INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
Subject to completion, dated December 20, 1996.
BT PYRAMID MUTUAL FUNDS
BT RETIREMENTPLUS FUND
PROSPECTUS: ___________, 1996
BT RetirementPlus Fund (the "Fund") seeks to provide investors with a high level
of current income while seeking to maintain a stable value per share. The Fund
is a separate series of BT Pyramid Mutual Funds (the "Trust"), an open-end,
management investment company (mutual fund). The Fund is offered solely to
participant-directed employee benefit plans meeting specified criteria.
UNLIKE OTHER MUTUAL FUNDS, THE FUND SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY
INVESTING ALL OF ITS NET INVESTABLE ASSETS IN BT RETIREMENTPLUS PORTFOLIO (THE
"PORTFOLIO"), A SEPARATE SUBTRUST OF BT INVESTMENT PORTFOLIOS, A NEW YORK MASTER
TRUST FUND (THE "PORTFOLIO TRUST"), WITH AN IDENTICAL INVESTMENT OBJECTIVE. SEE
"SPECIAL INFORMATION CONCERNING THE MASTER-FEEDER FUND STRUCTURE." THE FUND IS
NOT A MONEY MARKET FUND, AND THERE CAN BE NO ASSURANCE THAT IT WILL BE ABLE TO
MAINTAIN A STABLE VALUE PER SHARE OR OTHERWISE ACHIEVE ITS OBJECTIVE.
Please read this Prospectus before investing and keep it on file for future
reference. It contains important information concerning the Fund and the
Portfolio, including how the Portfolio invests and the services available to the
Fund's shareholders. Bankers Trust Company ("Bankers Trust") is the investment
adviser of the Portfolio.
To learn more about the Fund and the Portfolio, investors can obtain a copy of
the Fund's Statement of Additional Information ("SAI"), dated __________, 1996,
which has been filed with the Securities and Exchange Commission (the "SEC") and
is incorporated herein by this reference. For a free copy of this document,
please call the Trust's service agent at 1-800-667-7596.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY, BANKERS
TRUST OR ANY DEPOSITORY INSTITUTION. SHARES OF THE FUND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
AGENCY AND ARE SUBJECT TO INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
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.
<PAGE>
TABLE OF CONTENTS
PAGE
THE FUND..................................................................
WHO MAY INVEST
INVESTMENT PRINCIPLES AND RISKS
EXPENSE SUMMARY
THE FUND IN DETAIL........................................................
INVESTMENT OBJECTIVE AND POLICIES
RISK FACTORS AND CERTAIN SECURITIES AND INVESTMENT PRACTICES
SPECIAL INFORMATION CONCERNING THE MASTER-FEEDER FUND STRUCTURE
SECURITIES AND INVESTMENT PRACTICES OF THE PORTFOLIO
OTHER CLASSES OF SHARES
PERFORMANCE
MANAGEMENT OF THE TRUSTS
NET ASSET VALUE
SHAREHOLDER AND ACCOUNT POLICIES..........................................
ACCOUNT INFORMATION
TRANSACTIONS IN FUND SHARES
DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS
TAX CONSIDERATIONS
ADDITIONAL INFORMATION ABOUT THE TRUSTS
<PAGE>
THE FUND
The Fund's investment objective is a high level of current income while seeking
to maintain a stable value per share. The Fund seeks to achieve its investment
objective by investing all of its net investable assets in the Portfolio. The
Portfolio will seek to achieve this objective by investing in a diversified
portfolio of fixed income securities, money market instruments, futures, options
and other instruments ("Portfolio Securities") and by entering into contracts
("Wrapper Agreements") with financial institutions, such as insurance companies
and banks, that are intended to stabilize the value per share of the Fund
("Share"). See "Risk Factors and Certain Securities and Investment Practices."
There can be no assurance that the Fund will achieve its objective.
WHO MAY INVEST
Shares of the Fund are offered solely to participant-directed employee benefit
plans meeting specified criteria ("Plans"). The Fund is designed for investors
seeking stability of principal and a level of current income higher than money
market mutual funds over most time periods.
The Fund offers two classes of Shares. Investment Class Shares are subject to
shareholder servicing charges, while Institutional Class Shares are not subject
to these charges. See "Account Information" and "Transactions in Fund Shares."
