- - BT PYRAMID MUTUAL FUNDS -
EQUITY APPRECIATION FUND --
INVESTMENT CLASS
PROSPECTUS
------------------------------------------------
SEPTEMBER 27, 1996
BT Pyramid Mutual Funds (the "Trust") is an open-end management investment
company. The BT Investment Equity Appreciation Fund (the "Fund") is a separate
series of the Trust and offers two classes of shares. The shares offered by this
prospectus are the Investment Class of shares (the "Shares"). The Fund seeks
capital growth over the long-term through investment primarily in companies with
a strong profit growth orientation. Current income is secondary to this
investment objective.
Please read this Prospectus carefully before investing and keep it on file for
future reference. It contains important information including how the Fund
invests and the services available to shareholders.
A Statement of Additional Information ("SAI"), with respect to the Fund, with
the same date has been filed with the Securities and Exchange Commission, and is
incorporated herein by reference. You may request a free copy of the Statement
by calling the Trust's Service Agent at 1-800-730-1313.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, BANKERS TRUST COMPANY AND THE SHARES ARE NOT FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
AGENCY. AN INVESTMENT IN THE FUND IS SUBJECT TO RISK THAT MAY CAUSE THE VALUE OF
THE INVESTMENT TO FLUCTUATE, AND WHEN THE INVESTMENT IS REDEEMED, THE VALUE MAY
BE HIGHER OR LOWER THAN THE AMOUNT ORIGINALLY INVESTED BY THE INVESTOR.
LIKE SHARES OF ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
6 St. James Avenue - Boston, Massachusetts - 02116
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TABLE OF CONTENTS
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PAGE
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Summary of Fund Expenses 3
Fund Financial Highlights 5
Investment Objective, Policies and Risks 6
Risk Factors: Matching the Fund to Your Investment Needs 8
Net Asset Value 16
Purchase and Redemption of Shares 17
Dividends, Distributions and Taxes 20
Performance Information and Reports 21
Management of the Trust 22
Additional Information
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SUMMARY OF FUND EXPENSES
The following table provides (i) a summary of expenses allocable to the Shares,
as a percentage of the average daily net assets of the Fund; and (ii) an example
illustrating the dollar cost of such expenses on a $1,000 investment in the
Shares.
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ANNUAL OPERATING EXPENSES
(as a percentage of the average daily net assets of the Fund or the Shares)
.........................................................................................
Investment advisory fee (after waiver) 0.52%
12b-1 fees 0.00
Other expenses (after reimbursements or waivers) 0.48
.........................................................................................
Total operating expenses (after reimbursements or waivers) 1.00%
.........................................................................................
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EXAMPLE 1 year 3 years 5 years 10 years
.............................................................................................
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and
(2) redemption at the end of each time period $13 $40 $55 $120
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The expense table and the example above show the costs and expenses that an
investor will bear as a shareholder of the Fund. While reimbursement of
distribution expenses in an amount on an annual basis equal to 0.20% of the
Fund's average daily net assets are authorized to be made pursuant to the
Trust's Plan of Distribution under Rule 12b-1 of the Investment Company Act of
1940, as amended (the "1940 Act"), it is not expected that any payments will
actually be made under that plan in the foreseeable future. Prior to the date of
this Prospectus, the Fund had different investment objectives and the Trust
sought to achieve the Fund's investment objectives by investing all of the
Fund's investable assets in the Capital Appreciation Portfolio, a separate
registered investment company for which Bankers Trust Company ("Bankers Trust")
served as investment adviser. The Trust has now retained Bankers Trust as its
investment adviser (the "Adviser") and now invests directly in a portfolio of
investment securities.
Bankers Trust has voluntarily agreed to waive a portion of its investment
advisory fee. Without such waiver during the Portfolio's last fiscal year, the
Portfolio's investment advisory fee would have been equal on an annual basis to
0.65% of the Portfolio's average daily net assets. The expense table and the
example reflect a voluntary undertaking by Bankers Trust to waive or reimburse
expenses such that the total operating expenses allocable to the Shares will not
exceed on an annual basis 1.00%. For the Fund's last fiscal year, in the absence
of this undertaking and assuming the Fund had invested directly in securities
during that year, the total operating expenses of the Fund would have been equal
on an annual basis to 1.33%. THE EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN. Moreover, while the example assumes a 5% annual return,
actual performance will vary and may result in a return greater or less than 5%.
The Fund is sold by Signature Broker-Dealer Services, Inc. ("Signature") as the
Trust's distributor (the "Distributor") to customers of Bankers Trust or to
customers of another bank, dealer or other financial intermediary that has a
shareholder
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servicing agreement with Bankers Trust (along with Bankers Trust, a "Service
Agent"). Some Service Agents may impose certain conditions on their customers in
addition to or different from those imposed by the Fund and may charge their
customers a direct fee for their services. Each Service Agent has agreed to
transmit to shareholders who are its customers appropriate disclosures of any
fees that it may charge them directly.
In addition to the customers of Bankers Trust or other institutions described
above, this Fund is available for (a) accounts where an investment adviser or a
financial planner has discretion over such account and the account holder pays
such person as compensation for its advice and other services an annual fee of
at least 0.50% on the assets in the account; (b) accounts established under a
"wrap fee" program or formal asset allocation program where the account holder
pays the program sponsor an annual fee of at least 0.50% on the assets in the
account; (c) accounts established through an automated clearing or similar
system established for the use of investment professionals and through which
purchases and redemptions are transmitted to the Fund on an omnibus basis; and
(d) employees of Bankers Trust, their spouses and children.
Currently, the Fund has issued two classes of Shares. The Fund offers by
separate prospectus another class of Shares. Because the expenses vary between
classes, performance will vary with respect to each class. Additional
information concerning the Fund's other class of Shares is available from
Bankers Trust, as administrator at (800) 730-1313.
For more information with respect to the expenses of the Fund see "Management of
the Trust" herein.
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FUND FINANCIAL HIGHLIGHTS
Prior to the date of this Prospectus, the Fund did not offer two classes and the
Shares were simply referred to as the Fund. The following table shows the
selected data for a share outstanding, total investment return, ratios to
average net assets and other supplemental data for the Fund for each period
indicated and has been audited by Coopers & Lybrand L.L.P., the Fund's
independent accountants, whose report thereon appears in the Fund's Annual
Report which is incorporated by reference in the Fund's Statement of Additional
Information.
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For the
For the six period For the period
months ended January 1, For the year October 12,1993
March 31, 1995 to ended (Commencement of
1996 September 30, December 31, Operations) to
(unaudited) 1995 1994 December 31, 1993
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PER SHARE OPERATING PERFORMANCE
NET ASSET VALUE, BEGINNING OF
PERIOD $ 14.14 $ 10.14 $ 9.80 $10.00
------------ ------------- ------------ -------
INCOME (LOSS) FROM INVESTMENT
OPERATIONS
Net Investment Loss (0.02) (0.02) (0.03) (0.00)+
Net Realized and Unrealized
Gain (Loss) on Investments (0.03) 4.02 0.37 (0.20)
...............................................................................................
Total from Investment
Operations (0.05) 4.00 0.34 (0.20)
...............................................................................................
DISTRIBUTIONS
Distribution from Net
Realized Gain (0.38) -- -- --
...............................................................................................
NET ASSET VALUE, END OF PERIOD $ 13.71 $ 14.14 $ 10.14 $ 9.80
...............................................................................................
TOTAL INVESTMENT RETURN (0.15)% 39.45% 3.47% (8.81)%*
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period
(000's omitted) $128,207 $92,033 $29,973 $19,465
Ratio to Average Net Assets
Net Investment (Loss) (0.40)%* (0.38)%* (0.32)% (0.11)%*
Expenses, including
Expenses of the Capital
Appreciation Portfolio (a) 1.00%* 1.00%* 1.00% 1.00%*
Decrease Reflected in Above
Expense Ratio Due to
Absorption of Expenses by
Bankers Trust 0.26%* 0.33%* 0.46% 0.60%*
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* Annualized
+ Represents less than $0.01 per share
(a) Prior to the date of this Prospectus, the Trust sought to achieve the Fund's
investment objective by investing all of the Fund's investable assets in the
Capital Appreciation Portfolio, a separate registered investment company.
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INVESTMENT OBJECTIVE, POLICIES AND RISKS
The Fund's investment objective is capital growth over the long-term through
investment primarily in companies with a strong profit growth orientation; the
production of any current income is secondary to this objective. There can be no
assurances that the investment objective of the Fund will be achieved. The
investment objective of the Fund is not a fundamental policy and may be changed
upon notice to but without the approval of the Fund's shareholders.
The Fund invests primarily in common stocks of U.S. companies expected to
produce strong and sustainable profit growth, and to a lesser extent,
growth-oriented international corporations. Overall, the Adviser employs a
flexible investment program in pursuit of the Fund's investment objective. The
Fund is not restricted to investments in specific market sectors. The Fund may
invest in any market sector and in companies of any size and may take advantage
of any investment opportunity with attractive long-term prospects. The Adviser
takes advantage of its market access and the research available to it to select
investments in promising growth companies that are involved in new technologies,
new products, foreign markets and special developments, such as research
discoveries, acquisitions, recapitalizations, liquidations or management
changes, and companies whose stock may be undervalued by the market. These
situations are only illustrative of the types of investment the Fund may make.
The Fund is free to invest in any common stock which in the Adviser's judgment
provides above average potential for long-term growth of capital and income.
The Fund will generally invest a majority of its assets in securities of
medium-sized companies, which the Fund believes includes the highest
concentration of companies that meet the profit growth-oriented objectives of
the Fund. This portion of the Fund's portfolio will contain equity securities of
companies which fall within the dollar market capitalization range of the
companies in the S&P 400 Mid-Cap Index. The Fund as a whole will seek to
maintain a dollar-weighted average company market capitalization approximately
in the middle of the market capitalization of the largest and the smallest
companies contained in the S&P 400 Mid-Cap Index. The Fund may also invest in
securities of companies having various levels of market capitalization, both
larger and smaller than the companies contained in the S&P 400 Mid-Cap Index.
Investments will be in companies in various industries. Industry and company
fundamentals along with key investment themes and various quantitative screens
will be used in the investment process.
Criteria for selection of individual securities include the issuer's competitive
environment and position, prospects for growth, managerial strength, earnings
momentum and quality, underlying asset value, relative market value and overall
marketability. The Fund will follow a disciplined selling process to lessen
market risks.
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The Fund may invest up to 25% of its assets in securities of foreign issuers.
For further information on foreign investments and related hedging techniques,
see "Risk Factors: Matching the Fund to Your Investment Needs," "Additional
Investment Techniques and Risks" and the SAI.
EQUITY INVESTMENTS. The Fund invests primarily in common stock and other
securities with equity characteristics, such as trust or limited partnership
interests, rights and warrants. These investments may or may not pay dividends
and may or may not carry voting rights. The Fund may also invest in convertible
securities when, due to market conditions, it is more advantageous to obtain a
position in an attractive company by purchase of its convertible securities than
by purchase of its common stock. The convertible securities in which the Fund
invests may include any debt securities or preferred stock which may be
converted into common stock or which carries the right to purchase common stock.
Convertible securities entitle the holder to exchange the securities for a
specified number of shares of common stock, usually of the same company, at
specified prices within a certain period of time and to receive interest or
dividends until the holder elects to exercise the conversion privilege. Since
the Fund invests in both common stock and convertible securities, the risks of
the general equity markets may be tempered to a degree by the Fund's investments
in convertible securities which are often not as volatile as equity securities.
SHORT-TERM INSTRUMENTS. The Fund intends to stay invested in the securities
described above to the extent practical in light of its objective and long-term
investment perspective. However, the Fund's assets may be invested in short-term
instruments with remaining maturities of 397 days or less to meet anticipated
redemptions and expenses or for day-to-day operating purposes and, without
limit, when, in Bankers Trust's opinion, it is advisable to adopt a temporary
defensive position because of unusual and adverse conditions affecting the
equity markets. In addition, when the Fund experiences large cash inflows
through the sale of securities and desirable equity securities that are
consistent with the Fund's investment objective are unavailable in sufficient
quantities or at attractive prices, the Fund may hold short-term investments for
a limited time pending availability of such equity securities. 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 Moody's Investors Service, Inc. ("Moody's") or AA or higher by Standard &
Poor's Corporation ("S&P") 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 bankers' acceptances; and
(v) repurchase agreements. At the time the Fund invests in commercial paper,
bank obligations or repurchase agreements, the issuer or the issuer's parent
must have outstanding debt rated Aa or higher by Moody's or AA or higher by S&P
or outstanding commercial paper or bank obligations rated Prime-1 by Moody's or
A-1
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by S&P; 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.
Other Investments, Investment Techniques and Risks
The Fund may also utilize the following investments and investment techniques
and practices: Rule 144A securities, when-issued and delayed delivery
securities, securities lending, repurchase agreements, foreign investments,
options on stocks, options on stock indices, futures contracts on stock indices,
options on futures contracts, foreign currency exchange transaction and options
on foreign currencies. See "Additional Investment Techniques and Risks" for
further information.
Additional Investment Limitations
As a "diversified" fund, with respect to 75% of the Fund's total assets, no more
than 5% of the total assets of the Fund may be invested in the securities of any
one issuer (excluding cash and cash-equivalents, U.S. Government securities and
the securities of other investment companies) and the Fund will not own more
than 10% of the voting securities of any issuer. The Fund will not invest more
than 25% of its assets in the securities of issuers in any one industry. These
are fundamental investment policies of the Fund which may not be changed without
shareholder approval. No more than 15% of the Fund's net assets may be invested
in illiquid or not readily marketable securities (including repurchase
agreements and time deposits with remaining maturities of more than seven
calendar days). Additional investment policies of the Fund are contained in the
SAI.
