTIONS ON FOREIGN CURRENCIES. The 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 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.
The 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, U.S. Government securities and
other high quality liquid debt securities in a segregated account with
its custodian.
The Portfolio also intends to 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 U.S. Government
securities or other high quality liquid debt securities in an amount
not less than the value of the underlying foreign currency in U.S.
dollars marked to market daily.
ADDITIONAL RISKS OF 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 market-makers, 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. Similarly, options
on currencies may be traded over-the-counter. 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, due
to the margin and collateral requirements associated with such
positions.
Options on foreign currencies traded on national securities exchanges
are within the jurisdiction of the SEC, as are other securities traded
on such exchanges. As a result, many of the protections provided to
traders on organized exchanges will be available with respect to such
transactions. In particular, all foreign currency option positions
entered into on a national securities exchange are cleared and
guaranteed by the Options Clearing Corporation (the "OCC"), thereby
reducing the risk of counterparty default. Further, a liquid secondary
market in options traded on a national securities exchange may be more
readily available than in the over-the-counter market, potentially
permitting a 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.
As in the case of forward contracts, certain options on foreign
currencies are traded over-the-counter and involve liquidity and
credit risks which may not be present in the case of exchange-traded
currency options. 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, the Portfolio will
treat purchased over-the-counter options and assets used to cover
written over-the-counter options as illiquid securities. With respect
to options written with primary dealers in U.S. Government securities
pursuant to an agreement requiring a closing purchase transaction at a
formula price, the amount of illiquid securities may be calculated
with reference to the repurchase formula.
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.
OPTIONS ON SECURITIES. The Portfolio may write (sell) covered call and
put options to a limited extent on its portfolio securities ("covered
options") in an attempt to increase income. However, the 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 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 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.
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.
The Portfolio may terminate its obligation as the writer of a call or
put option by purchasing an option with the same exercise price and
expiration date as the option previously written. This transaction is
called a "closing purchase transaction." The Portfolio will realize a
profit or loss from a closing purchase transaction if the amount paid
to purchase an option is less or more, as the case may be, than the
amount received from the sale thereof. To close out a position as a
purchaser of an option, the 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.
The Portfolio may purchase call and put options on any securities in
which it may invest. The Portfolio would normally purchase a call
option in anticipation of an increase in the market value of such
securities. The purchase of a call option would entitle the Portfolio,
in exchange for the premium paid, to purchase a security at a
specified price during the option period. The Portfolio would
ordinarily have a gain if the value of the securities increased above
the exercise price sufficiently to cover the premium and would have a
loss if the value of the securities remained at or below the exercise
price during the option period.
The Portfolio would normally purchase put options in anticipation of a
decline in the market value of securities in its portfolio
("protective puts") or securities of the type in which it is permitted
to invest. The purchase of a put option would entitle the Portfolio,
in exchange for the premium paid, to sell a security, which may or may
not be held in the Portfolio's holdings, at a specified price during
the option period. The purchase of protective puts is designed merely
to offset or hedge against a decline in the market value of the
Portfolio's holdings. Put options also may be purchased by the
Portfolio for the purpose of 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.
The Portfolio has adopted certain other nonfundamental policies
concerning option transactions which are discussed below. The
Portfolio's activities in options may also be restricted by the
requirements of the Internal Revenue Code of 1986, as amended (the
"Code"), for qualification as a regulated investment company.
The hours of trading for options on securities may not conform to the
hours during which the underlying securities are traded. To the extent
that the option markets close before the markets for the underlying
securities, significant price and rate movements can take place in the
underlying securities markets that cannot be reflected in the option
markets. It is impossible to predict the volume of trading that may
exist in such options, and there can be no assurance that viable
exchange markets will develop or continue.
The Portfolio may engage in over-the-counter options transactions with
broker-dealers who make markets in these options. At present,
approximately ten broker-dealers, including several of the largest
primary dealers in U.S. Government securities, make these markets. The
ability to terminate over-the-counter option positions is more limited
than with exchange-traded option positions because the predominant
market is the issuing broker rather than an exchange, and may involve
the risk that broker-dealers participating in such transactions will
not fulfill their obligations. To reduce this risk, the Portfolio will
purchase such options only from broker-dealers who are primary
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.
OPTIONS ON SECURITIES INDICES. In addition to options on securities,
the Portfolio may also purchase and write (sell) call and put options
on securities indices. Such options give the holder the right to
receive a cash settlement during the term of the option based upon the
difference between the exercise price and the value of the index. Such
options will be used for the purposes described above under "Options
on Securities."
The Portfolio may, to the extent allowed by Federal and state
securities laws, invest in securities indices instead of investing
directly in individual foreign securities.
Options on securities indices entail risks in addition to the risks of
options on securities. The absence of a liquid secondary market to
close out options positions on securities indices is more likely to
occur, although the 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.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Because the Portfolio
buys and sells securities denominated in currencies other than the
U.S. dollar and receives interest, dividends and sale proceeds in
currencies other than the U.S. dollar, the Portfolio from time to time
may enter into foreign currency exchange transactions to convert to
and from different foreign currencies and to convert foreign
currencies to and from the U.S. dollar. 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.
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 their customers. A forward foreign currency
exchange contract generally has no deposit requirement and is traded
at a net price without commission. The Portfolio maintains with its
custodian a segregated account of high grade liquid assets 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.