The Fund is not in itself a balanced investment plan. Plan participants should
consider their investment objective and tolerance for risk when making an
investment decision. When Shares are redeemed, they may be worth more or less
than what they originally cost, although the nature of the Portfolio's
investments -- particularly the Wrapper Agreements -- are intended by the Fund
to stabilize the value per Share. A Plan offering investments in the Fund must
impose certain restrictions on the ability of a Plan participant to exchange
Shares for similar investment options. See "Account Information."
INVESTMENT PRINCIPLES AND RISKS
The value of most of the Portfolio Securities will fluctuate based upon changes
in domestic or foreign interest rates, the credit quality of the issuer, market
conditions, and other economic and political news. In general, their prices will
rise when interest rates fall, and fall when interest rates rise. The Wrapper
Agreements are intended to stabilize the value per Share by offsetting
fluctuations in the value of the Portfolio Securities under certain conditions.
Under most circumstances, the combination of Portfolio Securities and Wrapper
Agreements held by the Portfolio is expected to provide Fund shareholders with a
constant net asset value ("NAV") per Share and a current rate of return that is
higher than most money market mutual funds over most time periods. However,
there can be no guarantee that the Portfolio will maintain a constant NAV, and
consequently that the Fund will be able to maintain a constant NAV per Share.
There is also no guarantee that any Fund shareholder or Plan participant will
realize the same investment return as might be realized by a direct investment
in the Portfolio Securities without the Wrapper Agreements or that the Fund's
rate of return will be higher than that of most money market mutual funds.
The Portfolio incurs costs in connection with its investment in Wrapper
Agreements which will reduce the Fund's investment return. The Wrapper
Agreements may not insulate the Portfolio from loss if an issuer of Portfolio
Securities defaults on payments of interest or principal. Additionally, an
issuer of a Wrapper Agreement could default on its obligations under the
agreement or the Portfolio might be unable to obtain Wrapper Agreements covering
all of its assets. Either type of default or the inability to obtain Wrapper
Agreements might result in a decline in the value of the Shares.
<PAGE>
Bankers Trust may use various investment techniques to hedge the Portfolio's
risks, but there is no guarantee that these strategies will work as intended.
See "Risk Factors and Certain Securities and Investment Practices" for more
information.
EXPENSE SUMMARY
ANNUAL OPERATING EXPENSES are paid out of the assets of the Portfolio and the
Fund. The Portfolio pays an investment advisory fee and an administrative
services fee to Bankers Trust. The Fund incurs additional administrative
expenses such as maintaining shareholder records and furnishing shareholder
statements. The Fund must also provide semi-annual financial reports.
The following table is intended to assist investors in understanding the
expenses associated with investing in the Fund. The expenses shown below are
estimates for the first full year of operations. The table provides (i) a
summary of expenses related to purchases and redemptions (sales) of Shares and
the anticipated annual operating expenses of the Fund and the Portfolio, in the
aggregate, as a percentage of average daily net assets and (ii) an example
illustrating the dollar cost of such expenses on a $1,000 investment in the
Fund. THE TRUSTEES OF THE TRUST BELIEVE THAT THE AGGREGATE EXPENSES OF THE FUND
(INCLUDING ITS PROPORTIONATE SHARE OF THE PORTFOLIO'S EXPENSES) WILL BE LESS
THAN OR APPROXIMATELY EQUAL TO THE EXPENSES THAT THE FUND WOULD INCUR IF THE
TRUST RETAINED THE SERVICES OF AN INVESTMENT ADVISER AND THE ASSETS OF THE FUND
WERE INVESTED DIRECTLY IN PORTFOLIO SECURITIES AND WRAPPER AGREEMENTS.
SHAREHOLDER TRANSACTION EXPENSES
INVESTMENT INSTITUTIONAL
CLASS CLASS
Maximum Sales Charge on Purchases NONE NONE
Maximum Sales Charge on Reinvested Dividends NONE NONE
Maximum Redemption Fee 2.0% 2.0%
Shareholder transaction expenses are charges paid when investors buy, redeem or
exchange Shares. Under normal circumstances, redemptions of Shares that are
directed by Plan participants are not subject to a redemption fee. Redemptions
of Shares that are not directed by Plan participants and that are made on less
than twelve months' prior written notice to the Fund are subject to a redemption
fee payable to the Fund of 2% of the proceeds of the redemption. See
"Transactions in Fund Shares."