The Fund's investment objective is not a fundamental policy and may be changed
upon 30 days prior written notice to but without the approval of the Fund's
shareholders. If there is a change in the Fund's investment objective, the
Fund's shareholders should consider whether the Fund remains an appropriate
investment in light of their then-current needs.
See "Investment Objective, Policies and Risks" in the SAI for a description of
the additional fundamental policies of the Fund that cannot be changed without
approval by a "vote of a majority of the outstanding voting securities" (as
defined in the 1940 Act) of the Fund.
RISK FACTORS: MATCHING THE FUND TO YOUR
INVESTMENT NEEDS
By itself, the Fund does not constitute a balanced investment plan; the Fund
seeks capital growth over the long-term, with the production of any current
income being secondary to this primary investment objective, through investment
primarily in the equity securities of companies expected to produce strong and
sustainable profit growth and, to a limited extent, similarly oriented
international corporations.
In view of the long-term capital growth objective of the Fund and the Fund's
ability to invest in smaller- and medium-sized companies, the size range in
which many of
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the best profit growth-oriented companies are found, the risks of investment in
the Fund may be greater than the risks presented by the general equity markets,
and, since the Fund may also invest in preferred stock and convertible bonds,
changes in domestic and foreign interest rates may also affect the value of the
Fund's investments, and rising interest rates can be expected to reduce the
Shares' value. A description of a number of investments and investment
techniques available to the Fund, including foreign investments and the use of
options and futures, and certain risks associated with these investments and
techniques is included under "Additional Investment Techniques and Risks." The
Shares' yield and total return fluctuate, and your investment may be worth more
or less than your original cost when you redeem your Shares.
Risks of Investing in Foreign Securities
In seeking its investment objectives, the Fund may invest in securities of
foreign issuers. Foreign securities may involve a higher degree of risk and may
be less liquid or more volatile than domestic investments. Foreign securities
usually are denominated in foreign currencies, which means their value will be
affected by changes in the strength of foreign currencies relative to the U.S.
dollar as well as the other factors that affect security prices. Foreign
companies may not be subject to accounting standards or governmental supervision
comparable to U.S. companies, and there often is less publicly available
information about their operations. Generally, there is less governmental
regulation of foreign securities markets, and security trading practices abroad
may offer less protection to investors such as the Fund. The value of such
investments may be adversely affected by changes in political or social
conditions, diplomatic relations, confiscatory taxation, expropriation,
nationalization, limitation on the removal of funds or assets, or imposition of
(or change in) exchange control or tax regulations in those foreign countries.
Additional risks of foreign securities include settlement delays and costs,
difficulties in obtaining and enforcing judgments, and taxation of dividends at
the source of payment. The Fund will not invest more than 5% of the value of its
total assets in the securities of issuers based in developing countries,
including Eastern Europe.
Portfolio Turnover
The Fund intends to manage its holdings actively to pursue its investment
objective. Since the Fund has a long-term investment perspective, it does not
intend to respond to short-term market fluctuations or to acquire securities for
the purpose of short-term trading; however, it may take advantage of short-term
trading opportunities that are consistent with its investment objective. The
annual portfolio turnover rate of the Fund may exceed 100%. Higher portfolio
turnover rates result in higher brokerage costs and possible adverse tax
consequences. For the six months ended March 31, 1996, the period from January
1, 1995 to September 30, 1995, the Portfolio's fiscal year ended December 31,
1994 and the period from
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March 9, 1993 (commencement of the Portfolio's investment operations) to
December 31, 1993, the Portfolio's annualized portfolio turnover rate was 193%,
125%, 157% and 137%, respectively.
Additional Investment Techniques and Risks
RULE 144A SECURITIES. The Fund may purchase securities in the United States that
are not registered for sale under Federal securities laws but which can be
resold to institutions under the Securities and Exchange Commission's ("SEC")
Rule 144A. Provided that a dealer or institutional trading market in such
securities exists, these restricted securities are treated as exempt from the
Fund's 15% limit on illiquid securities. Under the supervision of the Board of
Trustees of the Trust, Bankers Trust determines the liquidity of restricted
securities and, through reports from Bankers Trust, the Board will monitor
trading activity in restricted securities. Because Rule 144A is relatively new,
it is not possible to predict how these markets will develop. If institutional
trading in restricted securities were to decline, the liquidity of the Fund
could be adversely affected.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Fund may purchase securities on
a when-issued or delayed delivery basis. Delivery of and payment for these
securities may take place as long as a month or more after the date of the
purchase commitment. The value of these securities is subject to market
fluctuation during this period and no income accrues to the Fund until
settlement takes place. The Fund maintains with the custodian a segregated
account containing high grade liquid securities in an amount at least equal to
these commitments. When entering into a when-issued or delayed delivery
transaction, the Fund will rely on the other party to consummate the
transaction; if the other party fails to do so, the Fund may be disadvantaged.
SECURITIES LENDING. The Fund is permitted to lend up to 30% of the total value
of its securities. These loans must be secured continuously by cash or
equivalent collateral or by a letter of credit at least equal to the market
value of the securities loaned plus accrued income. By lending its securities,
the Fund can increase its income by continuing to receive income on the loaned
securities as well as by the opportunity to receive interest on the collateral.
Any gain or loss in the market price of the borrowed securities which occurs
during the term of the loan inures to the Fund and its investors. In lending
securities to brokers, dealers and other organizations, the Fund is subject to
risk which, like those associated with other extensions of credit, include
delays in recovery and possible loss of rights in the collateral should the
borrower fail financially.
REPURCHASE AGREEMENTS. In a repurchase agreement the Fund buys a security and
simultaneously agrees to sell it back at a higher price. In the event of the
bankruptcy of the other party to either a repurchase agreement or a securities
loan, the Fund could experience delays in recovering either its cash or the
securities it lent. To the extent that, in the meantime, the value of the
securities repurchased had decreased or the value of the securities lent had
increased, the Fund could
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experience a loss. In all cases, Bankers Trust must find the creditworthiness of
the other party to the transaction satisfactory. A repurchase agreement is
considered a collateralized loan under the 1940 Act.
ADRS, GDRS, EDRS. The Fund may invest in securities of foreign issuers directly
or in the form of American Depositary Receipts ("ADRs"), Global Depositary
Receipts ("GDRs"), European Depositary Receipts ("EDRs") or other similar
securities representing securities of foreign issuers. These securities may not
necessarily be denominated in the same currency as the securities they
represent. Designed for use in U.S., international and european securities
markets, respectively, ADRs, GDRs and EDRs are alternatives to the purchase of
the underlying securities in their national markets and currencies. ADRs, GDRs
and EDRs are subject to the same risks as the foreign securities to which they
relate.
INVESTMENT IN OTHER INVESTMENT COMPANIES. With respect to certain countries in
which capital markets are either less developed or not easily accessed,
investments by the Fund may be made through investment in other investment
companies that in turn are authorized to invest in the securities of such
countries. Investment in other investment companies is limited in amount by the
1940 Act, will involve the indirect payment of a portion of the expenses,
including advisory fees, of such other investment companies and may result in a
duplication of fees and expenses. See the Statement of Additional Information
for more information with respect to the Fund's investing in other investment
companies.
Derivatives
The Fund may invest in various instruments that are commonly known as
derivatives. Generally, a derivative is a financial arrangement, the value of
which is based on, or "derived" from, a traditional security, asset or market
index. There are, in fact, many different types of derivatives and many
different ways to use them. There are a range of risks associated with those
uses. Futures and options may be used for traditional hedging purposes to
attempt to protect a fund from exposure to changing interest rates, securities
prices or currency exchange rates and for cash management purposes as a low cost
method of gaining exposure to a particular securities market without investing
directly in those securities. The Fund may invest in derivatives for hedging and
cash management purposes, but also as a substitute for investment directly in
the corresponding securities if the Adviser believes they offer the most
economic means of improving the risk/reward profile of the Fund. Some
derivatives are used for leverage, which tends to magnify the effects of an
instrument's price changes as market conditions change. Leverage involves the
use of a small amount of money to control a large amount of financial assets and
can, in some circumstances, lead to significant losses. The Fund will "cover"
its positions in derivatives, pursuant to interpretive positions of the SEC,
which serves to reduce the resulting leverage. Derivatives will not be used to
increase the Fund's overall portfolio risk above the level that could be
achieved, within the Fund's investment policies, using only traditional
investment securities or to acquire exposure to changes in the value of assets
or indices that by
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themselves would not be purchased for the Fund. The use of derivatives for non-
hedging purposes may be considered speculative. A description of the derivatives
that the Fund may use and some of their associated risks is found below.
OPTIONS ON STOCKS. The Fund may write and purchase put and call options on
stocks. A call option gives the purchaser of the option the right to buy, and
obligates the writer to sell, the underlying stock at the exercise price at any
time during the option period. Similarly, a put option gives the purchaser of
the option the right to sell, and obligates the writer to buy, the underlying
stock at the exercise price at any time during the option period. A covered call
option, which is a call option with respect to which the Fund owns the
underlying stock, sold by the Fund exposes the Fund during the term of the
option to possible loss of opportunity to realize appreciation in the market
price of the underlying stock or to possible continued holding of a stock which
might otherwise have been sold to protect against depreciation in the market
price of the stock. A covered put option sold by the Fund exposes the Fund
during the term of the option to a decline in price of the underlying stock. A
put option sold by the Fund is covered when, among other things, cash or liquid
securities are placed in a segregated account to fulfill the obligations
undertaken.
To close out a position when writing covered options, the Fund may make a
"closing purchase transaction," which involves purchasing an option on the same
stock with the same exercise price and expiration date as the option which it
has previously written on the stock. The Fund will realize a profit or loss for
a closing purchase transaction if the amount paid to purchase an option is less
or more, as the case may be, than the amount received from the sale thereof. To
close out a position as a purchaser of an option, the Fund may make a "closing
sale transaction," which involves liquidating the Fund's position by selling the
option previously purchased.
The Fund intends to treat over-the-counter options ("OTC Options") purchased and
the assets used to "cover" OTC Options written as not readily marketable and
therefore subject to the limitations described in "Investment Restrictions" in
the Statement of Additional Information.
OPTIONS ON STOCK INDICES. The Fund may purchase and write put and call options
on stock indices listed on stock exchanges. A stock index fluctuates with
changes in the market values of the stocks included in the index.
Options on stock indices are generally similar to options on stock except that
the delivery requirements are different. Instead of giving the right to take or
make delivery of stock at a specified price, an option on a stock index gives
the holder the right to receive a cash "exercise settlement amount" equal to (a)
the amount, if any, by which the fixed exercise price of the option exceeds (in
the case of a put) or is less than (in the case of a call) the closing value of
the underlying index on the date of exercise, multiplied by (b) a fixed "index
multiplier." Receipt of this
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cash amount will depend upon the closing level of the stock index upon which the
option is based being greater than, in the case of a call, or less than, in the
case of a put, the exercise price of the option.
The amount of cash received will be equal to such difference between the closing
price of the index and the exercise price of the option expressed in dollars
times a specified multiple. The writer of the option is obligated, in return for
the premium received, to make delivery of this amount. The writer may offset its
position in stock index options prior to expiration by entering into a closing
transaction on an exchange or the option may expire unexercised.
Because the value of an index option depends upon movements in the level of the
index rather than the price of a particular stock, whether the Fund will realize
a gain or loss from the purchase or writing of options on an index depends upon
movements in the level of stock prices in the stock market generally or, in the
case of certain indices, in an industry or market segment, rather than movements
in the price of a particular stock. Accordingly, successful use by the Fund of
options on stock indices will be subject to Bankers Trust's ability to predict
correctly movements in the direction of the stock market generally or of a
particular industry. This requires different skills and techniques than
predicting changes in the price of individual stocks.
FUTURES CONTRACTS ON STOCK INDICES. The Fund may enter into contracts providing
for the making and acceptance of a cash settlement based upon changes in the
value of an index of securities (a "Futures Contract"). This investment
technique is designed only to hedge against anticipated future change in general
market prices which otherwise might either adversely affect the value of
securities held by the Fund or adversely affect the prices of securities which
are intended to be purchased at a later date for the Fund. A Futures Contract
may also be entered into to close out or offset an existing futures position. In
general, each transaction in a Futures Contract involves the establishment of a
position which will move in a direction opposite to that of the investment being
hedged. If these hedging transactions are successful, the futures positions
taken for the Fund will rise in value by an amount which approximately offsets
the decline in value of the portion of the Fund's investments that are being
hedged. Should general market prices move in an unexpected manner, the full
anticipated benefits of a Futures Contract may not be achieved or a loss may be
realized.
Although Futures Contracts would be entered into for hedging purposes only, such
transactions do involve certain risks. These risks could include a lack of
correlation between the Futures Contract and the equity market being hedged, a
potential lack of liquidity in the secondary market and incorrect assessments of
market trends which may result in poorer overall performance than if a Futures
Contract had not been entered into.
Brokerage costs will be incurred and "margin" will be required to be posted and
maintained as a good-faith deposit against performance of obligations under a
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Futures Contract written for the Fund. The Fund may not purchase or sell a
Futures Contract if immediately thereafter its margin deposits on its
outstanding Futures Contracts would exceed 5% of the market value of the Fund's
total assets.