The Portfolio may enter into foreign currency hedging transactions in
an attempt to protect against changes in foreign currency exchange
rates between the trade and settlement dates of specific securities
transactions or changes in foreign currency exchange rates that would
adversely affect a portfolio position or an anticipated investment
position. Since consideration of the prospect for currency parities
will be incorporated into Bankers Trust's long-term investment
decisions, a Portfolio will not routinely enter into foreign currency
hedging transactions with respect to security transactions; however,
Bankers Trust believes that it is important to have the flexibility to
enter into foreign currency hedging transactions when it determines
that the transactions would be in the Portfolio's best interest.
Although these transactions tend to minimize the risk of loss due to a
decline in the value of the hedged currency, at the same time they
tend to limit any potential gain that might be realized should the
value of the hedged currency increase. The precise matching of the
forward contract amounts and the value of the securities involved will
not generally be possible because the future value of such securities
in foreign currencies will change as a consequence of market movements
in the value of such securities between the date the forward contract
is entered into and the date it matures. The projection of currency
market movements is extremely difficult, and the successful execution
of a hedging strategy is highly uncertain.
While these contracts are not presently regulated by the CFTC, the
CFTC may in the future assert authority to regulate forward contracts.
In such event the Portfolio's ability to utilize forward contracts in
the manner set forth in the Prospectus 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 a 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.
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, Bankers
Trust 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 Fund to eliminate the obligation from its portfolio,
but Bankers Trust will consider such an event in its determination of
whether a Fund should continue to hold the obligation. A description
of the ratings used herein and in the Funds' Prospectuses is set forth
in the Appendix to this SAI.
INVESTMENT RESTRICTIONS
The following investment restrictions are "fundamental policies" of
the Fund and the 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
Investment Company Act of 1940, as amended (the "1940 Act"), and as
used in this SAI and the Shares' respective Prospectuses, 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 the Portfolio, the Trust will hold a
meeting of the 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.
As a matter of fundamental policy, the Portfolio (or Fund) may not
(except that no investment restriction of the Fund shall prevent the
Fund from investing all of its Assets in an open-end investment
company with substantially the same investment objective):
(1) borrow money or mortgage or hypothecate assets of the
Portfolio (Fund), except that in an amount not to exceed 1/3
of the current value of the Portfolio's (Fund's) assets, it
may borrow money as a temporary measure for extraordinary or
emergency purposes and enter into reverse repurchase
agreements or dollar roll transactions, and except that it
may pledge, mortgage or hypothecate not more than 1/3 of such
assets to secure such borrowings (it is intended that money
would be borrowed only from banks and only either to
accommodate requests for the withdrawal of beneficial
interests (redemption of shares) while effecting an orderly
liquidation of portfolio securities or to maintain liquidity
in the event of an unanticipated failure to complete the
portfolio security transaction or other similar situations)
or reverse repurchase agreements, provided that collateral
arrangements with respect to options and futures, including
deposits of initial deposit and variation margin, are not
considered a pledge of assets for purposes of this
restriction and except that assets may be pledged to secure
letters of credit solely for the purpose of participating in
a captive insurance company sponsored by the Investment
Company Institute; for additional related restrictions, see
clause (i) under the caption "Additional Restrictions" below
(as an operating policy, the Portfolio may not engage in
dollar-roll transactions);
(2) underwrite securities issued by other persons except insofar
as the Portfolio (Trust or the Fund) may technically be
deemed an underwriter under the 1933 Act in selling a
portfolio security;
(3) make loans to other persons except: (a) through the lending
of the Portfolio's (Fund's) portfolio securities and provided
that any such loans not exceed 30% of the Portfolio's
(Fund's) net assets (taken at market value); (b) through the
use of repurchase agreements or the purchase of short-term
obligations; or (c) by purchasing a portion of an issue of
debt securities of types distributed publicly or privately;
(4) purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or
interests therein), interests in oil, gas or mineral leases,
commodities or commodity contracts (except futures and option
contracts) in the ordinary course of business (except that
the Portfolio (Trust) 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
(6) issue any senior security (as that term is defined in the
1940 Act) if such issuance is specifically prohibited by the
1940 Act or the rules and regulations promulgated thereunder,
provided that collateral arrangements with respect to options
and futures, including deposits of initial deposit and
variation margin, are not considered to be the issuance of a
senior security for purposes of this restriction.