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<PAGE>
ANNUAL OPERATING EXPENSES (as a percentage of the Fund's average daily net
assets)
INVESTMENT INSTITUTIONAL
CLASS CLASS
Investment advisory fee (after reimbursement 0.25% 0.25%
or waiver)*
12b-1 fee NONE NONE
Other expenses** 0.35% 0.15%
----- -----
Total operating expenses (after reimbursement
or waiver) 0.60% 0.40%
- -----------
* The Fund does not directly pay an investment advisory fee; the amount shown
reflects the Fund's proportionate share of the Portfolio's investment advisory
fee.
** The "other expenses" for Investment Class Shares include a shareholder
servicing fee of 0.20%. "Other expenses" do not include certain expenses such as
brokerage commissions.
EXPENSE TABLE EXAMPLE:
An investor would pay the following expenses assuming (1) 5% annual return and
(2) redemption at the end of each time period. No redemption fee has been
included.
ONE YEAR THREE YEARS
Investment Class Shares $6 $19
Institutional Class Shares $4 $13
The expense table and the example above show the costs and expenses that an
investor will bear directly or indirectly as a shareholder of the Fund. Bankers
Trust has voluntarily agreed to waive a portion of its investment advisory fee
payable by the Portfolio. Without such waiver, the Portfolio's investment
advisory fee would be 0.35% of its average daily net assets. Bankers Trust has
also voluntarily agreed to waive a portion of its administration fees (included
in "Other Expenses") payable by the Portfolio. Without such waiver, the
Portfolio's "Other Expenses" would be 0.43% for Investment Class Shares and
0.23% for Institutional Class Shares. In the absence of these undertakings, it
is estimated that "Total Operating Expenses" would be 0.78% for Investment Class
Shares and 0.58% for Institutional Class Shares. Bankers Trust may terminate
these voluntary waivers and reimbursements at any time in its sole discretion
without notice to shareholders. 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%.
- 3 -
<PAGE>
Shares of the Fund are sold by Edgewood Services, Inc. ("Edgewood") as the
Trust's distributor (the "Distributor"). For more information about the Fund's
and the Portfolio's expenses see "Management of the Fund" and "Valuation
Details" herein.
THE FUND IN DETAIL
INVESTMENT OBJECTIVE AND POLICIES
The Fund seeks to achieve its investment objective by investing all of its net
investable assets in the Portfolio, which has the same investment objective as
the Fund. Since the investment characteristics of the Fund will correspond
directly to that of the Portfolio, the following is a discussion of the various
investments of and techniques employed by the Portfolio. Additional information
about the investment policies of the Portfolio appears in "Risk Factors and
Certain Securities and Investment Practices" in this Prospectus and the SAI.
There can be no assurance that the Fund's and the Portfolio's investment
objective will be achieved.
The Portfolio's investment objective is a high level of current income while
seeking to maintain a stable value per Share. The Portfolio expects to invest at
least 65% of its total assets in fixed income securities ("Fixed Income
Securities") of varying maturities rated, at the time of purchase, in one of the
top three long-term rating categories by Standard & Poor's Rating Services, a
division of the McGraw-Hill Companies, Inc. ("S&P"), Moody's Investors Service,
Inc. ("Moody's"), or Duff & Phelps Credit Rating Co., or comparably rated by
another nationally recognized statistical rating organization ("NRSRO"), or, if
not rated by a NRSRO, of comparable quality as determined by Bankers Trust in
its sole discretion.
In addition, the Portfolio will enter into Wrapper Agreements with insurance
companies, banks or other financial institutions ("Wrapper Providers") that are
rated, at the time of purchase, in one of the top two long-term rating
categories by Moody's or S&P. There is no active trading market for Wrapper
Agreements, and none is expected to develop; therefore, they will be considered
illiquid. At the time of purchase, the value of all of the Wrapper Agreements
and any other illiquid securities will not exceed 15% of the Portfolio's net
assets.