OPTIONS ON FUTURES CONTRACTS. The Fund may invest in options on such Futures
Contracts for similar purposes.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS. Because the Fund may buy and sell
securities denominated in currencies other than the U.S. dollar and receives
interest, dividends and sale proceeds in currencies other than the U.S. dollar,
the Fund from time to time may enter into foreign currency exchange transactions
to convert to and from different foreign currencies and to convert foreign
currencies to and from the U.S. dollar. The Fund either enters into these
transactions on a spot (i.e., cash) basis at the spot rate prevailing in the
foreign currency exchange market or uses forward contracts to purchase or sell
foreign currencies.
A forward foreign currency exchange contract is an obligation by the Fund to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract. Forward foreign currency exchange
contracts establish an exchange rate at a future date. These contracts are
transferable in the interbank market conducted directly between currency traders
(usually large commercial banks) and their customers. A forward foreign currency
exchange contract generally has no deposit requirement and is traded at a net
price without commission. The Fund maintains with its custodian a segregated
account of high grade liquid assets in an amount at least equal to its
obligations under each forward foreign currency exchange contract. Neither spot
transactions nor forward foreign currency exchange contracts eliminate
fluctuations in the prices of the Fund's securities or in foreign exchange
rates, or prevent loss if the prices of these securities should decline.
The Fund may enter into foreign currency hedging transactions in an attempt to
protect against changes in foreign currency exchange rates between the trade and
settlement dates of specific securities transactions or changes in foreign
currency exchange rates that would adversely affect a portfolio position or an
anticipated investment position. Since consideration of the prospect for
currency parities will be incorporated into Bankers Trust's long-term investment
decisions, the Fund 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 Fund's best interest. Although these transactions tend to minimize the
risk of loss due to a decline in the value of the hedged currency, at the same
time they tend to limit any potential gain that might be realized should the
value of the hedged currency increase. The precise matching of the forward
contract amounts and the value of the securities involved will not generally be
possible because the future value of such securities in foreign currencies will
change as a consequence of market movements in the value of such
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securities between the date the forward contract is entered into and the date it
matures. The projection of currency market movements is extremely difficult, and
the successful execution of a hedging strategy is highly uncertain.
OPTIONS ON FOREIGN CURRENCIES. The Fund may write covered put and call options
and purchase put and call options on foreign currencies for the purpose of
protecting against declines in the dollar value of portfolio securities and
against increases in the dollar cost of securities to be acquired. The Fund may
use options on currency to cross-hedge, which involves writing or purchasing
options on one currency to hedge against changes in exchange rates for a
different, but related currency. As with other types of options, however, the
writing of an option on foreign currency will constitute only a partial hedge up
to the amount of the premium received, and the Fund could be required to
purchase or sell foreign currencies at disadvantageous exchange rates, thereby
incurring losses. The purchase of an option on foreign currency may be used to
hedge against fluctuations in exchange rates although, in the event of exchange
rate movements adverse to the Fund's position, it may forfeit the entire amount
of the premium plus related transaction costs.
In addition, the Fund may purchase call options on currency when the Adviser
anticipates that the currency will appreciate in value.
There is no assurance that a liquid secondary market on an options exchange will
exist for any particular option, or at any particular time. If the Fund is
unable to effect a closing purchase transaction with respect to covered options
it has written, the Fund will not be able to sell the underlying currency or
dispose of assets held in a segregated account until the options expire or are
exercised. Similarly, if the Fund is unable to effect a closing sale transaction
with respect to options it has purchased, it would have to exercise the options
in order to realize any profit and will incur transaction costs upon the
purchase or sale of underlying currency. The Fund pays brokerage commissions or
spreads in connection with its options transactions.
As in the case of forward contracts, certain options on foreign currencies are
traded over-the-counter and involve liquidity and credit risks which may not be
present in the case of exchange-traded currency options. The Fund's ability to
terminate over-the-counter options ("OTC Options") will be more limited than
with exchange-traded options. It is also possible that broker-dealers
participating in OTC Options transactions will not fulfill their obligations.
Until such time as the staff of the SEC changes its position, the Fund will
treat purchased OTC Options and assets used to cover written OTC Options as
illiquid securities. With respect to options written with primary dealers in
U.S. Government securities pursuant to an agreement requiring a closing purchase
transaction at a formula price, the amount of illiquid securities may be
calculated with reference to the repurchase formula.
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All options that the Fund writes will be covered under applicable requirements
of the SEC. The Fund will write and purchase options only to the extent
permitted by the policies of state securities authorities in states where Shares
are qualified for offer and sale.
There can be no assurance that the use of these portfolio strategies will be
successful.
ASSET COVERAGE. To assure that the Fund's use of futures and related options, as
well as when-issued and delayed-delivery securities and foreign currency
exchange transactions, are not used to achieve investment leverage, the Fund
will cover such transactions, as required under applicable interpretations of
the SEC, either by owning the underlying securities or by establishing a
segregated account with the Fund's custodian containing high grade liquid debt
securities in an amount at all times equal to or exceeding the Fund's commitment
with respect to these instruments or contracts.
NET ASSET VALUE
The net asset value per share of the Shares is calculated on each day on which
the New York Stock Exchange Inc. (the "NYSE") is open (each such day being a
"Valuation Day"). The NYSE is currently open on each day, Monday through Friday,
except: (a) January 1st, Presidents' Day (the third Monday in February), Good
Friday, Memorial Day (the last Monday in May), July 4th, Labor Day (the first
Monday in September), Thanksgiving Day (the last Thursday in November) and
December 25th; and (b) the preceding Friday or the subsequent Monday when one of
the calendar-determined holidays falls on a Saturday or Sunday, respectively.
The net asset value per Share is calculated once on each Valuation Day as of the
close of regular trading on the NYSE (the "Valuation Time"), which is currently
4:00 p.m., New York time or in the event that the NYSE closes early, at the time
of such early closing. The net asset value per Share is computed by dividing the
value of the Fund's total assets, less all liabilities allocable to the Shares,
by the total number of Shares outstanding. The Fund's securities and other
assets are valued primarily on the basis of market quotations or, if quotations
are not readily available, by a method which the Trust's Board of Trustees
believes accurately reflects fair value.
Under procedures adopted by the Board, a net asset value for the Fund later
determined to have been inaccurate for any reason will be recalculated.
Purchases and redemptions made at a net asset value determined to have been
inaccurate will be adjusted, although in certain circumstances, such as where
the difference between the original net asset value and the recalculated net
asset value divided by the recalculated net asset value is 0.005% (1/2 of 1%) or
less or shareholder transactions are otherwise insubstantially affected, further
action is not required.
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PURCHASE AND REDEMPTION OF SHARES
Purchase of Shares
The Trust accepts purchase orders for Shares at the net asset value per Share of
the Fund next determined on each Valuation Day. See "Net Asset Value" above.
There is no sales charge on the purchase of Shares , but costs of distributing
Shares of the Fund may be reimbursed from its assets, as described herein.
Service Agents may impose initial and subsequent investment minimums that differ
from the amounts presented in the "Minimum Investments" table below. Shares of
the Fund may be purchased in only those states where they may be lawfully sold.
Purchase orders for Shares that are received by a Service Agent and transmitted
to Bankers Trust, as the Trust's transfer agent (the "Transfer Agent"), prior to
the Valuation Time (currently 4:00 p.m., New York time or earlier, should the
NYSE close earlier) on any Valuation Day will be effective at that day's
Valuation Time. The Trust and Signature reserve the right to reject any purchase
order.
Shares must be purchased in accordance with procedures established by the
Transfer Agent and Service Agents, including Bankers Trust, in connection with
customers' accounts. It is the responsibility of each Service Agent to transmit
to the Transfer Agent purchase and redemption orders and to transmit to Bankers
Trust as the Trust's custodian (the "Custodian") purchase payments on behalf of
its customers in a timely manner, and a shareholder must settle with the Service
Agent his or her entitlement to an effective purchase or redemption order as of
a particular time. Because Bankers Trust is the Custodian and Transfer Agent of
the Trust, funds may be transferred directly from or to a customer's account
with Bankers Trust or from the Fund without incurring the additional costs or
delays associated with the wiring of federal funds.
Certificates for Shares will not be issued. Each shareholder's account will be
maintained by a Service Agent or the Transfer Agent.
AUTOMATIC INVESTMENT PLAN. The Fund may offer shareholders an automatic
investment plan under which shareholders may authorize some Service Agents to
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place a purchase order each month or quarter for Shares. For further information
regarding the automatic investment plan, shareholders should contact their
Service Agent.
<TABLE>
<S> <C>
MINIMUM INVESTMENTS
TO OPEN AN ACCOUNT $ 2,500
For retirement accounts $ 500
Through automatic investment plans $ 1,000
TO ADD TO AN ACCOUNT $ 250
For retirement accounts $ 100
Through automatic investment plan $ 100
MINIMUM BALANCE $ 1,000
For retirement accounts None
</TABLE>
Redemption of Shares
Shareholders may redeem Shares at the net asset value per Share next determined
on each Valuation Day. Redemption requests should be transmitted by customers in
accordance with procedures established by the Transfer Agent and the
shareholder's Service Agent. Redemption requests for Shares received by the
Service Agent and transmitted to the Transfer Agent prior to the Valuation Time
(currently 4:00 p.m., New York time or earlier, should the NYSE close earlier)
on each Valuation Day will be effective at that day's Valuation Time and the
redemption proceeds normally will be delivered to the shareholder's account with
the Service Agent on the next day, but in any event within seven calendar days
following receipt of the request.
Service Agents may allow redemptions or exchanges by telephone and may also
disclaim liability for following instructions communicated by telephone that the
Service Agent reasonably believes to be genuine. The Service Agent must provide
the investor with an opportunity to choose whether or not to utilize the
telephone redemption or exchange privilege. The Service Agent must employ
reasonable procedures to confirm that instructions communicated by telephone are
genuine. If the Service Agent does not do so, it may be liable for any losses
due to unauthorized or fraudulent instructions. Such procedures may include,
among others, requiring some form of personal identification prior to acting
upon instructions received by telephone, providing written confirmation of such
transactions and/or tape recording of telephone instructions.
Redemption orders are processed without charge by the Trust. A Service Agent may
on at least 30 days' notice involuntarily redeem a shareholder's account with
the Fund having a minimum market value, but not if an account is below the
minimum due to a change in market value. See "Minimum Investments" above for
minimum balance amounts.
AUTOMATIC CASH WITHDRAWAL PLAN. The Fund may offer shareholders an automatic
cash withdrawal plan, under which shareholders who own Shares may elect to
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receive periodic cash payments. Retirement plan accounts are eligible for
automatic cash withdrawal plans only where the shareholder is eligible to
receive qualified distributions. For further information regarding the automatic
cash withdrawal plan, shareholders should contact their Service Agent.
Exchange Privilege
Shareholders may exchange their Shares for shares of certain other funds in the
BT Family of Funds registered in their state. The Fund reserves the right to
terminate or modify the exchange privilege in the future. To make an exchange,
follow the procedures indicated in "Purchase of Shares" and "Redemption of
Shares" in that fund's prospectus. Before making an exchange, please note the
following:
- - Call your Service Agent for information and a prospectus. Read the prospectus
for relevant information.
- - Complete and sign an application, taking care to register your new account in
the same name, address, and taxpayer identification number as your existing
account(s).
- - Each exchange represents the sale of shares of one fund and the purchase of
shares of another, which may produce a gain or loss for tax purposes. Your
Service Agent will send a written confirmation of each exchange transaction.
Tax-Saving Retirement Plans
Retirement plans offer significant tax savings and are available to individuals,
partnerships, corporations, nonprofit organizations and educational
institutions. Contact your Service Agent or Bankers Trust for further
information. Bankers Trust can set up your new account in the Fund under one of
several tax-sheltered plans. These plans contain special tax advantages and let
you invest for retirement while sheltering your investment income from current
taxes. Minimums may differ from those listed elsewhere in the Prospectus.
- - INDIVIDUAL RETIREMENT ACCOUNTS (IRAS): personal savings plans that offer tax
advantages for individuals to set aside money for retirement and allow new
contributions of $2,000 per tax year.
- - ROLLOVER IRAS: tax-deferred retirement accounts that retain the special tax
advantages of lump sum distributions from qualified retirement plans and
transferred IRA accounts.
- - SIMPLIFIED EMPLOYEE PENSION PLANS (SEP): a relatively easy and inexpensive
alternative to retirement planning for sole proprietors, partnerships and
corporations. Under a SEP, employers make tax-deductible contributions to
their own and to eligible employees' IRA accounts. Employee contributions are
available through a "Salary Deferral" SEP for businesses with fewer than 25
eligible employees.
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- - KEOGH PLANS: defined contribution plans available to individuals with self-
employed income and non-incorporated businesses such as sole proprietors,
professionals and partnerships. Contributions are tax-deductible to the
employer and earnings are tax-sheltered until distribution.
- - CORPORATE PROFIT-SHARING AND MONEY-PURCHASE PLANS: defined contribution plans
available to corporations to benefit their employees by making contributions
on their behalf and in some cases permitting their employees to make
contributions.
- - 401(K) PROGRAMS: defined contribution plans available to corporations allowing
tax-deductible employer contributions and permitting employers to contribute a
percentage of their wages on a tax-deferred basis.
- - 403(B) CUSTODIAN ACCOUNTS: defined contribution plans open to employees of
most nonprofit organizations and educational institutions.