ADDITIONAL RESTRICTIONS. In order to comply with certain statutes and
policies, the Portfolio (or the Trust, on behalf of the Fund) will not
as a matter of operating policy (except that no operating policy shall
prevent the Fund from investing all of its Assets in an open-end
investment company with substantially the same investment objective):
(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 sells) 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 Portfolio (Fund) currently does not engage in short selling.);
(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); 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 10% of the Portfolio's (Fund's) total assets
(taken at the greater of cost or market value) in securities
(excluding Rule 144A securities) that are restricted as to
resale under the 1933 Act;
(viii)invest more than 15% of the Portfolio's (Fund's) total assets
(taken at the greater of cost or market value) in (a)
securities (excluding Rule 144A securities) that are
restricted as to resale under the 1933 Act, and (b)
securities that are issued by issuers which (including
predecessors) have been in operation less than three years
(other than U.S. Government securities), provided, however,
that no more than 5% of the Portfolio's (Fund's) total assets
are invested in securities issued by issuers which (including
predecessors) have been in operation less than three years;
(ix) 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);
(x) with respect to 75% of its assets, invest more than 5% of its total
assets in the securities (excluding U.S. Government securities) of
any one issuer;
(xi) invest in securities issued by an issuer any of whose
officers, directors, trustees or security holders is an
officer or Trustee of the Portfolio (Trust), or is an officer
or director of the Adviser, if after the purchase of the
securities of such issuer for the Portfolio (Fund) one or
more of such persons owns beneficially more than 1/2 of 1% of
the shares or securities, or both, all taken at market value,
of such issuer, and such persons owning more than 1/2 of 1%
of such shares or securities together own beneficially more
than 5% of such shares or securities, or both, all taken at
market value;
(xii) invest in warrants (other than warrants acquired by the
Portfolio (Fund) as part of a unit or attached to securities
at the time of purchase) if, as a result, the investments
(valued at the lower of cost or market) would exceed 5% of
the value of the Portfolio's (Fund's) net assets or if, as a
result, more than 2% of the Portfolio's (Fund's) net assets
would be invested in warrants not listed on a recognized
United States or foreign stock exchange, to the extent
permitted by applicable state securities laws;
(xiii)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 practices 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 short-term
U.S. Government 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); and
(xiv) 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
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 if that
restriction is complied with at the time the relevant action is taken,
notwithstanding a later change in the market value of an investment,
in net or total assets, or in the change of securities rating of the
investment, or any other later change.
The Fund will comply with the state securities laws and regulations of
all states in which it is registered. The Portfolio will comply with
the permitted investments and investment limitations in the securities
laws and regulations of all states in which the corresponding Fund, or
any other registered investment company investing in the Portfolio, is
registered.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
The Adviser is responsible for decisions to buy and sell securities,
futures contracts and options on such securities and futures for the
Portfolio, the selection of brokers, dealers and futures commission
merchants to effect transactions and the negotiation of brokerage
commissions, if any. Broker-dealers may receive brokerage commissions
on portfolio transactions, including options, futures 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, as amended, when placing portfolio
transactions for the Portfolio with a broker to pay a brokerage
commission (to the extent applicable) in excess of that which another
broker might have charged for effecting the same transaction on
account of the receipt of research, market or statistical information.
The term "research, market or statistical information" includes 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 Rules of Fair Practice 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 Bankers Trust as a factor in the selection of
broker-dealers to execute portfolio transactions. Bankers Trust will
make such allocations if commissions are comparable to those charged
by nonaffiliated, qualified broker-dealers for similar services.
Higher commissions may be paid to firms that provide research services
to the extent permitted by law. Bankers Trust may use this research
information in managing the 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 Portfolio that such
information is only supplementary to the Adviser's own research
effort, since the information must still be analyzed, weighed and
reviewed by the Adviser's staff. Such information may be useful to the
Adviser in providing services to clients other than the Portfolio, and
not all such information is used by the Adviser in connection with the
Portfolio. Conversely, such information provided to the Adviser by
brokers and dealers through whom other clients of the Adviser effect
securities transactions may be useful to the Adviser in providing
services to the Portfolio.
In certain instances there may be securities 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 that the
ability of a Portfolio to participate in volume transactions will
produce better executions for the Portfolio.
For the year ended September 30, 1996, the period from January 1, 1995
through September 30, 1995, and the year ended December 31, 1994,
International Equity Portfolio paid brokerage commissions in the
amount of $603,995, $132,894, and $110,580, 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. These
performance figures are calculated in the following manner:
Total return: 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.
COMPARISON OF FUND PERFORMANCE
Comparison of the quoted nonstandardized performance of various
investments is valid only if performance is calculated in the same
manner. Since there are different methods of calculating performance,
investors should consider the effect of the methods used to calculate
performance when comparing performance of a Fund with performance
quoted with respect to other investment companies or types of
investments.
In connection with communicating its performance to current or
prospective shareholders, a Fund also may compare these figures to the
performance of other mutual funds tracked by mutual fund rating
services or to unmanaged indices which may assume reinvestment of
dividends but generally do not reflect deductions for administrative
and management costs. Evaluations of a Fund's performance made by
independent sources may also be used in advertisements concerning the
Fund.
Sources for a Fund's performance could include the following:
ASIAN WALL STREET JOURNAL, a weekly Asian newspaper that often reviews
U.S. mutual funds investing internationally.
BARRON'S, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
BUSINESS WEEK, a national business weekly that periodically reports
the performance rankings and ratings of a variety of mutual funds
investing abroad.
CHANGING TIMES, THE KIPLINGER MAGAZINE, a monthly investment advisory
publication that periodically features the performance of a variety of
securities.
CONSUMER DIGEST, a monthly business/financial magazine that includes a
"Money Watch" section featuring financial news.
FINANCIAL TIMES, Europe's business newspaper, which features from time
to time articles on international or country-specific funds.
FINANCIAL WORLD, a general business/financial magazine that includes a
"Market Watch" department reporting on activities in the mutual fund
industry.
FORBES, a national business publication that from time to time reports
the performance of specific investment companies in the mutual fund
industry.
FORTUNE, a national business publication that periodically rates the
performance of a variety of mutual funds.
GLOBAL INVESTOR, a European publication that periodically reviews the
performance of U.S. mutual funds investing internationally.
INVESTOR'S DAILY, a daily newspaper that features financial, economic
and business news.
LIPPER ANALYTICAL SERVICES, INC.'S MUTUAL FUND PERFORMANCE ANALYSIS, a
weekly publication of industry-wide mutual fund averages by type of
fund.