The Fixed Income Securities include fixed income securities issued or guaranteed
by the U.S. Government, or any agency or instrumentality thereof; publicly or
privately issued U.S. dollar-denominated debt of domestic or foreign entities,
including corporate, sovereign or supranational entities; publicly issued U.S.
dollar denominated asset-backed securities issued by domestic or foreign
entities; mortgage pass-through securities issued by the Government National
Mortgage Association, the Federal Home Loan Mortgage Corporation or the Federal
National Mortgage Association; mortgage pass-through securities issued by
non-government entities such as banks, mortgage lenders, or other financial
institutions, including private label mortgage pass-through securities and whole
loans; collateralized mortgage obligations ("CMOs") and real estate mortgage
investment conduits ("REMICs"), which are mortgage-backed debt instruments that
make payments of principal and interest at a variety of intervals and are
collateralized by any of the aforementioned mortgage pass-through securities or
whole loans; and obligations issued or guaranteed, or backed by securities
issued or guaranteed by, the U.S. Government, or any of its agencies or
instrumentalities, including Certificates of Accrual Treasury Securities
("CATS"), Treasury Income Growth Receipts ("TIGRs"), and Treasury Receipts
("TRs") and zero coupon securities (securities consisting solely of the
principal or interest component of a U.S. Treasury bond).
The Portfolio Securities purchased by the Portfolio also include short-term
investments rated, at the time of purchase, in one of the top two short-term
- 4 -
<PAGE>
rating categories by an NRSRO or, if unrated, of comparable quality in the
opinion of Bankers Trust, including commercial paper and time deposits,
certificates of deposit, bankers' acceptances and other instruments of foreign
and domestics banks and thrift institutions. The Portfolio may invest up to 35%
of its total assets in such short-term investments for purposes of liquidity and
up to 100% of its total assets in such instruments for temporary defensive
purposes. The Portfolio may also invest in and utilize the following investments
and investment techniques and practices: Rule 144A securities (as defined
below), when-issued and delayed delivery securities, securities lending,
repurchase agreements, reverse repurchase agreements and dollar rolls, and
options and futures contracts. See "Risk Factors and Certain Securities and
Investment Practices" in this Prospectus and the SAI for more information.
In selecting securities for the Portfolio, Bankers Trust attempts to maintain an
average portfolio duration of the Portfolio Securities within a range of 2.5 to
4.5 years. Duration is a measure of the expected life of a Fixed Income Security
on a present value basis which incorporates the security's yield, coupon
interest payments, final maturity and call features into a single measure.
RISK FACTORS AND CERTAIN SECURITIES AND INVESTMENT PRACTICES
The following pages contain more detailed information about types of instruments
in which the Portfolio may invest and strategies Bankers Trust may employ in
pursuit of the Portfolio's investment objective. A summary of the risks and
restrictions associated with these investments and investment practices is
included as well.
Bankers Trust may not buy all of these instruments or use all of these
techniques to the full extent permitted unless it believes that doing so will
help the Portfolio achieve its goal. Current holdings and investment strategies
will be described in the financial reports of the Fund and the Portfolio, which
will be sent to Fund shareholders twice a year.
RISKS OF INVESTING IN FIXED INCOME SECURITIES
All fixed income investments have exposure to three types of risks. Credit risk
is the possibility that the issuer of a Fixed Income Security will fail to make
timely payments of either interest or principal to the Portfolio. Interest rate
risk is the potential for fluctuations in the prices of Fixed Income Securities
due to changing interest rates. Income risk is the potential for decline in the
Portfolio's income due to the investment or reinvestment of assets in Fixed
Income Securities when market interest rates are falling.
Although there is no assurance that it will achieve its objective, the Portfolio
attempts to enhance yield while minimizing these risks. If an issuer of a Fixed
Income Security or a Wrapper Provider becomes financially impaired, it may
default on its obligations and the Portfolio's interest income may be reduced or
the Portfolio may incur a loss of principal. This is an example of credit risk.
In order to minimize credit risk, the Portfolio's assets are allocated among a
diversified group of issuers. Credit analysis is applied to every security and
Wrapper Provider selected for the Portfolio. Once purchased, a security and, in
the case of a Wrapper Agreement, the Wrapper Provider are monitored regularly by
Bankers Trust for maintenance of adequate credit characteristics. In the event
that the rating of a security or Wrapper Provider is downgraded by one or more
NRSRO, the Portfolio may elect to retain the security or applicable Wrapper
Agreement. However, some Wrapper Agreements may require that Fixed Income
Securities that fall below investment grade be liquidated within a set time
period, typically within one year or less. The Portfolio may elect not to cover
with Wrapper Agreements any Fixed Income Securities with a remaining maturity of
60 days of less.