- - DEFERRED BENEFIT PLANS: plan sponsors may invest all or part of their pension
assets in the Fund.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DISTRIBUTIONS. The Fund distributes substantially all of its net investment
income and capital gains to shareholders each year. Income dividends are
distributed on the first business day in April, July and October. In December,
another income dividend will be distributed plus any net capital gains. Unless a
shareholder instructs the Trust to pay such dividends and distributions in cash,
they will be automatically reinvested in additional Shares.
FEDERAL TAXES. The Fund intends to qualify as a regulated investment company, as
defined in the Internal Revenue Code of 1986, as amended (the "Code"). Provided
the Fund meets the requirements imposed by the Code and distributes all of its
income and gains, the Fund will not pay any Federal income or excise taxes.
Distributions from the Fund's income and short-term capital gains are taxed as
dividends, and long-term capital gain distributions are taxed as long-term
capital gains. The Fund's distributions are taxable when they are paid, whether
you take them in cash or reinvest them in additional shares. Distributions
declared in December and paid in January are taxable as if paid on December 31.
The Fund will send each shareholder a tax statement by January 31 showing the
tax status of the distributions received in the past year.
CAPITAL GAINS. You may realize a capital gain or loss when you redeem (sell) or
exchange Shares. Because the tax treatment also depends on your purchase price
and your personal tax position, you should keep your regular account statements
to use in determining your tax.
"BUYING A DIVIDEND." On the ex-date for a distribution from income and/or
capital gains, the Fund's share value is reduced by the amount of the
distribution. If you
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buy Shares just before the ex-date ("buying a dividend"), you will pay the full
price for the Shares and then receive a portion of the price back as a taxable
distribution.
OTHER TAX INFORMATION. In addition to Federal taxes, you may be subject to state
or local taxes on your investment, depending on the laws in your area. Income
received by the Fund from sources within foreign countries may be subject to
withholding and other taxes imposed by such countries. You should consult with
your own tax adviser concerning the application of Federal, state and local
taxes to your distributions from the Fund.
PERFORMANCE INFORMATION AND REPORTS
The Shares' performance may be used from time to time in advertisements,
shareholder reports or other communications to shareholders or prospective
shareholders. Performance information may include the Shares' investment results
and/or comparisons of its investment results to the Russell Mid-Cap Index, the
Standard and Poor's 500 Composite Stock Price Index, the Standard and Poor's
Mid-Cap 400 Index, the Lipper General Equity Averages, the Lipper Mid Cap
Average, the Lipper Growth Fund Average or other various unmanaged indices or
results of other mutual funds or investment or savings vehicles. The Shares'
investment results as used in such communications will be calculated on a yield
or total return basis in the manner set forth below. From time to time, fund
rankings may be quoted from various sources, such as Lipper Analytical Services,
Inc., Value Line and Morningstar, Inc.
The Trust may provide period and average annualized "total return" quotations
for the Shares. The Shares' "total return" refers to the change in the value of
an investment in the Shares over a stated period based on any change in net
asset value per Share and including the value of any Shares purchasable with any
dividends or capital gains distributed during such period. Period total return
may be annualized. An annualized total return is a compounded total return which
assumes that the period total return is generated over a one-year period, and
that all dividends and capital gain distributions are reinvested. An annualized
total return will be higher than a period total return if the period is shorter
than one year, because of the compounding effect.
The Trust may provide annualized "yield" quotations for the Shares. The "yield"
of the Shares refers to the income generated by an investment in the Shares over
a 30-day or one-month period (which period shall be stated in any such
advertisement or communications). This income is then annualized; that is, the
amount generated by the investment over the period is assumed to be generated
over a one-year period and is shown as a percentage of investment.
Unlike some bank deposits or other investments which pay a fixed yield for a
stated period of time, the total return of the Fund will vary depending upon
interest rates, the current market value of the securities held by the Fund and
changes in
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the Shares' expenses. In addition, during certain periods for which total return
or yield quotations may be provided, Bankers Trust, as Adviser, Service Agent or
Administrator, may have voluntarily agreed to waive portions of their fees on a
month-to-month basis. Such waivers will have the effect of increasing the
Shares' net income (and therefore its total rate of return or yield) during the
period such waivers are in effect.
Shareholders will receive financial reports semi-annually that include the
Shares' financial statements, including listings of investment securities held
by the Fund at those dates. Annual reports are audited by independent
accountants.
MANAGEMENT OF THE TRUST
Board of Trustees
The affairs of the Trust are managed under the supervision of its Board of
Trustees. By virtue of the responsibilities assumed by Bankers Trust, as the
Administrator of the Trust, the Trust does not require employees other than its
officers. None of the Trust's officers devote full time to the affairs of the
Trust. For more information with respect to the Trustees of the Trust, see
"Management of the Trust" in the SAI.
Investment Adviser
The Trust has retained the services of Bankers Trust, as investment adviser. Mr.
Bluford Putnam (PhD), Managing Director of Bankers Trust and Chief Investment
Officer of Equity and Balanced Portfolios, is responsible for the management
oversight of the Fund's portfolio management team which includes seven
investment professionals. Mr. Putnam has been employed by Bankers Trust since
1994. His previous experience includes economist at the Federal Reserve Bank of
New York, principal at Morgan Stanley and Chief Economist at Kleinwort Benson,
Ltd. He was also a founding partner of Stern Stewart and Co., in 1982, a leading
corporate finance advisory firm and is the author of "The Blackwell Guide to
Wall Street," which focused, in part, on equity valuation. Mr. Anthony Takazawa
(CFA), Vice President of Bankers Trust, has senior portfolio management
responsibilities for the Fund. Mr. Takazawa joined Bankers Trust in 1996. He has
eight years of investment and financial analysis experience. Previously, he
worked at Phoenix Mutual Life Insurance Company as an investment analyst,
portfolio manager and director of research.
Bankers Trust, a New York banking corporation with principal offices at 280 Park
Avenue, New York, New York 10017, is a wholly owned subsidiary of Bankers Trust
New York Corporation. Bankers Trust conducts a variety of general banking and
trust activities and is a major wholesale supplier of financial services to the
international and domestic institutional market. As of December 31, 1995,
Bankers Trust New York Corporation was the ninth largest bank holding company in
the United States with total assets of approximately $104 billion. Bankers Trust
is a worldwide merchant bank dedicated to servicing the needs of corporations,
governments, financial institutions and private clients through a global network
of over 120 offices in more than 40 countries. Investment management is a core
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business of Bankers Trust, built on a tradition of excellence from its roots as
a trust bank founded in 1903. The scope of Bankers Trust's investment management
capability is unique due to its leadership positions in both active and passive
quantitative management and its presence in major equity and fixed income
markets around the world. Bankers Trust is one of the nation's largest and most
experienced investment managers with approximately $210 billion in assets under
management globally as of March 31, 1996.
Bankers Trust has more than 50 years of experience managing retirement assets
for the nation's largest corporations and institutions. In the past, these
clients have been serviced through separate account and commingled fund
structures. Now, the BT Family of Funds family brings Bankers Trust's extensive
investment management expertise -- once available to only the largest
institutions in the U.S. -- to individual investors for the first time. Bankers
Trust's officers have had extensive experience in managing investment portfolios
having objectives similar to those of the Fund.
Bankers Trust, subject to the supervision and direction of the Board of Trustees
of the Trust, manages the Fund, in accordance with the Fund's investment
objective and stated investment policies, makes investment decisions for the
Fund, places orders to purchase and sell securities and other financial
instruments on behalf of the Fund and employs professional investment managers
and securities analysts who provide research services to the Fund. Bankers Trust
may utilize the expertise of any of its worldwide subsidiaries and affiliates to
assist it in its role as investment adviser. All orders for investment
transactions on behalf of the Fund are placed by Bankers Trust with
broker-dealers and other financial intermediaries that it selects, including
those affiliated with Bankers Trust. A Bankers Trust affiliate will be used in
connection with a purchase or sale of an investment for the Fund only if Bankers
Trust believes that the affiliate's charge for the transaction does not exceed
usual and customary levels. The Fund will not invest in obligations for which
Bankers Trust or any of its affiliates is the ultimate obligor or accepting
bank. The Fund may, however, invest in the obligations of correspondents or
customers of Bankers Trust.
Under its Investment Advisory Agreement with the Trust, Bankers Trust receives a
fee from the Fund computed daily and paid monthly at the annual rate of 0.65% of
the average daily net assets of the Fund.
Prior to the date of this Prospectus, Bankers Trust received an identical fee
pursuant to its Investment Advisory Agreement with the Capital Appreciation
Portfolio (the "Portfolio"). For the Portfolio's fiscal year ended September 30,
1995, Bankers Trust, after a partial waiver, was paid investment advisory fees
by the Portfolio equal to 0.52% of the average daily net assets of the
Portfolio.
Bankers Trust has been advised by its counsel that, in counsel's opinion,
Bankers Trust currently may perform the services for the Trust described in this
Prospectus and the SAI without violation of the Glass-Steagall Act or other
applicable banking
23
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laws or regulations. State laws on this issue may differ from the
interpretations of relevant Federal law and banks and financial institutions may
be required to register as dealers pursuant to state securities law.
Administrator
Under its Administration and Services Agreement with the Trust, Bankers Trust
calculates the net asset value of the Fund and generally assists the Board of
Trustees of the Trust in all aspects of the administration and operation of the
Trust. The Administration and Services Agreement provides for the Trust to pay
Bankers Trust a fee computed daily and paid monthly at the annual rate of 0.40%
of the average daily net assets of the Fund. For the fiscal years of each of the
Fund and the Portfolio ended September 30, 1995, after partial waivers, Bankers
Trust received administrative service fees of 0.25% of the average daily net
assets of the Fund and 0.05% of the average daily net assets of the Portfolio,
respectively.
Under the Administration and Services Agreement, Bankers Trust may delegate one
or more of its responsibilities to others, including Signature, at Bankers
Trust's expense. For more information, see the SAI.
Distributor
Under its Distribution Agreement with the Trust, Signature, as Distributor,
serves as the Trust's principal underwriter on a best efforts basis. In
addition, Signature provides the Trust with office facilities. Signature is a
wholly owned subsidiary of Signature Financial Group, Inc. ("SFG"). SFG and its
affiliates currently provide administration and distribution services for other
registered investment companies. The principal business address of SFG and
Signature is 6 St. James Avenue, Boston, Massachusetts 02116.
Pursuant to the terms of the Trust's Plan of Distribution pursuant to Rule 12b-1
under the 1940 Act (the "Plan"), Signature may seek reimbursement in an amount
not exceeding 0.20% of the Fund's average daily net assets annually for expenses
incurred in connection with any activities primarily intended to result in the
sale of the Fund's Shares, including, but not limited to: compensation to and
expenses (including overhead and telephone expenses) of account executives or
other employees of Signature who, as their primary activity, engage in or
support the distribution of Shares; printing of prospectuses, statements of
additional information and reports for other than existing Fund shareholders in
amounts in excess of that typically used in connection with the distribution of
Shares; costs of placing advertising in various media; services of parties other
than Signature or its affiliates in formulating sales literature; and
typesetting, printing and distribution of sales literature. All costs and
expenses in connection with implementing and operating the Plan will be paid by
the Fund, subject to the 0.20% of net assets limitation. All costs and expenses
associated with preparing the prospectus and statement of additional information
and in connection with printing them for and distributing them to existing
shareholders and regulatory authorities, which costs and expenses would not be
considered distribution expenses for purposes of the Plan, will also be
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paid by the Fund. Expenses incurred in connection with distribution activities
willbe identified to the Fund or the other series of the Trust involved,
although it is anticipated that some activities may be conducted on a Trust-wide
basis, with the result that those activities will not be identifiable to any
particular series. In the latter case, expenses will be allocated among the
series of the Trust on the basis of their relative net assets. It is not
expected that any payments will be made under the Plan in the foreseeable
future.
Service Agent
All shareholders must be represented by a Service Agent. Bankers Trust acts as a
Service Agent pursuant to its Administration and Services Agreement with the
Trust and receives no additional compensation from the Fund for such shareholder
services. The service fees of any other Service Agents, including broker-dealers
and other financial intermediaries, will be paid by Bankers Trust from its fees.
The services provided by a Service Agent may include establishing and
maintaining shareholder accounts, processing purchase and redemption
transactions, arranging for bank wires, performing shareholder sub-accounting,
answering client inquiries regarding the Trust, assisting clients in changing
dividend options, account designations and addresses, providing periodic
statements showing the client's account balance, transmitting proxy statements,
periodic reports, updated prospectuses and other communications to shareholders
and, with respect to meetings of shareholders, collecting, tabulating and
forwarding to the Trust executed proxies and obtaining such other information
and performing such other services as the Administrator or the Service Agent's
clients may reasonably request and agree upon with the Service Agent. Service
Agents may separately charge their clients additional fees only to cover
provision of additional or more comprehensive services not already provided
under the Administration and Services Agreement with Bankers Trust, or of the
type or scope not generally offered by a mutual fund, such as cash management
services or enhanced retirement or trust reporting. In addition, investors may
be charged a transaction fee if they effect transactions in Fund shares through
a broker or agent. Each Service Agent has agreed to transmit to shareholders,
who are its customers, appropriate disclosures of any fees that it may charge
them directly.
Custodian and Transfer Agent
Bankers Trust acts as Custodian of the assets of the Trust and serves as the
Transfer Agent for the Trust under the Administration and Services Agreement
with the Trust.