MONEY, a monthly magazine that from time to time features both
specific funds and the mutual fund industry as a whole.
MORNINGSTAR, INC., a publisher of financial information and mutual
fund research.
NEW YORK TIMES, a nationally distributed newspaper which regularly
covers financial news.
PERSONAL INVESTING NEWS, a monthly news publication that often reports
on investment opportunities and market conditions.
PERSONAL INVESTOR, a monthly investment advisory publication that
includes a "Mutual Funds Outlook" section reporting on mutual fund
performance measures, yields, indices and portfolio holdings.
SUCCESS, a monthly magazine targeted to the world of entrepreneurs and
growing business, often featuring mutual fund performance data.
U.S. NEWS AND WORLD REPORT, a national business weekly that periodically
reports mutual fund performance data.
VALUE LINE, a biweekly publication that reports on the largest 15,000
mutual funds.
WALL STREET JOURNAL, a Dow Jones and Company, Inc. newspaper which regularly
covers financial news.
WEISENBERGER INVESTMENT COMPANIES SERVICES, an annual compendium of
information about mutual funds and other investment companies,
including comparative data on funds' backgrounds, management policies,
salient features, management results, income and dividend records, and
price ranges.
WORKING WOMEN, a monthly publication that features a "Financial
Workshop" section reporting on the mutual fund/financial industry.
VALUATION OF SECURITIES; REDEMPTIONS AND PURCHASES IN KIND
Equity and debt securities (other than short-term debt obligations
maturing in 60 days or less), including listed securities and
securities for which price quotations are available, will normally be
valued on the basis of market valuations furnished by a pricing
service. Short-term debt obligations and money market securities
maturing in 60 days or less are valued at amortized cost, which
approximates market.
Securities for which market quotations are not readily available are
valued by Bankers Trust pursuant to procedures adopted by The
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.
The Trust, on behalf of the Fund, and the 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 the Fund, and the Portfolio have elected, however,
to be governed by Rule 18f-1 under the 1940 Act as a result of which
the Fund and the 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.
The Portfolio has agreed to make a redemption in kind to the 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 Portfolio and in no case will they receive
a security issued by the Portfolio. The Portfolio has advised the
Trust that the Portfolio will not redeem in kind except in
circumstances in which the Fund is permitted to redeem in kind or
unless requested by the Fund.
Each investor in a Portfolio, including the 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.
The Fund may, at its own option, accept securities in payment for
shares. The securities delivered in payment for shares are valued by
the method described under "Net Asset Value" 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 Bankers Trust, appropriate investments for the
Portfolio. In addition, securities accepted in payment for shares
must: (i) meet the investment objective and policies of the Portfolio;
(ii) be acquired by the Fund for investment and not for resale (other
than for resale to the 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. The Fund reserves the right to accept or reject at its own
option any and all securities offered in payment for its shares.
MANAGEMENT OF THE TRUST AND THE PORTFOLIOS
The Board of Trustees is composed of persons experienced in financial
matters who meet throughout the year to oversee the activities of the
Fund or Portfolio they represent. In addition, the Trustees review
contractual arrangements with companies that provide services to the
Fund/Portfolio and review the Fund's performance.
The Trustees and officers of the Trust and Portfolio, their age and
their principal occupations during the past five years are set forth
below. Their titles may have varied during that period. Asterisks
indicate those Trustees who are "interested persons" (as defined in
the 1940 Act) of the Trust. Unless otherwise indicated, the address of
each Trustee and officer is P.O. Box 897, Pittsburgh, Pennsylvania
15230-0897.
TRUSTEES OF THE TRUST
CHARLES P. BIGGAR (birthdate: October 13, 1930) -- Trustee; Retired;
Director of Chase/NBW Bank Advisory Board; Director, Batemen, Eichler,
Hill Richards Inc.; formerly Vice President of International Business
Machines and President of the National Services and the Field
Engineering Divisions of IBM. His address is 12 Hitching Post Lane,
Chappaqua, New York 10514.
RICHARD J. HERRING (birthdate: February 18, 1946) -- Trustee; Professor,
Finance Department, The Wharton School, University of Pennsylvania.
His address is The Wharton School, University of Pennsylvania Finance
Department, 3303
Steinberg Hal 1/Dietrich Hall, Philadelphia, Pennsylvania 19104.
BRUCE E. LANGTON (birthdate: May 10, 1931) -- Trustee; Retired; Director,
Adela Investment Co. and University Patents, Inc.; formerly Assistant
Treasurer of IBM Corporation (until 1986). His address is 99 Jordan Lane,
Stamford, Connecticut 06903.
PHILIP W. COOLIDGE* (birthdate: September 2, 1951) -- President and
Trustee; Chairman. Chief Executive Officer and President, Signature
Financial Group, Inc. ("SFG") (since December, 1988) and Signature
Broker-Dealer Services, Inc. ("Signature") (since April, 1989).
His address is 6 St. James Avenue, Boston, Massachusetts, 02116.
TRUSTEES OF THE PORTFOLIO
PHILIP SAUNDERS, JR. (birthdate: October 11, 1935) - Trustee; Principal.
Philip Saunders Associates (Consulting); former Director of Financial
Industry Consulting, Wolf & Company; President. John Hancock Home Mortgage
Corporation; and Senior Vice President of Treasury and Financial Services.