When interest rates rise, Fixed Income Security prices generally decline. When
interest rates fall, Fixed Income Security prices generally increase. Generally,
the longer the maturity of the Fixed Income Security, the higher its yield,
although longer-term Fixed Income Securities tend to offer less price stability
in response to changes in interest rates than do shorter-term investments.
- 5 -
<PAGE>
Therefore, portfolios with shorter average maturities tend to have less risk and
lower returns than portfolios with longer average maturities. This is an example
of interest rate risk. An average portfolio duration of 2.5 to 4.5 years is
generally maintained for the Portfolio Securities. In order to maintain that
average portfolio duration, the Portfolio will invest primarily in Fixed Income
Securities of short- to intermediate-term maturities. This will help to minimize
interest rate risk. In addition, unlike most traditional fixed income
portfolios, the Portfolio purchases Wrapper Agreements that should offset
substantially all of the price fluctuations typically associated with
longer-term Fixed Income Securities.
It is important to note the distinction between the Portfolio and short-term
investments such as money market funds. The securities held by the Portfolio
have a longer average maturity than those of money market funds. Because a money
market fund has a shorter average maturity, its yield will track the direction
of current market rates of return more closely than the Portfolio. For example,
in a rising interest rate environment, money market yields may rise more quickly
than will the Portfolio's. In a falling interest rate environment, money market
yields may fall more quickly than the Portfolio's. Over the long-term, however,
intermediate and long-term Fixed Income Securities such as those purchased by
the Portfolio have historically offered higher yields than short-term
investments (I.E., money market funds).
RISKS OF WRAPPER AGREEMENTS
Each Wrapper Agreement obligates the Wrapper Provider to maintain the "Book
Value" of a portion of the Portfolio's assets ("Covered Assets") up to a
specified maximum dollar amount, upon the occurrence of certain events. The Book
Value of the Covered Assets is their purchase price (i) plus interest on the
Covered Assets at a rate specified in the Wrapper Agreement ("Crediting Rate"),
and (ii) less an adjustment to reflect any defaulted securities. The Crediting
Rate used in computing Book Value is calculated by a formula specified in the
Wrapper Agreement and is adjusted periodically. In the case of most Wrapper
Agreements purchased by the Portfolio, the Crediting Rate is based on the actual
interest income earned on the Covered Assets plus or minus an adjustment for an
amount receivable from or payable to the Wrapper Provider based on fluctuations
in the market value of the Covered Assets. As a result, while the Crediting Rate
will generally reflect movements in market rates of interest, it may at any time
be more or less than these rates or the actual interest income earned on the
Covered Assets. The Crediting Rate may also be impacted by defaulted securities
and by increases and decreases of the amount of Covered Assets as a result of
contributions and withdrawals tied to the sale and redemption of Shares.
Furthermore, the premiums due Wrapper Providers in connection with the
Portfolio's investment in Wrapper Agreements are offset against and thus reduce
the Crediting Rate. These premiums are generally paid quarterly. In no event
will the Crediting Rate fall below zero percent under the Wrapper Agreements
entered into by the Portfolio.
Under the terms of a typical Wrapper Agreement, if the market value (plus
accrued interest on the underlying securities) of the Covered Assets is less
than their Book Value at the time the Covered Assets are liquidated in order to
provide proceeds for withdrawals of Portfolio interests resulting from
redemptions of Shares by Plan participants, the Wrapper Provider becomes
obligated to pay to the Portfolio the difference. Conversely, the Portfolio
becomes obligated to make a payment to the Wrapper Provider if it is necessary
for the Portfolio to liquidate Covered Assets at a price above their Book Value
in order to make withdrawal payments. (Withdrawals generally will arise when the
Fund must pay shareholders who redeem their Shares.) Because it is anticipated
that each Wrapper Agreement will cover all Covered Assets up to a specified
dollar amount, if more than one Wrapper Provider becomes obligated to pay to the
Portfolio the difference between Book Value and market value (plus accrued
interest on the underlying securities), each Wrapper Provider will pay a
pro-rata amount in proportion to the maximum dollar amount of coverage provided.
Thus, the Portfolio will not have the option of choosing which Wrapper Agreement
to drawn upon in any such payment situation.