Organization of the Trust
The Trust was organized on February 28, 1992 under the laws of the Commonwealth
of Massachusetts. The Fund was established and designated as a separate series
of the Trust on June 23, 1992. The Trust offers Shares of beneficial interest of
separate series, par value $0.001 per share. On August 6, 1996, the Trustees of
the Trust established and designated two Classes of shares of beneficial
25
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- -------------------------------------------------------------------
interest of the Fund -- the Advisor Class of Shares and the Investment Class of
Shares. The shares of the other series of the Trust are offered through separate
prospectuses. The Board of Trustees may establish additional series or add
additional classes of shares to the Fund or other series of the Trust in the
future. No series of shares has any preference over any other series.
The Trust is an entity commonly known as a "Massachusetts business trust." Under
Massachusetts law, shareholders of such a business trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which both inadequate
insurance existed and the Trust itself was unable to meet its obligations. When
matters are submitted for shareholder vote, shareholders of a Fund will have one
vote for each full share held and proportionate, fractional votes for fractional
shares held. A separate vote of a Fund or Class is required on any matter
affecting the Fund or Class on which shareholders are entitled to vote.
Shareholders of a Fund or Class are not entitled to vote on Trust matters that
do not affect that Fund or Class, respectively. There normally will be no
meetings of shareholders for the purpose of electing Trustees unless and until
such time as less than a majority of Trustees holding office have been elected
by shareholders, at which time the Trustees then in office will call a
shareholders' meeting for the election of Trustees. Any Trustee may be removed
from office upon the vote of shareholders holding at least two-thirds of the
Trust's outstanding shares at a meeting called for that purpose. The Trustees
are required to call such a meeting upon the written request of shareholders
holding at least 10% of the Trust's outstanding shares.
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INVESTMENT ADVISER AND ADMINISTRATOR
BANKERS TRUST COMPANY
DISTRIBUTOR
SIGNATURE BROKER-DEALER SERVICES, INC.
CUSTODIAN AND TRANSFER AGENT
BANKERS TRUST COMPANY
INDEPENDENT ACCOUNTANTS
COOPERS & LYBRAND L.L.P.
COUNSEL
WILLKIE FARR & GALLAGHER
....................
No person has been authorized to give any information or to make any
representations with respect to the Fund or the Shares other than those
contained in the Trust's Prospectuses, its Statements of Additional Information
or the Trust's official sales literature in connection with the offering of the
Trust's shares and, if given or made, such other information or representations
must not be relied on as having been authorized by the Trust. This Prospectus
does not constitute an offer in any state in which, or to any person to whom,
such offer may not lawfully be made.
...........................
<PAGE>
BT0493D
BT Pyramid Mutual Funds
BT INVESTMENT EQUITY APPRECIATION FUND
SEPTEMBER 27, 1996
STATEMENT OF ADDITIONAL INFORMATION
BT Pyramid Mutual Funds (the "Trust") is an open-end management investment
company that offers investors a selection of investment portfolios, each having
distinct investment objectives and policies. This Statement of Additional
Information relates to BT Investment Equity Appreciation Fund (the "Fund") which
seeks capital growth over the long-term through investment primarily in
companies with a strong profit growth orientation. Current income is a secondary
goal.
Two classes of shares of the Fund, the Advisor Class and the Investment Class
(each a "Class" and collectively the "Classes") are offered for sale. The
Classes are offered for sale by Signature Broker-Dealer Services, Inc.
("Signature"), the Trust's Distributor, to clients and customers (including
affiliates and correspondents) of Bankers Trust Company ("Bankers Trust"), the
Fund's Adviser, and to clients and customers of other organizations.
This Statement of Additional Information is not a Prospectus and is only
authorized for distribution when preceded or accompanied by either the Advisor
Class' Prospectus or the Investment Class' Prospectus, both dated September 27,
1996. This Statement of Additional Information is intended to provide additional
information regarding the activities and operations of the Trust and should be
read in conjunction with the Prospectus. The Prospectus provides the basic
information investors should know before investing, and may be obtained without
charge by calling the Trust at the telephone number listed below or by
contacting any Service Agent. Capitalized terms not otherwise defined in this
Statement of Additional Information have the meanings accorded to them in the
Fund's Prospectus.
BANKERS TRUST COMPANY
Investment Adviser and Administrator
SIGNATURE BROKER-DEALER SERVICES, INC.
Distributor
6 St. James Avenue Boston, Massachusetts 02116 (800) 730-1313
<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
Investment Objectives
The investment objective of the Fund is described in the Fund's Prospectus.
There can, of course, be no assurance that the Fund will achieve its investment
objective.
Investment Policies
The following is a discussion of the various investments of and techniques
employed by the Fund:
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 to this
Statement of Additional Information.
Short-Term Instruments. When the Fund experiences large cash inflows through the
sale of securities and desirable equity securities, that are consistent with the
Fund's investment objective, which are unavailable in sufficient quantities or
at attractive prices, the Fund may 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 S&P or
Aa
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or higher by Moody's or, if unrated, of comparable quality in the opinion of
Bankers Trust; (iii) commercial paper; (iv) bank obligations, including
negotiable certificates of deposit, time deposits and banker's acceptances; and
(v) repurchase agreements. At the time the Fund invests in commercial paper,
bank obligations or repurchase agreements, the issuer of the issuer's parent
must have outstanding debt rated AA or higher by S&P or Aa or higher by Moody's
or outstanding commercial paper or bank obligations rated A-1 by S&P or Prime-1
by Moody's; or, if no such ratings are available, the instrument must be of
comparable quality in the opinion of Bankers Trust. These instruments may be
denominated in U.S. dollars or in foreign currencies.
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
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<PAGE>
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 Fund's
holdings under the supervision of the Trust's Board of Trustees. In reaching
liquidity decisions, the Adviser will consider, among other things, the
following factors: (i) the frequency of trades and quotes for the security; (ii)
the number of dealers and other potential purchasers or sellers of the security;
(iii) dealer undertakings to make a market in the security; and (iv) the nature
of the security and of the marketplace trades (e.g., the time needed to dispose
of the security, the method of soliciting offers and the mechanics of the
transfer).
Lending of Portfolio Securities. The Fund has the authority to lend portfolio
securities to brokers, dealers and other financial organizations. The Fund will
not lend securities to Bankers Trust, Signature or their affiliates. By lending
its securities, the 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 Fund will adhere to the
following conditions whenever its securities are loaned: (i) the Fund 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 Fund must be able to terminate the loan at any time; (iv)
the Fund must receive reasonable interest on the loan, as well as any dividends,
interest or other distributions on the loaned securities, and any increase in
market value; (v) the Fund may pay only reasonable custodian fees in connection
with the loan; and (vi) voting rights on the loaned securities may pass to the
borrower; provided, however, that if a material event adversely affecting the
investment occurs, the Board of Trustees must terminate the loan and regain the
right to vote the securities.
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, the
Fund
4
<PAGE>
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. The Fund 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. The Fund may enter into futures contracts which are based on debt
securities that are backed by the full faith and credit of the U.S. Government,
such as long-term U.S. Treasury Bonds, Treasury Notes, Government National
Mortgage Association modified pass-through mortgage-backed securities and
three-month U.S. Treasury Bills. The Fund may also enter into futures contracts
which are based on bonds issued by entities other than the U.S. Government.
At the same time a futures contract is purchased or sold, the Fund 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 Fund would provide or
receive cash that reflects any decline or increase in the contract's value.
At the time of delivery of securities pursuant to such a contract, adjustments
are made to recognize differences in value arising from the delivery of
securities with a different interest rate from that specified in the contract.
In some (but not many) cases, securities called for by a futures contract may
not have been issued when the contract was written.
Although futures contracts 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
5
<PAGE>
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 Fund 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 the
Fund holds or intends to acquire fixed-income securities, is to attempt to
protect the Fund from fluctuations in interest or foreign exchange rates without
actually buying or selling fixed-income securities or foreign currencies. For
example, if interest rates were expected to increase, the Fund might enter into
futures contracts for the sale of debt securities. Such a sale would have much
the same effect as selling an equivalent value of the debt securities owned by
the Fund. If interest rates did increase, the value of the debt security in the
Fund would decline, but the value of the futures contracts to the Fund would
increase at approximately the same rate, thereby keeping the net asset value of
the Fund from declining as much as it otherwise would have. The Fund could
accomplish similar results by selling debt securities and investing in bonds
with short maturities when interest rates are expected to increase. However,
since the futures market is more liquid than the cash market, the use of futures
contracts as an investment technique allows the Fund to maintain a defensive
position without having to sell its portfolio securities.
Similarly, when it is expected that interest rates may decline, futures
contracts may be purchased to attempt to hedge against anticipated purchases of
debt securities at higher prices. Since the fluctuations in the value of futures
contracts should be similar to those of debt securities, the Fund could take
advantage of the anticipated rise in the value of debt securities without
actually buying them until the market had stabilized. At that time, the futures
contracts could be liquidated and the Fund could then buy debt securities on the
cash market. To the extent the Fund enters into futures contracts for this
purpose, the assets in the segregated asset account maintained to cover the
Fund'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 Fund with respect to such futures contracts.
The ordinary spreads between prices in the cash and futures market, due to
differences in the nature of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the
6
<PAGE>
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 Fund, if the Adviser's investment
judgment about the general direction of interest rates is incorrect, the Fund's
overall performance would be poorer than if it had not entered into any such
contract. For example, if the Fund has hedged against the possibility of an
increase in interest rates which would adversely affect the price of debt
securities held in its portfolio and interest rates decrease instead, the Fund
will lose part or all of the benefit of the increased value of its debt
securities which it has hedged because it will have offsetting losses in its
futures positions. In addition, in such situations, if the Fund has insufficient
cash, it may have to sell debt securities from its portfolio to meet daily
variation margin requirements. Such sales of bonds may be, but will not
necessarily be, at increased prices which reflect the rising market. The Fund
may have to sell securities at a time when it may be disadvantageous to do so.
Options on Futures Contracts. The Fund may purchase and write options on futures
contracts for hedging purposes. The purchase of a call option on a futures
contract is similar in some respects to the purchase of a call option on an
individual security. Depending on the pricing of the option compared to either
the price of the futures contract upon which it is based or the price of the
underlying debt securities, it may or may not be less risky than ownership of
the futures contract or underlying debt securities. As with the purchase of
futures contracts, when the Fund 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 underlying 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, the Fund will retain the
full amount of the option premium which provides a partial hedge against any
decline that may have occurred in the Fund's holdings. The writing of a put
option on a futures contract constitutes a partial hedge against increasing
prices of the
7
<PAGE>
underlying security or foreign currency which is deliverable upon exercise of
the futures contract. If the futures price at expiration of the option is higher
than the exercise price, the Fund will retain the full amount of the option
premium which provides a partial hedge against any increase in the price of
securities which the Fund intends to purchase. If a put or call option the Fund
has written is exercised, the Fund will incur a loss which will be reduced by
the amount of the premium it receives. Depending on the degree of correlation
between changes in the value of its portfolio securities and changes in the
value of its futures positions, the Fund's losses from existing options on
futures may to some extent be reduced or increased by changes in the value of
portfolio securities.
The purchase of a put option on a futures contract is similar in some respects
to the purchase of protective put options on portfolio securities. For example,
the Fund may purchase a put option on a futures contract to hedge its portfolio
against the risk of rising interest rates.
The amount of risk the Fund assumes when it purchases an option on a futures
contract is the premium paid for the option plus related transaction costs. In
addition to the correlation risks discussed above, the purchase of an option
also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the option purchased.
The Board of Trustees has adopted the requirement that futures contracts and
options on futures contracts be used as a hedge and may also use stock index
futures on a continual basis to equitize cash so that the fund may maintain 100%
equity exposure. In addition to this requirement, the Board of Trustees has also
adopted a restriction that the Fund will not enter into any futures contracts or
options on futures contracts if immediately thereafter the amount of margin
deposits on all the futures contracts of the Fund and premiums paid on
outstanding options on futures contracts owned by the Fund (other than those
entered into for bona fide hedging purposes) would exceed 5% of the market value
of the total assets of the Fund.
Options on Foreign Currencies. The Fund may purchase and write options on
foreign currencies for hedging purposes in a manner similar to that in which
futures contracts on foreign currencies, or forward contracts, will be utilized.
For example, a decline in the dollar value of a foreign currency in which
portfolio securities are denominated will reduce the dollar value of such
securities, even if their value in the foreign currency remains constant. In
order to protect against such diminutions in the value of portfolio securities,
the Fund may purchase put options on the foreign currency. If the value of the
currency does decline, the Fund will have the right to sell such currency for a
fixed amount in dollars and will thereby offset, in whole or in
8
<PAGE>
part, the adverse effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby increasing the cost of such
securities, the Fund may purchase call options thereon. The purchase of such
options could offset, at least partially, the effects of the adverse movements
in exchange rates. As in the case of other types of options, however, the
benefit to the Fund deriving from purchases of foreign currency options will be
reduced by the amount of the premium and related transaction costs. In addition,
where currency exchange rates do not move in the direction or to the extent
anticipated, the Fund could sustain losses on transactions in foreign currency
options which would require it to forego a portion or all of the benefits of
advantageous changes in such rates.