John Hancock Mutual Life Insurance Company, Inc. His address
is 445 Glen Road, Weston, Massachusetts 02193:
CHARLES P. BIGGAR (birthdate: October 13, 1930) - Trustee; Retired;
Director of Chase/NBW Bank Advisory Board; Director, Batemen, Eichler,
Hill Richards Inc.; formerly Vice President of International Business
Machines and President of the National Services and the Field
Engineering Divisions of IBM. His address is 12 Hitching Post Lane,
Chappaqua, New York 10514.
S. LELAND DILL (birthdate: March 28, 1930) - Trustee; Retired; Director,
Coutts Group, Coutts (U.S.A.) International; Coutts Trust Holdings Ltd.;
Director, Zweig Series Trust; formerly Partner of KPMG Peat Marwick;
Director, Vinters International Company Inc.; General Partner of Pemco
(an investment company registered under the 1940 Act). His address
is 5070 North Ocean Drive, Singer Island, Florida 33404.
PHILIP W. COOLIDGE* (birthdate: September 2, 1951) - Trustee and
President of each Portfolio; Chairman, Chief Executive Officer and
President, SFG (since December, 1988) and Signature (since April,
1989).
OFFICERS OF THE TRUST
RONALD M. PETNUCH (birthdate: February 27, 1960) - President and Treasurer;
Senior Vice President, Federated Services Company ("FSC") ; formerly,
Director of Proprietary Client Services, Federated Administrative
Services ("FAS"), and Associate Corporate Counsel, Federated Investors ("FI")
CHARLES L. DAVIS, JR. (birthdate: March 23, 1960) - Vice President and
Assistant Treasurer; Vice President, FAS.
JAY S. NEUMAN (birthdate: April 22, 1950) - Secretary; Corporate Counsel, FI.
Messrs. Coolidge, Davis, Neuman and Petnuch also hold similar
positions for other investment companies for which Signature or
Edgewood, respectively, 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 or the Portfolio. No director, officer or
employee of Edgewood or any of its affiliates will receive any
compensation from the Trust or the Portfolio for serving as an officer
or Trustee of the Trust or the Portfolio.
<PAGE>
The following table reflects fees paid to the Trustees for the year
ended September 30, 1996.
<TABLE>
<CAPTION>
TRUSTEE COMPENSATION TABLE
PENSION OR
BENEFITS ACCRUED
AGGREGATE AS PART OF TRUST ESTIMATED ANNUAL TOTAL COMPENSATION
NAME OF PERSON, COMPENSATION OR PORTFOLIO BENEFITS UPON FROM FUND COMPLEX*
POSITION FROM TRUST EXPENSES RETIREMENT PAID TO
- ----------------------- ---------------- -------------------- --------------------- -------
TRUSTEES
- --------
<S> <C> <C> <C> <C>
Richard J. Herring, $13,000 none none $23,000
Trustee of Trust
Bruce E. Langton, $13,000 none none $23,000
Trustee of Trust
and Portfolio
Philip W. Coolidge, none none none none
Trustee of Trust
and Portfolio
Charles P. Biggar, $10,000 none none $23,000
Trustee of Trust
and Portfolio
Philip Saunders, Jr. none none none $23,000
Trustees of Portfolio
S. Leland Dill none none none $23,000
Trustees of Portfolio
</TABLE>
* Aggregated information is furnished for the BT Family of
Funds which consists of the following: BT Investment Funds,
BT Institutional Funds, BT Pyramid Funds, BT Advisor Funds,
BT Investment Portfolios, Cash Management Portfolio, Treasury
Money Portfolio, Tax Free Money Portfolio, NY Tax Free Money
Portfolio, International Equity Portfolio, Utility Portfolio,
Short Intermediate US Government Securities Portfolio,
Intermediate Tax Free Portfolio, Asset Management Portfolio,
Equity 500 Index Portfolio, and Capital Appreciation
Portfolio.
Bankers Trust reimbursed the Fund and Portfolio for a portion of their
Trustees fees for the period above. See "Investment Adviser" and
"Administrator" below.
INVESTMENT ADVISER
Under the terms of the Portfolio's investment advisory agreement with
Bankers Trust (the "Advisory Agreement"), Bankers Trust manages the
Portfolio subject to the supervision and direction of the Board of
Trustees of the Portfolio. Bankers Trust will: (i) act in strict
conformity with The Portfolio's Declaration of Trust, the 1940 Act and
the Investment Advisers Act of 1940, as the same may from time to time
be amended; (ii) manage The Portfolio in accordance with the
Portfolio's investment objectives, restrictions and policies; (iii)
make investment decisions for the Portfolio; and (iv) place purchase
and sale orders for securities and other financial instruments on
behalf of the Portfolio.
Bankers Trust bears all expenses in connection with the performance of
services under the Advisory Agreement. The Trust and the Portfolio
bear certain other expenses incurred in their operation, including:
taxes, interest, brokerage fees and commissions, if any; fees of
Trustees of the Trust or the Portfolio who are not officers, directors
or employees of Bankers Trust, Edgewood or any of their affiliates;
SEC fees and state Blue Sky fees; charges of custodians and transfer
and dividend disbursing agents; certain insurance premiums; outside
auditing and legal expenses; costs of maintenance of corporate
existence; costs attributable to investor services, including, without
limitation, telephone and personnel expenses; costs of preparing and
printing prospectuses and SAIs for regulatory purposes and for
distribution to existing shareholders; costs of shareholders' reports
and meetings of shareholders, officers and Trustees of the Trust or
the Portfolio; and any extraordinary expenses.