- 6 -
<PAGE>
The terms of the Wrapper Agreements vary concerning when these payments must
actually be made between the Portfolio and the Wrapper Provider. In some cases,
payments may be due upon disposition of the Covered Assets; other Wrapper
Agreements provide for settlement only upon termination of the Wrapper Agreement
or total liquidation of the Covered Assets. A Wrapper Provider's obligation to
make payments to the Portfolio may be subject to prior notice requirements for
certain types of withdrawals from the Portfolio. For example, the Wrapper
Agreement may require that one year's notice be provided to obtain Book Value
payments with respect to withdrawals to provide liquidity for Fund redemptions
that are not directed by Plan participants. The Portfolio does not anticipate
that it will be required to liquidate Covered Assets for the purpose of paying
such withdrawals before any such notice period has expired. However, in the
unlikely event that this occurs, the NAV of the Portfolio, and hence of the
Shares, may be reduced.
The Fund expects that the use of Wrapper Agreements by the Portfolio will under
most circumstances permit the Fund to maintain a constant NAV per Share and to
pay dividends that will generally reflect over time both the interest income of,
and market gains and losses on, the Covered Assets held by the Portfolio less
the expenses of the Fund and the Portfolio. However, there can be no guarantee
that the Fund will maintain a constant NAV per Share or that any Fund
shareholder or Plan participant will realize the same investment return as might
be realized by investing directly in the Portfolio assets other than the Wrapper
Agreements. For example, a default by the issuer of a Portfolio Security or a
Wrapper Provider on its obligations might result in a decrease in the value of
the Portfolio assets and, consequently, the Shares. The Wrapper Agreements
generally do not protect the Portfolio from loss if an issuer of Portfolio
Securities defaults on payments of interest or principal. Additionally, a Fund
shareholder may realize more or less than the actual investment return on the
Portfolio Securities depending upon the timing of the shareholder's purchases
and redemption of Shares, as well as those of other shareholders. Furthermore,
there can be no assurance that the Portfolio will be able at all times to obtain
Wrapper Agreements. Although it is the current intention of the Portfolio to
obtain such agreements covering all of its assets (with the exception noted),
the Portfolio may elect not to cover some or all of its assets with Wrapper
Agreements should Wrapper Agreements become unavailable or should other
conditions such as cost, in Bankers Trust's sole discretion, render their
purchase inadvisable.
Some Wrapper Agreements require that the Portfolio maintain a specified
percentage of its total assets in short-term investments ("Liquidity Reserve").
These short-term investments must be used for the payment of withdrawals from
the Portfolio and Portfolio expenses. To the extent the Liquidity Reserve falls
below the specified percentage of total assets, the Portfolio is obligated to
direct all net cash flow to the replenishment of the Liquidity Reserve. The
obligation to maintain a Liquidity Reserve may result in a lower return for the
Portfolio and the Fund than if these funds were invested in longer-term Fixed
Income Securities. The Liquidity Reserve required by all Wrapper Agreements is
not expected to exceed 20% of the Portfolio's total assets. Wrapper Agreements
also require that the Covered Assets have a specified duration or maturity,
consist of specified types of securities or be of a specified investment
quality. The Portfolio will purchase Wrapper Agreements whose criteria in this
regard are consistent with the Portfolio's (and the Fund's) investment objective
and policies as described in this Prospectus. Wrapper Agreements may also
require the disposition of securities whose ratings are downgraded below a
certain level. This may limit the Portfolio's ability to hold such downgraded
securities. Please see the SAI for additional information concerning Wrapper
Agreements.
DERIVATIVES
The Portfolio may invest in various instruments, including the Wrapper
Agreements, that are commonly known as derivatives. Generally, a derivative is a
financial arrangement the value of which is based on, or "derived" from, a
traditional security, asset or market index. Some "derivatives" such as
mortgage-related and other asset-backed securities are in many respects like any
other investments, although they may be more volatile or less liquid than more
traditional debt securities. There are, in fact, many different types of
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<PAGE>
derivatives and many different ways to use them. There are a range of risks
associated with those uses. Futures contracts and options are commonly used for
traditional hedging purposes to attempt to protect an investor from exposure to
changing interest rates, securities prices or currency exchange rates and for
cash management purposes as a low cost method of gaining exposure to a
particular securities market without investing directly in those securities.
However, some derivatives are used for leverage, which tends to magnify the
effect of an instrument's price changes as market conditions change. Leverage
involves the use of a small amount of money to control a large amount of
financial assets and can, in some circumstances, lead to significant losses.