The Fund may write options on foreign currencies for the same types of hedging
purposes. For example, where the Fund anticipates a decline in the dollar value
of foreign currency denominated securities due to adverse fluctuations in
exchange rates it could, instead of purchasing a put option, write a call option
on the relevant currency. If the expected decline occurs, the options will most
likely not be exercised, and the diminution in value of portfolio securities
will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, the Fund could write a
put option on the relevant currency which, if rates move in the manner
projected, will expire unexercised and allow the Fund to hedge such increased
cost up to the amount of the premium. As in the case of other types of options,
however, the writing of a foreign currency option will constitute only a partial
hedge up to the amount of the premium, and only if rates move in the expected
direction. If this does not occur, the option may be exercised and the Fund
would be required to purchase or sell the underlying currency at a loss which
may not be offset by the amount of the premium. Through the writing of options
on foreign currencies, the Fund also may be required to forego all or a portion
of the benefits which might otherwise have been obtained from favorable
movements in exchange rates.
The Fund may write covered call options on foreign currencies. A call option
written on a foreign currency by the Fund is "covered" if the Fund owns the
underlying foreign currency covered by the call or has an absolute and immediate
right to acquire that foreign currency without additional cash consideration (or
for additional cash consideration held in a segregated account by its Custodian)
upon conversion or exchange of other foreign currency held in its portfolio. A
call option is also covered if the Fund has a call on the same foreign
9
<PAGE>
currency and in the same principal amount as the call written where the exercise
price of the call held (a) is equal to or less than the exercise price of the
call written or (b) is greater than the exercise price of the call written if
the difference is maintained by the Fund in cash, U.S. Government securities and
other high quality liquid debt securities in a segregated account with its
custodian.
The Fund also may write call options on foreign currencies that are not covered
for cross-hedging purposes. A call option on a foreign currency is for
cross-hedging purposes if it is not covered, but is designed to provide a hedge
against a decline in the U.S. dollar value of a security which the Fund owns or
has the right to acquire and which is denominated in the currency underlying the
option due to an adverse change in the exchange rate. In such circumstances, the
Fund collateralizes the option by maintaining in a segregated account with its
custodian, cash or 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 the Fund in futures
contracts, options on foreign currencies and forward contracts are not traded on
contract markets regulated by the CFTC or (with the exception of certain foreign
currency options) by the SEC. To the contrary, such instruments are traded
through financial institutions acting as 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
10
<PAGE>
options traded on a national securities exchange may be more readily available
than in the over-the-counter market, potentially permitting the Fund to
liquidate open positions at a profit prior to exercise or expiration, or to
limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however, is
subject to the risks of the availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effects of other political and
economic events. In addition, exchange-traded options on foreign currencies
involve certain risks not presented by the over-the-counter market. For example,
exercise and settlement of such options must be made exclusively through the
OCC, which has established banking relationships in applicable foreign countries
for this purpose. As a result, the OCC may, if it determines that foreign
governmental restrictions or taxes would prevent the orderly settlement of
foreign currency option exercises, or would result in undue burdens on the OCC
or its clearing member, impose special procedures on exercise and settlement,
such as technical changes in the mechanics of delivery of currency, the fixing
of dollar settlement prices or prohibitions on exercise.
As in the case of forward contracts, certain options on foreign currencies are
traded over-the-counter and involve liquidity and credit risks which may not be
present in the case of exchange-traded currency options. The Fund's ability to
terminate over-the-counter options will be more limited than with
exchange-traded options. It is also possible that broker-dealers participating
in over-the-counter options transactions will not fulfill their obligations.
Until such time as the staff of the SEC changes its position, the Fund will
treat purchased over-the-counter options and assets used to cover written
over-the-counter options as illiquid securities. 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.
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<PAGE>
Options on Securities. The Fund may write (sell) covered call and put options to
a limited extent on its portfolio securities ("covered options") in an attempt
to increase income. However, the Fund may forgo the benefits of appreciation on
securities sold or may pay more than the market price on securities acquired
pursuant to call and put options written by the Fund.
When the Fund writes a covered call option, it gives the purchaser of the option
the right to buy the underlying security at the price specified in the option
(the "exercise price") by exercising the option at any time during the option
period. If the option expires unexercised, the Fund will realize income in an
amount equal to the premium received for writing the option. If the option is
exercised, a decision over which the Fund has no control, the Fund must sell the
underlying security to the option holder at the exercise price. By writing a
covered call option, the Fund forgoes, in exchange for the premium less the
commission ("net premium"), the opportunity to profit during the option period
from an increase in the market value of the underlying security above the
exercise price.
When the Fund writes a covered put option, it gives the purchaser of the option
the right to sell the underlying security to the Fund at the specified exercise
price at any time during the option period. If the option expires unexercised,
the Fund will realize income in the amount of the premium received for writing
the option. If the put option is exercised, a decision over which the Fund has
no control, the Fund must purchase the underlying security from the option
holder at the exercise price.
By writing a covered put option, the Fund, in exchange for the net premium
received, accepts the risk of a decline in the market value of the underlying
security below the exercise price. The Fund will only write put options
involving securities for which a determination is made at the time the option is
written that the Fund wishes to acquire the securities at the exercise price.
The Fund may terminate its obligation as the writer of a call or put option by
purchasing an option with the same exercise price and expiration date as the
option previously written. This transaction is called a "closing purchase
transaction." The Fund will realize a profit or loss from a closing purchase
transaction if the amount paid to purchase an option is less or more, as the
case may be, than the amount received from the sale thereof. To close out a
position as a purchaser of an option, the Fund, may make a "closing sale
transaction" which involves liquidating the Fund's position by selling the
option previously purchased. Where the Fund cannot effect a closing purchase
transaction, it may be forced to incur brokerage commissions or dealer spreads
in selling securities it receives or it may be forced to hold underlying
securities until an option is exercised or expires.
When the Fund writes an option, an amount equal to the net premium received by
the Fund is included in the liability section
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of the Fund's Statement of Assets and Liabilities as a deferred credit. The
amount of the deferred credit will be subsequently marked to market to reflect
the current market value of the option written. The current market value of a
traded option is the last sale price or, in the absence of a sale, the mean
between the closing bid and asked price. If an option expires on its stipulated
expiration date or if the Fund enters into a closing purchase transaction, the
Fund will realize a gain (or loss if the cost of a closing purchase transaction
exceeds the premium received when the option was sold), and the deferred credit
related to such option will be eliminated. If a call option is exercised, the
Fund will realize a gain or loss from the sale of the underlying security and
the proceeds of the sale will be increased by the premium originally received.
The writing of covered call options may be deemed to involve the pledge of the
securities against which the option is being written. Securities against which
call options are written will be segregated on the books of the custodian for
the Fund.
The Fund may purchase call and put options on any securities in which it may
invest. The Fund would normally purchase a call option in anticipation of an
increase in the market value of such securities. The purchase of a call option
would entitle the Fund, in exchange for the premium paid, to purchase a security
at a specified price during the option period. The Fund would ordinarily have a
gain if the value of the securities increased above the exercise price
sufficiently to cover the premium and would have a loss if the value of the
securities remained at or below the exercise price during the option period.
The Fund would normally purchase put options in anticipation of a decline in the
market value of securities in its portfolio ("protective puts") or securities of
the type in which it is permitted to invest. The purchase of a put option would
entitle the Fund, in exchange for the premium paid, to sell a security, which
may or may not be held in the Fund's holdings, at a specified price during the
option period. The purchase of protective puts is designed merely to offset or
hedge against a decline in the market value of the Fund's holdings. Put options
also may be purchased by the Fund for the purpose of affirmatively benefiting
from a decline in the price of securities which the Fund does not own. The Fund
would ordinarily recognize a gain if the value of the securities decreased below
the exercise price sufficiently to cover the premium and would recognize a loss
if the value of the securities remained at or above the exercise price. Gains
and losses on the purchase of protective put options would tend to be offset by
countervailing changes in the value of underlying portfolio securities.
The Fund has adopted certain other nonfundamental policies concerning option
transactions which are discussed below. The Fund's activities in options may
also be restricted by the requirements of the Internal Revenue Code of 1986, as
amended
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(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 Fund 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 Fund will purchase such
options only from broker-dealers who are primary government securities dealers
recognized by the Federal Reserve Bank of New York and who agree to (and are
expected to be capable of) entering into closing transactions, although there
can be no guarantee that any such option will be liquidated at a favorable price
prior to expiration. The Adviser will monitor the creditworthiness of dealers
with whom the Fund enters into such options transactions under the general
supervision of the Trust's Board of Trustees.
Options on Securities Indices. In addition to options on securities, the Fund
may also purchase and write (sell) call and put options on securities indices.
Such options give the holder the right to receive a cash settlement during the
term of the option based upon the difference between the exercise price and the
value of the index. Such options will be used for the purposes described above
under "Options on Securities."
Options on securities indices entail risks in addition to the risks of options
on securities. The absence of a liquid secondary market to close out options
positions on securities indices is more likely to occur, although the Fund
generally will only purchase or write such an option if the Adviser believes the
option can be closed out.
Use of options on securities indices also entails the risk that trading in such
options may be interrupted if trading in certain securities included in the
index is interrupted. The Fund will not purchase such options unless the Adviser
believes the market is sufficiently developed such that the risk of trading in
such options is no greater than the risk of trading in options on securities.
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<PAGE>
Price movements in the Fund's holdings may not correlate precisely with
movements in the level of an index and, therefore, the use of options on indices
cannot serve as a complete hedge. Because options on securities indices require
settlement in cash, the Adviser may be forced to liquidate portfolio securities
to meet settlement obligations.
Forward Foreign Currency Exchange Contracts. Because the Fund may buy and sell
securities denominated in currencies other than the U.S. dollar and receives
interest, dividends and sale proceeds in currencies other than the U.S. dollar,
the 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. The Fund 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 the Fund to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract. Forward foreign currency exchange
contracts establish an exchange rate at a future date. These contracts are
transferable in the interbank market conducted directly between currency traders
(usually large commercial banks) and their customers. A forward foreign currency
exchange contract generally has no deposit requirement and is traded at a net
price without commission. The Fund maintains with its custodian a segregated
account of high grade liquid assets in an amount at least equal to its
obligations under each forward foreign currency exchange contract. Neither spot
transactions nor forward foreign currency exchange contracts eliminate
fluctuations in the prices of the Fund's securities or in foreign exchange
rates, or prevent loss if the prices of these securities should decline.
The Fund may enter into foreign currency hedging transactions in an attempt to
protect against changes in foreign currency exchange rates between the trade and
settlement dates of specific securities transactions or changes in foreign
currency exchange rates that would adversely affect the portfolio position or an
anticipated investment position. Since consideration of the prospect for
currency parities will be incorporated into Bankers Trust's long-term investment
decisions, the Fund will not routinely enter into 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 Fund's best interest. Although these transactions tend to minimize the
risk of loss due to a decline in the value of the hedged currency, at the same
time
15
<PAGE>
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
Fund'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 Fund than if it had not entered into such contracts.
The use of foreign currency forward contracts may not eliminate fluctuations in
the underlying U.S. dollar equivalent value of the prices or rates of return on
the Fund's foreign currency denominated portfolio securities and the use of such
techniques will subject the Fund to certain risks.
The matching of the increase in value of a forward contract and the decline in
the U.S. dollar equivalent value of the foreign currency denominated asset that
is the subject of the hedge generally will not be precise. In addition, the Fund
may not always be able to enter into foreign currency forward contracts at
attractive prices and this will limit the Fund's ability to use such contract to
hedge or cross-hedge its assets. Also, with regard to the Fund's use of
cross-hedges, there can be no assurance that historical correlations between the
movement of certain foreign currencies relative to the U.S. dollar will
continue. Thus, at any time poor correlation may exist between movements in the
exchange rates of the foreign currencies underlying the Fund's cross-hedges and
the movements in the exchange rates of the foreign currencies in which the
Fund's assets that are the subject of such cross-hedges are denominated.
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 the Fund, an
obligation may cease to be rated or its rating may be reduced below the minimum
required for purchase by the Fund. Neither event would require the Fund to
eliminate the
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<PAGE>
obligation from its portfolio, but Bankers Trust will consider such an event in
its determination of whether the Fund should continue to hold the obligation. A
description of the ratings used herein and in the Prospectus is set forth in the
Appendix to this Statement of Additional Information.
Investment Restrictions
The following investment restrictions are "fundamental policies" of the Fund and
may not be changed without the approval of a "vote of a majority of the
outstanding voting securities" of the Fund. "A vote of a majority of the
outstanding voting securities" under the Investment Company Act of 1940, as
amended (the "1940 Act"), and as used in this Statement of Additional
Information and the Prospectus, means, the lesser of (i) 67% or more of the
outstanding shares of the Fund present at a meeting, if the holders of more than
50% of the outstanding shares of the Fund are present or represented by proxy or
(ii) more than 50% of the outstanding shares of the Fund.
As a matter of fundamental policy, the Trust, with respect to the Fund, may not
(except that no investment restriction of the Fund shall prevent the Fund from
investing all of its investable assets in an open-end investment company with
substantially the same investment objective):
(1) borrow money or mortgage or hypothecate assets of the Fund, except
that in an amount not to exceed 1/3 of the current value of the Fund's 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 "State and Federal Restrictions"
below ;
(2) underwrite securities issued by other persons except insofar as the
Trust or the Fund may technically be deemed an underwriter under the 1933 Act in
selling the portfolio security;
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(3) make loans to other persons except: (a) through the lending of the
Fund's portfolio securities and provided that any such loans not exceed 30% of
the Fund's net assets (taken at market value); (b) through the use of repurchase
agreements or the purchase of short-term obligations; or (c) by purchasing a
portion of an issue of debt securities of types distributed publicly or
privately (under current regulations, the Fund's fundamental policy with respect
to 20% risk weighing for financial institutions prevent the Fund from engaging
in securities lending);
(4) purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or interests therein),
interests in oil, gas or mineral leases, commodities or commodity contracts
(except futures and option contracts) in the ordinary course of business (except
that the Trust may hold and sell, for the Fund's portfolio, real estate acquired
as a result of the Fund's ownership of securities);
(5) concentrate its investments in any particular industry (excluding
U.S. Government securities), but if it is deemed appropriate for the achievement
of the Fund's investment objective, 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.