For the year ended September 30, 1996, the period from January 1, 1995
to September 30, 1995, and the year ended December 31, 1994, Bankers
Trust aggregated $759,552, $322,696, and $322,489, respectively, in
compensation for investment advisory services provided to
International Equity Portfolio. During the same periods, Bankers Trust
reimbursed $229,297, $108,743, and $117,653, respectively, to that
Portfolio to cover expenses.
Bankers Trust may have deposit, loan and other commercial banking
relationships with the issuers of obligations which may be purchased
on behalf of the Portfolio, including outstanding loans to such
issuers which could be repaid in whole or in part with the proceeds of
securities so purchased. Such affiliates deal, trade and invest for
their own accounts in such obligations and are among the leading
dealers of various types of such obligations. Bankers Trust has
informed the Portfolio that, in making its investment decisions, it
does not obtain or use material inside information in its possession
or in the possession of any of its affiliates. In making investment
recommendations for the Portfolio, Bankers Trust will not inquire or
take into consideration whether an issuer of securities proposed for
purchase or sale by a Portfolio is a customer of Bankers Trust, its
parent or its subsidiaries or affiliates and, in dealing with its
customers, Bankers Trust, its parent, subsidiaries and affiliates will
not inquire or take into consideration whether securities of such
customers are held by any fund managed by Bankers Trust or any such
affiliate.
The Fund's prospectus contains disclosure as to the amount of Bankers
Trust's investment advisory and administration and services fees,
including waivers thereof. Bankers Trust may not recoup any of its
waived investment advisory or administration and services fees. Such
waivers by Bankers Trust shall stay in effect for at least 12 months.
ADMINISTRATOR
Under the administration and services agreements, Bankers Trust is
obligated on a continuous basis to provide such administrative
services as the Board of Trustees of the Trust and the Portfolio
reasonably deem necessary for the proper administration of the Trust
or Portfolio. Bankers Trust will generally assist in all aspects of
the Fund's and Portfolio's operations; supply and maintain office
facilities (which may be in Bankers Trust's own offices), statistical
and research data, data processing services, clerical, accounting,
bookkeeping and 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.
Pursuant to a sub-administration agreement (the "Sub-Administration
Agreement"), FSC performs such sub-administration duties for the Trust
and the Portfolio as from time to time may be agreed upon by Bankers
Trust and FSC. The Sub-Administration Agreement provides that FSC will
receive such compensation as from time to time may be agreed upon by
FSC and Bankers Trust. All such compensation will be paid by Bankers
Trust.
For the year ended September 30, 1996, the period from January 1, 1995
to September 30, 1995, and the year ended December 31, 1994, Bankers
Trust received $175,281, $74,468, and $74,420, respectively, in
compensation for administrative and other services provided to
International Equity Portfolio.
Bankers Trust has agreed that if in any year the aggregate expenses of
any Fund and its respective Portfolio (including fees pursuant to the
Advisory Agreement, but excluding interest, taxes, brokerage and, if
permitted by the relevant state securities commissions, extraordinary
expenses) exceed the expense limitation of any state having
jurisdiction over a Fund, Bankers Trust will reimburse the Fund for
the excess expense to the extent required by state law. As of the date
of this SAI, the most restrictive annual expense limitation applicable
to any Fund is 2.5% of the Fund's first $30 million of average annual
net assets, 2.0% of the next $70 million of average annual net assets
and 1.5% of the remaining average annual net assets.
CUSTODIAN AND TRANSFER AGENT
Bankers Trust, 280 Park Avenue, New York, New York 10017, serves as
Custodian for the Trust and for the Portfolio pursuant to the
administration and services agreements. As Custodian, it holds the
Fund's and the Portfolio's assets. Bankers Trust also serves as
transfer agent of the Trust and of the Portfolio pursuant to the
respective administration and services agreement. Under its transfer
agency agreement with the Trust, Bankers Trust maintains the
shareholder account records for the Fund, handles certain
communications between shareholders and the Trust and causes to be
distributed any dividends and distributions payable by the Trust.
Bankers Trust may be reimbursed by the Fund or the Portfolio for its
out-of-pocket expenses. Bankers Trust will comply with the
self-custodian provisions of Rule 17f-2 under the 1940 Act.
USE OF NAME
The Trust and Bankers Trust have agreed that the Trust may use "BT" as
part of its name for so long as Bankers Trust serves as investment
adviser to the Portfolio. The Trust has acknowledged that the term
"BT" is used by and is a property right of certain subsidiaries of
Bankers Trust and that those subsidiaries and/or Bankers Trust may at
any time permit others to use that term.
The Trust may be required, on 60 days' notice from Bankers Trust at
any time, to abandon use of the acronym "BT" as part of its name. If
this were to occur, the Trustees would select an appropriate new name
for the Trust, but there would be no other material effect on the
Trust, its shareholders or activities.
BANKING REGULATORY MATTERS
Bankers Trust has been advised by its counsel that in its opinion
Bankers Trust may perform the services for the Portfolio contemplated
by the Advisory Agreement and other activities for the Fund and the
Portfolio described in the Prospectus and this SAI without violation
of the Glass-Steagall Act or other applicable banking laws or
regulations. However, counsel has pointed out that future changes in
either Federal or state statutes and regulations concerning the
permissible activities of banks or trust companies, as well as future
judicial or administrative decisions or interpretations of present and
future statutes and regulations, might prevent Bankers Trust from
continuing to perform those services for the Trust and the Portfolio.