Bankers Trust uses derivatives only in circumstances where it believes they
offer the most economic means of improving the risk/reward profile of the
Portfolio. Derivatives will not be used to increase portfolio risk above the
level that could be achieved using only traditional investment securities or to
acquire exposure to changes in the value of assets or indexes that by themselves
would not be purchased for the Portfolio. The use of derivatives for non-hedging
purposes may be considered speculative. A further description of the derivatives
that the Portfolio may use and some of their associated risks is found in
"Securities and Investment Practices of the Portfolio."
SPECIAL INFORMATION CONCERNING THE MASTER-FEEDER FUND STRUCTURE
Unlike other mutual funds that directly acquire and manage their own portfolio
securities, the Fund seeks to achieve its investment objective by investing all
of its net investable assets in the Portfolio, a separate subtrust of a
registered investment company with the same investment objective as the Fund.
Therefore, a Fund shareholder's interest in the Portfolio's assets is indirect.
In addition to selling a beneficial interest to the Fund, the Portfolio may sell
beneficial interests to other mutual funds or institutional investors. Such
investors will invest in the Portfolio on the same terms and conditions and will
pay a proportionate share of the Portfolio's expenses. However, the other
investors investing in the Portfolio are not required to sell their shares or
other interests at the same public offering price as the Fund, due to variations
in sales commissions and other operating expenses. Therefore, investors in the
Fund should be aware that these differences may result in differences in returns
experienced by investors in the different entities that invest in the Portfolio.
Such differences in returns are also present in other mutual fund structures.
Information concerning other holders of interests in the Portfolio is available
from Bankers Trust, as the Administrator, at 1-800-667-7596.
The master-feeder structure is relatively complex, so shareholders should
carefully consider this investment approach. Smaller investors in the Portfolio
may be materially affected by the actions of larger investors in the Portfolio.
For example, if a large investor withdraws from the Portfolio, the remaining
investors may experience higher pro rata operating expenses, thereby producing
lower returns (however, this possibility exists as well for traditionally
structured funds that have large investors). Additionally, the Portfolio may
become less diverse, resulting in increased portfolio risk. Also, investors with
a greater pro rata ownership in the Portfolio could have effective voting
control of its operations. Except as permitted by the SEC, whenever the Trust is
requested to vote on matters pertaining to the Portfolio, the Trust will hold a
meeting of shareholders of the Fund and will cast all of its votes in the same
proportion as the votes of the Fund's shareholders. Fund shareholders who do not
vote will not affect the Trust's votes on the Portfolio's matters; the Trust's
votes representing Fund shareholders not voting will be voted by the Trustees or
officers of the Trust in the same proportion as the Fund shareholders who do, in
fact, vote. Certain changes in the Portfolio's investment objective, policies or
restrictions may require the Fund to withdraw its interest in the Portfolio. Any
such withdrawal could result in a distribution "in kind" of Portfolio assets (as
opposed to a cash distribution from the Portfolio). If securities are
distributed, the Fund could incur brokerage, tax or other charges in converting
the securities to cash. In addition, the distribution in kind may result in a
less diversified portfolio of investments or adversely affect the liquidity of
the Fund. Notwithstanding the above, there are other means for meeting
redemption requests, such as borrowing. The Fund may withdraw its investment
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from the Portfolio at any time, if the Board of Trustees of the Trust (the
"Trust Board") determines that it is in the best interests of the shareholders
of the Fund to do so. Upon any such withdrawal, the Trust Board would consider
what action might be taken, including the investment of all the assets of the
Fund in another pooled investment entity having the same investment objective as
the Fund or the retaining of an investment adviser to manage the Fund's assets
in accordance with the investment policies described herein with respect to the
Portfolio.
The Fund's investment objective is not a fundamental policy and may be changed
upon notice to, but without the need for approval of, its shareholders. If there
is a change in the Fund's investment objective, its shareholders should consider
whether the Fund remains an appropriate investment in light of their
then-current needs. The investment objective of the Portfolio also is not a
fundamental policy. Shareholders of the Fund will receive 30 days' prior written
notice with respect to any change in the investment objective of the Fund or the
Portfolio. See "Risk Factors and Certain Securities and Investment Practices" in
the SAI for a description of the fundamental policies of the Portfolio that
cannot be changed without approval by "the vote of a majority of the outstanding
voting securities" (as defined in the Investment Company Act of 1940 (the "1940
Act")) of the Portfolio.