State and Federal Restrictions. In order to comply with certain state and
Federal statutes and policies, the Trust, on behalf of the Fund will not as a
matter of operating policy:
(i) borrow money (including through reverse repurchase or forward
roll transactions) for any purpose in excess of 5% of the Fund's total assets
(taken at cost), except that the 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 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
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<PAGE>
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 Fund, and the value of securities of any one issuer in which the Fund is
short exceeds the lesser of 2.0% of the value of the Fund's net assets or 2.0%
of the securities of any class of any U.S. issuer and, provided that short sales
may be made only in those securities which are fully listed on a national
securities exchange or a foreign exchange (This provision does not include the
sale of securities that the Fund contemporaneously owns or where the Fund has
the right to obtain securities equivalent in kind and amount to those sold,
i.e., short sales against the box.) (The 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 Fund if such purchase at the time thereof
would cause: (a) more than 10% of the Fund's total assets (taken at the greater
of cost or market value) to be invested in the securities of such issuers; (b)
more than 5% of the Fund's total assets (taken at the greater of cost or market
value) to be invested in any one investment company; or (c) more than 3% of the
outstanding voting securities of any such issuer to be held for the Fund;
provided further that, except in the case of a merger or consolidation, the Fund
shall not purchase any securities of any open-end investment company unless (1)
the investment adviser waives the investment advisory fee with respect to assets
invested in other open-end investment companies and (2) the Fund incurs no sales
charge in connection with the investment;
(vii) invest more than 10% of the 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 5% in securities that are issued by issuers which
(including predecessors) have been in operation less than three years (other
than U.S. Government securities);
(ix) invest more than 15% of the Fund's net assets (taken at the greater
of cost or market value) in
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securities that are illiquid or not readily marketable excluding (a) Rule 144A
securities that have been determined to be liquid by the Board of Trustees; and
(b) commercial paper that is sold under section 4(2) of the 1933 Act which: (i)
is not traded flat or in default as to interest or principal; and (ii) is rated
in one of the two highest categories by at least two nationally recognized
statistical rating organizations and the Trust's Board of Trustees have
determined the commercial paper to be liquid; or (iii) is rated in one of the
two highest categories by one nationally recognized statistical rating agency
and the Trust's Board of Trustees has determined that the commercial paper is of
equivalent quality and is liquid;
(x) invest in securities issued by an issuer any of whose officers,
directors, trustees or security holders is an officer or Trustee of the Trust,
or is an officer or director of the Adviser, if after the purchase of the
securities of such issuer for the 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;
(xi) invest in warrants (other than warrants acquired by the Fund as
part of a unit or attached to securities at the time of purchase) if, as a
result, the investments (valued at the lower of cost or market) would exceed 5%
of the value of the Fund's net assets or if, as a result, more than 2% of the
Fund's net assets would be invested in warrants not listed on a recognized
United States or foreign stock exchange, to the extent permitted by applicable
state securities laws;
(xii) 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 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
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<PAGE>
options are sold shall not exceed 5% of the Fund's net assets; (c) the
securities subject to the exercise of the call written by the Fund must be owned
by the Fund at the time the call is sold and must continue to be owned by the
Fund until the call has been exercised, has lapsed, or the Fund has purchased a
closing call, and such purchase has been confirmed, thereby extinguishing the
Fund's obligation to deliver securities pursuant to the call it has sold; and
(d) at the time a put is written, the 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 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 Fund has purchased a closing put, which is a put of the same series as the
one previously written); and
(xiii) 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 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 Fund's total assets.
There will be no violation of any investment restrictions or policies (except
with respect to illiquid securities) if that restriction is complied with at the
time the relevant action is taken, notwithstanding a later change in the market
value of an investment, in net or total assets, or in the change of securities
rating of the investment, or any other later change.
Portfolio Transactions and Brokerage Commissions
The Adviser is responsible for decisions to buy and sell securities, futures
contracts and options on such securities and futures for the Fund, the selection
of brokers, dealers and futures commission merchants to effect transactions and
the negotiation of brokerage commissions, if any. Broker-dealers may receive
brokerage commissions on portfolio transactions, including options, futures and
options on futures transactions and the purchase and sale of underlying
securities upon the exercise of options. Orders may be directed to any
broker-dealer or futures commission merchant, including to the extent and in the
manner permitted by applicable law, Bankers Trust or its
21
<PAGE>
subsidiaries or affiliates. Purchases and sales of certain portfolio securities
on behalf of the Fund are frequently placed by the Adviser with the issuer or a
primary or secondary market-maker for these securities on a net basis, without
any brokerage commission being paid by the Fund. Trading does, however, involve
transaction costs. Transactions with dealers serving as market-makers reflect
the spread between the bid and asked prices. Transaction costs may also include
fees paid to third parties for information as to potential purchasers or sellers
of securities. Purchases of underwritten issues may be made which will include
an underwriting fee paid to the underwriter.
The Adviser seeks to evaluate the overall reasonableness of the brokerage
commissions paid (to the extent applicable) in placing orders for the purchase
and sale of securities for the Fund taking into account such factors as price,
commission (negotiable in the case of national securities exchange
transactions), if any, size of order, difficulty of execution and skill required
of the executing broker-dealer through familiarity with commissions charged on
comparable transactions, as well as by comparing commissions paid by the Fund to
reported commissions paid by others. The Adviser reviews on a routine basis
commission rates, execution and settlement services performed, making internal
and external comparisons.
The Adviser is authorized, consistent with Section 28(e) of the Securities
Exchange Act of 1934, as amended, when placing portfolio transactions for the
Fund with a broker to pay a brokerage commission (to the extent applicable) in
excess of that which another broker might have charged for effecting the same
transaction on account of the receipt of research, market or statistical
information. The term "research, market or statistical information" includes
advice as to the value of securities; the advisability of investing in,
purchasing or selling securities; the availability of securities or purchasers
or sellers of securities; and furnishing analyses and reports concerning
issuers, industries, securities, economic factors and trends, portfolio strategy
and the performance of accounts.
Consistent with the policy stated above, the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. and such other policies as the
Trustees of the Trust may determine, the Adviser may consider sales of shares of
the Trust and of other investment company clients of Bankers Trust as a factor
in the selection of broker-dealers to execute portfolio transactions. Bankers
Trust will make such allocations if commissions are comparable to those charged
by nonaffiliated, qualified broker-dealers for similar services.
Higher commissions may be paid to firms that provide research services to the
extent permitted by law. Bankers Trust may use this research information in
managing the Fund's assets, as well as the assets of other clients.
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<PAGE>
Except for implementing the policies stated above, there is no intention to
place portfolio transactions with particular brokers or dealers or groups
thereof. In effecting transactions in over-the-counter securities, orders are
placed with the principal market-makers for the security being traded unless,
after exercising care, it appears that more favorable results are available
otherwise.
Although certain research, market and statistical information from brokers and
dealers can be useful to the Fund and to the Adviser, it is the opinion of the
management of the Fund that such information is only supplementary to the
Adviser's own research effort, since the information must still be analyzed,
weighed and reviewed by the Adviser's staff. Such information may be useful to
the Adviser in providing services to clients other than the Fund, and not all
such information is used by the Adviser in connection with the Fund. Conversely,
such information provided to the Adviser by brokers and dealers through whom
other clients of the Adviser effect securities transactions may be useful to the
Adviser in providing services to the Fund.
In certain instances there may be securities which are suitable for the Fund as
well as for one or more of the Adviser's other clients. Investment decisions for
the Fund and for the Adviser's other clients are made with a view to achieving
their respective investment objectives. It may develop that a particular
security is bought or sold for only one client even though it might be held by,
or bought or sold for, other clients. Likewise, a particular security may be
bought for one or more clients when one or more clients are selling that same
security. Some simultaneous transactions are inevitable when several clients
receive investment advice from the same investment adviser, particularly when
the same security is suitable for the investment objectives of more than one
client. When two or more clients are simultaneously engaged in the purchase or
sale of the same security, the securities are allocated among clients in a
manner believed to be equitable to each. It is recognized that in some cases
this system could have a detrimental effect on the price or volume of the
security as far as the Fund in concerned. However, it is believed that the
ability of the Fund to participate in volume transactions will produce better
executions for the Fund.
Prior to the date of this Statement of Additional Information, the Fund sought
to achieve the investment objective by investing all of its investable assets in
the Capital Appreciation Portfolio (the "Portfolio"), which is a separate
registered investment company with an identical investment objective. The Fund's
fiscal year end is September 30. Formerly, both the Fund's and the Portfolio's
fiscal year end was December 31. For the six months ended March 31, 1996
(unaudited), the period from January 1, 1995 to September 30,
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1995, the fiscal year ended December 31, 1994 and the period March 9, 1993
(commencement of operations) through December 31, 1993, the Portfolio paid
brokerage commissions in the amount of $451,235, $247,868, $162,941 and $58,016,
respectively.
PERFORMANCE INFORMATION
Standard Performance Information
From time to time, quotations of the Class' performance may be included in
advertisements, sales literature or sha reholder reports. These performance
figures are calculated in the following manner:
Total return: A Class' 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 Class may also calculate total return figures which
represent aggregate performance over a period or year-by-year
performance.
Prior to the date of this Statement of Additional Information, the Fund did not
offer classes of shares and the performance of the Investment Class was that of
the Fund's. The Investment Class' total return for the one year ended March 31,
1996 was 30.73%. The Investment Class' cumulative total return for the period
from commencement of operations, October 12, 1993, through March 31, 1996 was
15%. The Investment Class' average annual total return for the period from
commencement of operations, October 12, 1993, through March 31, 1996 was 41.19%.
Performance Results: Any total return quotation provided for the Fund
should not be considered as representative of the performance of the
Fund in the future since the net asset value and public offering price
of shares of the Fund will vary based not only on the type, quality and
maturities of the securities held in its portfolio, but also on changes
in the current value of such securities and on changes in the expenses
of the Fund. These factors and possible differences in the methods used
to calculate total return should be considered when comparing the total
return of the Fund to total returns published for other investment
companies or other investment vehicles. Total return reflects the
performance of both principal and income.
Comparison of Fund Performance
Comparison of the quoted nonstandardized performance of various investments is
valid only if performance is calculated in the same manner. Since there are
Different methods of calculating performance, investors should consider the
effect of the methods used to calculate performance when comparing performance
of the Fund with performance quoted with respect to other investment companies
or types of investments.
In connection with communicating its performance to current or prospective
shareholders, the Fund also may compare these figures to the performance of
other mutual funds tracked by mutual fund rating services or to unmanaged
indices which may assume reinvestment of dividends but generally do not reflect
deductions for administrative and management costs. Evaluations of the Fund's
performance made by independent sources may also be used in advertisements
concerning the Fund. Sources for the Fund's performance information could
include the following:
Asian Wall Street Journal, Barron's, Business Week, Changing Times, The
Kiplinger Magazine, Consumer Digest, Financial Times, Financial World, Forbes,
Fortune, Global Investor, Investor's Daily, Lipper Analytical Services, Inc.'s
Mutual Fund Performance Analysis, Money, Morningstar Inc., New York Times,
Personal Investing News, Personal Investor, Success, U.S. News and World Report,
Value Line, Wall Street Journal, Weisenberger Investment Companies Services and
Working Women.
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
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are valued by Bankers Trust pursuant to procedures adopted by the Trust'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 the Fund purchases securities which are restricted as to
resale or for which current market quotations are not readily available, the
Adviser will value such securities based upon all relevant factors as outlined
in FRR 1.
The Trust, on behalf of the Fund, reserves the right, if conditions exist which
make cash payments undesirable, to honor any request for redemption or
withdrawal by making payment in whole or in part in readily marketable
securities chosen by the Trust, and valued as they are for purposes of computing
the Class' net asset values (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, has elected, however, to be governed by Rule 18f-1 under the
1940 Act as a result of which the Fund is obligated to redeem shares with
respect to any one investor during any 90-day period, solely in cash up to the
lesser of $250,000 or 1% of the net asset value of the Fund's Classes at the
beginning of the period.
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The Fund may, at its own option, accept securities in payment for shares of a
class. 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 Fund. In addition, securities accepted in payment for shares
must: (i) meet the investment objective and policies of the acquiring Fund; (ii)
be acquired by the applicable Fund for investment and not for resale (other than
for resale to the Fund); (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
The Board of Trustees is composed of persons experienced in financial matters
who meet throughout the year to oversee the activities of the Fund. In addition,
the Trustees review contractual arrangements with companies that provide
services to the Fund and review the Fund's performance.
The Trustees and officers of the Trust, their 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 6 St. James Avenue,
Boston, Massachusetts.
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Trustees of the Trust
HARRY VAN BENSCHOTEN (age 67) -- Trustee; retired (since 1987); Director,
Canada Life Insurance Corporation of New York and Competitive Technologies,
Inc., a public company listed on the American Stock Exchange; Corporate Vice
President, Newmont Mining Corporation (prior to 1987). His address is 6581
Ridgewood Drive, Naples, Florida 33963.