State laws on this issue may differ from the interpretations of
relevant Federal law and banks and financial institutions may be
required to register as dealers pursuant to state securities law. If
the circumstances described above should change, the Boards of
Trustees would review the relationships with Bankers Trust and
consider taking all actions necessary in the circumstances.
COUNSEL AND INDEPENDENT ACCOUNTANTS
Willkie Farr & Gallagher, One Citicorp Center, 153 East 53rd Street,
New York, New York 10022-4669, serves as Counsel to the Trust and the
Portfolio. Coopers & Lybrand L.L.P., 1100 Main Street, Suite 900,
Kansas City, Missouri 64105 acts as Independent Accountants of the
Trust and the Portfolio.
ORGANIZATION OF THE TRUST
Shares of the Trust do not have cumulative voting rights, which means
that holders of more than 50% of the shares voting for the election of
Trustees can elect all Trustees. Shares are transferable but have no
preemptive, conversion or subscription rights. Shareholders generally
vote by Fund, except with respect to the election of Trustees and the
ratification of the selection of independent accountants.
Massachusetts law provides that shareholders could under certain
circumstances be held personally liable for the obligations of the
Trust. However, the Trust's Declaration of Trust disclaims shareholder
liability for acts or obligations of the Trust and requires that
notice of this disclaimer be given in each agreement, obligation or
instrument entered into or executed by the Trust or a Trustee. The
Declaration of Trust provides for indemnification from the Trust's
property for all losses and expenses of any shareholder held
personally liable for the obligations of the Trust. Thus, the risk of
a shareholder's incurring financial loss on account of shareholder
liability is limited to circumstances in which the Trust itself would
be unable to meet its obligations, a possibility that the Trust
believes is remote. Upon payment of any liability incurred by the
Trust, the shareholder paying the liability will be entitled to
reimbursement from the general assets of the Trust. The Trustees
intend to conduct the operations of the Trust in a manner so as to
avoid, as far as possible, ultimate liability of the shareholders for
liabilities of the Trust.
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
TAXATION OF THE FUNDS
The Trust intends to qualify annually and to elect each Fund to be
treated as a regulated investment company under the Code.
To qualify as a regulated investment company, the Fund must, among
other things: (a) derive in each taxable year at least 90% of its
gross income from dividends, interest, payments with respect to
securities loans and gains from the sale or other disposition of
stock, securities or foreign currencies or other income derived with
respect to its business of investing in such stock, securities or
currencies; (b) derive less than 30% of its gross income from the sale
or other disposition of certain assets (namely, in the case of the
Fund, (i) stock or securities; (ii) options, futures, and forward
contracts (other than those on foreign currencies); and (iii) foreign
currencies (including options, futures, and forward contracts on such
currencies) not directly related to the Fund's principal business of
investing in stock or securities (or options and futures with respect
to stocks or securities)) held less than three months (the "30%
Limitation"); (c) diversify its holdings so that, at the end of each
quarter of the taxable year, (i) at least 50% of the market value of
the Fund's assets is represented by cash and cash items (including
receivables), U.S. Government securities, the securities of other
regulated investment companies and other securities, with such other
securities of any one issuer limited for the purposes of this
calculation to an amount not greater than 5% of the value of the
Fund's total assets and not greater than 10% of the outstanding voting
securities of such issuer and (ii) not more than 25% of the value of
its total assets is invested in the securities of any one issuer
(other than U.S. Government securities or the securities of other
regulated investment companies); and (d) distribute at least 90% of
its investment company taxable income (which includes, among other
items, dividends, interest and net short-term capital gains in excess
of net long-term capital losses) and its net tax-exempt interest
income, if any, each taxable year.
As a regulated investment company, the Fund will not be subject to
U.S. Federal income tax on its investment company taxable income and
net capital gains (the excess of net long-term capital gains over net
short-term capital losses), if any, that it distributes to
shareholders. The Fund intends to distribute to its shareholders, at
least annually, substantially all of its investment company taxable
income and net capital gains. Amounts not distributed on a timely
basis in accordance with a calendar year distribution requirement are
subject to a nondeductible 4% excise tax. To prevent imposition of the
excise tax, the Fund must distribute during each calendar year an
amount equal to the sum of: (1) at least 98% of its ordinary income
(not taking into account any capital gains or losses) for the calendar
year; (2) at least 98% of its capital gains in excess of its capital
losses (adjusted for certain ordinary losses, as prescribed by the
Code) for the one-year period ending on October 31 of the calendar
year; and (3) any ordinary income and capital gains for previous years
that was not distributed during those years. A distribution will be
treated as paid on December 31 of the current calendar year if it is
declared by the Fund in October, November or December with a record
date in such a month and paid by the Fund during January of the
following calendar year. Such distributions will be taxable to
shareholders in the calendar year in which the distributions are
declared, rather than the calendar year in which the distributions are
received. To prevent application of the excise tax, the Fund intends
to make its distributions in accordance with the calendar year
distribution requirement.
Each Fund shareholder will also 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. The
dollar amount of dividends excluded from Federal income taxation and
the dollar amount subject to such income taxation, if any, will vary
for each shareholder depending upon the size and duration of each
shareholder's investment in the Fund. To the extent that the Fund
earns taxable net investment income, the Fund intends to designate as
taxable dividends the same percentage of each dividend as its taxable
net investment income bears to its total net investment income earned.