MARTIN J. GRUBER (age 58) -- Trustee; Chairman of the Finance Department
and Nomura Professor of Finance, Leonard N. Stern School of Business, New York
University (since 1964). His address is 229 S. Irving Street, Ridgewood, New
Jersey 07450.
KELVIN J. LANCASTER (age 71) -- Trustee; Professor, Department of
Economics, Columbia University. His address is 35 Claremont Avenue, New York,
New York 10027.
PHILIP W. COOLIDGE* (age 44) -- President and Trustee; Chairman, Chief
Executive Officer and President, Signature Financial Group, Inc. ("SFG") (since
December, 1988) and Signature (since April, 1989).
Officers of the Trust
JOHN R. ELDER (age 47) -- Treasurer; Vice President, SFG (since April,
1995); Treasurer, Phoenix Family of Mutual Funds (prior to April, 1995); Audit
Manager, Price Waterhouse (prior to1983).
BARBARA M. O'DETTE (age 36) -- Assistant Treasurer; Assistant Treasurer,
SFG (since December, 1988); and Signature (since April, 1989).
THOMAS M. LENZ (age 38) -- Secretary; Senior Vice President and Associate
General Counsel, SFG (since November, 1989); Assistant Secretary, Signature
(since February, 1991).
LINDA T. GIBSON (age 31) -- Assistant Secretary; Vice President, Global
Product Management and Assistant Secretary, SFG (since May, 1992); Assistant
Secretary, Signature (since October, 1992).
MOLLY S. MUGLER (age 44) -- Assistant Secretary; Legal Counsel and
Assistant Secretary, SFG (since December, 1988);Assistant Secretary, Signature
(since April, 1989).
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Messrs. Coolidge, Elder and Lenz and Mss. Gibson, Mugler and O'Dette also
hold similar positions for other investment companies for which Signature or an
affiliate serves as the principal underwriter.
No person who is an officer or director of Bankers Trust is an officer or
Trustee of the Trust. No director, officer or employee of Signature or any of
its affiliates will receive any compensation from the Trust for serving as an
officer or Trustee of the Trust. The Trust pays each Trustee who is not a
director, officer or employee of the Adviser, the Distributor, the Administrator
or any of their affiliates an annual fee of $10,000, respectively, per annum
plus $1,250, respectively, per meeting attended and reimburses them for travel
and out-of-pocket expenses.
For the six months ended March 31, 1996 (unaudited) and the period January 1,
1995 to September 30, 1995, the Fund incurred Trustees fees equal to $4,322 and
$3,980, respectively. For the same period, the Trustees of the Portfolio accrued
Trustees fees equal to $1,532 and $1,107, respectively.
The following table reflects fees paid to the Trustees of the Trust and
Portfolio for the year ended September 30, 1995.
Trustee Compensation Table
Aggregate Total Compensation
Name of Person, Compensation from Fund Complex
Position from Trust Paid to Trustees
Harry Van Benschoten, $12,500 $12,500
Trustee of Trust
Martin J. Gruber, $12,500 $12,500
Trustee of Trust
Kelvin J. Lancaster, $12,500 $12,500
Trustee of Trust
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Philip W. Coolidge, none none
Trustee of Trust
and Portfolio
Philip Saunders, Jr, none $12,500
Trustee of Portfolio
Charles P. Biggar, none $12,500
Trustee of Portfolio
S. Leland Dill, none $12,500
Trustee of 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.
As of September 17, 1996, the Trustees and officers of the Trust owned in
the aggregate less than 1% of the shares of the Fund or Trust (all series taken
together). As of the same date, Bankers Trust on behalf of its customers is the
record owner of 48.53% of the outstanding shares of the Fund. As of the same
date, Northern Telecom c/o Bankers Trust Co., 34 Exchange Place, Jersey City,
New Jersey was the beneficial owner of 48.92% of the outstanding shares of the
Fund. Shareholders owning 25% or more of the outstanding shares of the Fund may
diminish the voting power of other shareholders.
Investment Adviser
Under the terms of the investment advisory agreement with Bankers Trust (the
"Advisory Agreement"), Bankers Trust manages the Fund subject to the supervision
and direction of the Board of Trustees of the Trust. Bankers Trust will: (i) act
in strict conformity with the Trust'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 Fund in accordance with the Fund's investment objective,
restrictions and policies; (iii) make investment decisions for the Fund; and
(iv) place purchase and sale orders for securities and other financial
instruments on behalf of the Fund.
Bankers Trust bears all expenses in connection with the performance of services
under the Advisory Agreement. The Trust bears certain other expenses incurred in
its operation, including: taxes, interest, brokerage fees and commissions, if
any; fees of Trustees of the Trust who are not officers, directors or employees
of Bankers Trust, Signature or any of their affiliates; SEC fees and state Blue
Sky qualification fees; charges of custodians and transfer and dividend
disbursing agents; certain insurance premiums; outside auditing and legal
expenses; costs of maintenance of corporate existence; costs
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attributable to investor services, including, without limitation, telephone and
personnel expenses; costs of preparing and printing prospectuses and statements
of additional information for regulatory purposes and for distribution to
existing shareholders; costs of shareholders' reports and meetings of
shareholders, officers and Trustees of the Trust; and any extraordinary
expenses.
For the six months ended March 31, 1996 (unaudited), the period from January 1,
1995 to September 30, 1995, the year ended December 31, 1994 and the period from
March 9, 1993 (commencement of operations of the Portfolio) through December 31,
1993, Bankers Trust aggregated $546,623, $482,453, $329,399 and $67,695,
respectively, in compensation for investment advisory services provided to the
Portfolio. During the same periods, Bankers Trust reimbursed $148,398, $131,702,
$114,930 and $43,137, respectively, to the 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 Fund,
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
Fund that, in making its investment decisions, it does not obtain or use
material inside information in its possession or in the possession of any of its
affiliates. In making investment recommendations for the Fund, Bankers Trust
will not inquire or take into consideration whether an issuer of securities
proposed for purchase or sale by the Fund is a customer of Bankers Trust, its
parent or its subsidiaries or affiliates and, in dealing with its customers,
Bankers Trust, its parent, subsidiaries and affiliates will not inquire or take
into consideration whether securities of such customers are held by any fund
managed by Bankers Trust or any such affiliate.
Each Class' 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 reasonably deem necessary for the proper administration of
the Trust. Bankers Trust will: generally assist in all aspects of the Fund'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
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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")
Signature performs such sub-administration duties for the Trust as from time to
time may be agreed upon by Bankers Trust and Signature. The Sub-Administration
Agreement provides that Signature will receive such compensation as from time to
time may be agreed upon by Signature and Bankers Trust. All such compensation
will be paid by Bankers Trust.
For the six months ended March 31, 1996 (unaudited), the period from January 1,
1995 to September 30, 1995, the year ended December 31, 1994 and the period from
October 12, 1993 (commencement of operations) through December 31, 1993, Bankers
Trust aggregated $217,947, $155,327, $101,002 and $14,862, respectively, in
compensation for administrative and other services provided to the Fund. During
the same periods, Bankers Trust reimbursed $45,396, $57,346, $59,973 and
$10,467, respectively, to the Fund to cover expenses.
For the six months ended March 31, 1996 (unaudited), the period from January 1,
1995 to September 30, 1995, the year ended December 31, 1994 and the period from
March 9, 1993 (commencement of operations of the Portfolio) through December 31,
1993, Bankers Trust aggregated $84,096, $74,224, $50,677 and $10,415,
respectively, in compensation for administrative and other services provided to
the Portfolio.
Bankers Trust has agreed that if in any fiscal year the aggregate expenses of
the Fund (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 the Fund, Bankers Trust will reimburse the Fund for the
excess expense to the extent required by state law. As of the date of this
Statement of Additional Information, the most restrictive annual expense
limitation applicable to any Fund or Class is 2.50% of the Fund's or Class'
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first $30 million of average annual net assets, 2.00% of the next $70 million of
average annual net assets and 1.50% 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 pursuant to the administration and services agreements. As
Custodian, it holds the Fund's assets. Bankers Trust also serves as transfer
agent of the Trust pursuant to the respective administration and services
agreement. Under its transfer agency agreement with the Trust, Bankers Trust
maintains the shareholder account records for each Class of Shares of 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 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 Fund contemplated by the Advisory Agreement and
other activities for the Fund described in the Prospectus and this Statement of
Additional Information without violation of the Glass-Steagall Act or other
applicable banking laws or regulations. However, counsel has pointed out that
future changes in either Federal or state statutes and regulations concerning
the permissible activities of banks or trust companies, as well as future
judicial or administrative decisions or interpretations of present and future
statutes and regulations, might prevent Bankers Trust from continuing to perform
those services for the Trust. State laws on this issue may differ from the
interpretations of relevant Federal law and banks and financial institutions may
be required to register as dealers pursuant to state securities law. If the
circumstances described above should change, the Board of Trustees would review
the relationship with Bankers Trust and consider taking all actions necessary in
the circumstances.
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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. Coopers & Lybrand L.L.P.,
1100 Main Street, Suite 900, Kansas City, Missouri 64105 acts as Independent
Accountants of the Trust.
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.
The Trust was organized on February 28, 1992.
TAXATION
Taxation of the Fund
The Trust intends to qualify annually and to elect the 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
35
<PAGE>
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
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its distributions in accordance with the calendar year distribution requirement.
The 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.
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 Fund's assets
to be invested in various countries will vary.
If the Fund is liable for foreign taxes, and if more than 50% of the value of
the Fund'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 which have invested in the Fund. 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 Fund'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 Fund 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
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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.
Sale of Shares
Any gain or loss realized by a shareholder upon the sale or other disposition of
Shares of a Class of the Fund, or upon receipt of a distribution in complete
liquidation of the Fund, generally will be a capital gain or loss which will be
long-term or short-term, generally depending upon the shareholder's holding
period for the shares. Any loss realized on a sale or exchange will be
disallowed to the extent the shares disposed of are replaced (including shares
acquired pursuant to a dividend reinvestment plan) within a period of 61 days
beginning 30 days before and ending 30 days after disposition of the Shares. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss. Any loss realized by a shareholder on a disposition of a Class'
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 Fund 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 inthe Fund may be
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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 the Fund is liable for any income or franchise tax in the
Commonwealth of Massachusetts, provided that the Fund continues to qualify as a
regulated investment company under Subchapter M of the Code.
Fund shareholders may be subject to state and local taxes on the 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 unaudited financial statements for the Fund and the Portfolio for
the six months ended March 31, 1996 and the audited financial statements for the
Fund and the Portfolio for the year ended September 30, 1995 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, by providing each person
receiving this statement of additional information with a copy of the Fund's
most recent annual and semi-annual reports.
BT Investment Equity Appreciation Fund
Statement of Assets and Liabilities, March 31, 1996
Statement of Operations forthe six months ended March 31, 1996
Statement of Changes in Net Assets for the six months ended March 31,1996 and
the period from January 1, 1995 to September 30, 1995
Financial Highlights: Supplemental data for each period indicated
Notes to Financial Statements
Capital Appreciation Portfolio
Schedule of Portfolio Investments, March 31, 1996
Statement of Assets and Liabilities, March 31, 1996
Statement of Operations for the six months ended March 31, 1996
Statement of Changes in Net Assets for the six months ended March 31, 1996
and the period from January 1, 1995 to September 30, 1995
Financial Highlights: Supplemental data for each period indicated
Notes to Financial Statements
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BT Investment Equity Appreciation Fund
Statement of Assets and Liabilities, September 30, 1995
Statement of Operations for the period January 1, 1995 to September 30, 1995
Statement of Changes in Net Assets for the period from January 1, 1995 to
September 30, 1995 and the year ended December 31, 1994
Financial Highlights: Supplemental data for each period indicated
Notes to Financial Statements
Report of Independent Accountants
Capital Appreciation Portfolio
Statement of Assets and Liabilities, September 30, 1995
Statement of Operations for the period January 1, 1995 to September 30, 1995
Statement of Changes in Net Assets for the period from January 1, 1995 to
September 30, 1995 and the year ended December 31, 1994
Financial Highlights: Supplemental data for each period indicated
Schedule of Portfolio Investments, September 30, 1995
Notes to Financial Statements
Report of Independent Accountants
40
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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
A-1
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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 strangest 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.
A-2
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CONTENTS
Investment Objectives, Policies and Restrictions........................
Performance Information.................................................
Valuation of Securities; Redemptions and Purchases in Kind..............
Management of the Trust.................................................
Organization of the Trust...............................................
Taxation................................................................
Financial Statements....................................................
Appendix: Commercial Paper Ratings..................................... A-1
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Investment Adviser and Administrator
BANKERS TRUST COMPANY
Distributor
SIGNATURE BROKER-DEALER SERVICES, INC.
Custodian and Transfer Agent
BANKERS TRUST COMPANY
Independent Accountants
COOPERS & LYBRAND L.L.P.
Counsel
WILLKIE FARR & GALLAGHER
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No person has been authorized to give any information or to make any
representations other than those contained in the Trust's Prospectus, its
Statement of Additional Information or the Trust's official sales literature in
connection with the offering of the Trust's shares and, if given or made, such
other information or representations must not be relied on as having been
authorized by the Trust. Neither the Prospectus nor this Statement of Additional
Information constitutes an offer in any state in which, or to any person to
whom, such offer may not lawfully be made.