Therefore, the percentage of each dividend designated as taxable, if
any, may vary.
INTERNATIONAL EQUITY PORTFOLIO
FOREIGN SECURITIES. 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, it may
make an election pursuant to which certain foreign taxes paid by it
would be treated as having been paid directly by shareholders of the
entities, such as the Fund, which have invested in the Portfolio.
Pursuant to such election, the amount of foreign taxes paid will be
included in the income of the 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 portion 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.
DISTRIBUTIONS
Dividends paid out of the Fund's investment company taxable income
will be taxable to a U.S. shareholder as ordinary income.
Distributions of net capital gains, if any, designated as capital gain
dividends are taxable as long-term capital gains, regardless of how
long the shareholder has held the Fund's shares, and are not eligible
for the dividends-received deduction. Shareholders receiving
distributions in the form of additional shares, rather than cash,
generally will have a cost basis in each such share equal to the net
asset value of a share of the Fund on the reinvestment date.
Shareholders will be notified annually as to the U.S. Federal tax
status of distributions.
TAXATION OF THE PORTFOLIO
The Portfolio is 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 the Fund from the 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 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. The Fund's basis in its interest in the
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 a 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.
FOREIGN WITHHOLDING TAXES
Income received by the 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 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 the Fund in the Portfolio
does not cause the Fund to be liable for any income or franchise tax
in the State of New York.
The Portfolio is organized as a New York trust. The Portfolio is not
subject to any income or franchise tax in the State of New York or the
Commonwealth of Massachusetts.
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 the Fund.
FINANCIAL STATEMENTS
The following financial statements for the Fund or Portfolio have been
filed with the SEC pursuant to section 30(b) of the 1940 Act and Rule
30b2-1 thereunder and are hereby incorporated herein by reference. A
copy of such financial statements will be provided, without charge, to
each person receiving this SAI.
INTERNATIONAL EQUITY PORTFOLIO:
Statement of Assets and Liabilities, September 30, 1996
Statement of Operations for the year ended September 30, 1996
Statement of Changes in Net Assets for the year ended
September 30, 1996, and for the period from January 1, 1995
to September 30, 1995 Financial Highlights: Selected ratios
and supplemental data for each period indicated Schedule of
Portfolio Investments, September 30, 1996 Notes to Financial
Statements Report of Independent Accountants
<PAGE>
A-2
APPENDIX
COMMERCIAL PAPER RATINGS
S&P'S COMMERCIAL PAPER RATINGS
A is the highest commercial paper rating category utilized by
S&P, which uses the numbers 1+, 1, 2 and 3 to denote relative strength
within its A classification. Commercial paper issues rated A by S&P
have the following characteristics: Liquidity ratios are better than
industry average. Long-term debt rating is A or better. The issuer has
access to at least two additional channels of borrowing. Basic
earnings and cash flow are in an upward trend. Typically, the issuer
is a strong company in a well-established industry and has superior
management.
MOODY'S COMMERCIAL PAPER RATINGS
Issuers rated Prime-1 (or related supporting institutions)
have a superior capacity for repayment of short-term promissory
obligations. Prime-1 repayment capacity will normally be evidenced by
the following characteristics: leading market positions in
well-established industries; high rates of return on funds employed;
conservative capitalization structures with moderate reliance on debt
and ample asset protection; broad margins in earnings coverage of
fixed financial charges and high internal cash generation;
well-established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions)
have a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings trends
and coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is
maintained.
Issuers rated Prime-3 (or related supporting institutions)
have an acceptable capacity for repayment of short-term promissory
obligations. The effect of industry characteristics and market
composition may be more pronounced. Variability in earnings and
profitability may result in changes in the level of debt protection
measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
FITCH INVESTORS SERVICE AND DUFF & PHELPS COMMERCIAL PAPER RATINGS
Commercial paper rated "Fitch-1" is considered to be the
highest grade paper and is regarded as having the strongest degree of
assurance for timely payment. "Fitch-2" is considered very good grade
paper and reflects an assurance of timely payment only slightly less
in degree than the strongest issue.
Commercial paper issues rated "Duff 1" by Duff & Phelps, Inc.
have the following characteristics: very high certainty of timely
payment, excellent liquidity factors supported by strong fundamental
protection factors, and risk factors which are very small. Issues
rated "Duff 2" have a good certainty of timely payment, sound
liquidity factors and company fundamentals, small risk factors, and
good access to capital markets.
<PAGE>
DISTRIBUTOR
Edgewood Services, Inc. BT INSTITUTIONAL FUNDS
Clearing Operations
P.O. Box 897
Pittsburgh, PA 15230-0897
(800) 545-1074
INVESTMENT ADVISER INTERNATIONAL EQUITY FUND
Bankers Trust Company
280 Park Avenue
New York, NY 10017
TRANSFER AGENT
Bankers Trust Company
280 Park Avenue
New York, NY 10017
CUSTODIAN
Bankers Trust Company STATEMENT OF
280 Park Avenue ADDITIONAL INFORMATION
New York, NY 10017 APRIL 1, 1997
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
1100 Main Street, Suite 900
Kansas City, MO 64105
LEGAL COUNSEL
Willkie Farr & Gallagher
One Citicorp Center
153 East 53rd Street
New York, NY 10022-4669
Cusip# 055924856
Cusip# 055924849
BT0494 (7/97)
<PAGE>