SECURITIES AND INVESTMENT PRACTICES OF THE PORTFOLIO
U.S. GOVERNMENT SECURITIES are high-quality debt securities issued or guaranteed
by the U.S. Treasury or by an agency or instrumentality of the U.S. Government.
Not all U.S. Government securities are backed by the full faith and credit of
the United States. For example, securities issued by the Federal Farm Credit
Bank or by the Federal National Mortgage Association are supported by the
instrumentality's right to borrow money from the U.S. Treasury under certain
circumstances. However, securities issued by certain other U.S. agencies or
instrumentalities are supported only by the credit of the entity that issued
them.
OTHER U.S. DOLLAR-DENOMINATED FIXED INCOME SECURITIES. Bonds and other debt
instruments are used by issuers to borrow money from investors. The issuer pays
the investor a fixed or variable rate of interest and must repay the amount
borrowed at maturity. Some debt securities, such as zero coupon bonds, do not
pay current interest but are purchased at a discount from their face values.
Debt securities, loans and other direct debt have varying degrees of quality and
varying levels of sensitivity to changes in interest rates. Longer-term bonds
are generally more sensitive to interest rate changes than short-term bonds.
SOVEREIGN AND SUPRANATIONAL FIXED INCOME SECURITIES. Debt instruments issued or
guaranteed by foreign governments, agencies and supranational organizations
("sovereign debt obligations"), especially sovereign debt obligations of
developing countries, may involve a high degree of risk. The issuer of the
obligation or the governmental authorities that control the repayment of the
debt may be unable or unwilling to repay principal and interest when due and may
require renegotiation or rescheduling of debt payments. In addition, prospects
for repayment of principal and interest may depend on political as well as
economic factors.
MORTGAGE-BACKED SECURITIES. The Portfolio may purchase mortgage-backed
securities issued by the U.S. Government, its agencies or instrumentalities and
non-governmental entities such as banks, mortgage lenders or other financial
institutions. Mortgage-backed securities include mortgage pass-through
securities, mortgage-backed bonds and mortgage pay-through securities. A
mortgage pass-through security is a pro rata interest in a pool of mortgages
where the cash flow generated from the mortgage collateral is passed through to
the security holder. A mortgage-backed bond is a general obligation of the
issuer, payable out of the issuer's general funds and additionally secured by a
first lien on a pool of mortgages. Mortgage pay-through securities exhibit
characteristics of both pass-through and mortgage-backed bonds. The mortgage
pass-through securities issued by non-governmental entities such as banks,
mortgage lenders or other financial institutions in which the Portfolio may
invest include private label mortgage pass-through securities and whole loans.
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Mortgage-backed securities also include other debt obligations secured by
mortgages on commercial real estate or residential properties. Other types of
mortgage-backed securities will likely be developed in the future, and the
Portfolio may invest in them if Bankers Trust determines they are consistent
with the Portfolio's investment objective and policies.
Unlike ordinary Fixed Income Securities, which generally pay a fixed rate of
interest and return principal upon maturity, mortgage-backed securities repay
both interest income and principal as part of their periodic payments. Because
the mortgages underlying mortgage-backed certificates can be prepaid at any time
by homeowners or corporate borrowers, mortgage-backed securities give rise to
certain unique "pre-payment" risks. Prepayment risk or call risk is the
likelihood that, during periods of falling interest rates, securities with high
stated interest rates will be prepaid (or "called") prior to maturity, requiring
the Portfolio to invest the proceeds at generally lower interest rates.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOs") are pay-through securities
collateralized by mortgages or mortgage-backed securities. CMOs are issued in
classes and series that have different maturities and often are retired in
sequence. The issuer of a series of CMOs may elect to be treated as a REMIC.
ASSET-BACKED SECURITIES. Asset-backed securities have structural characteristics
similar to mortgage-backed securities. However, the underlying assets are not
first lien mortgage loans or interests therein but include assets such as motor
vehicle installment sale contracts, other installment sale contracts, home
equity loans, leases of various types of real and personal property and
receivables from revolving credit (credit card) agreements. Such assets are
securitized through the use of trusts or special purpose corporations. Payments
or distributions of principal and interest on asset-backed securities may be
guaranteed up to certain amounts and for a certain time period by a letter of
credit or a pool insurance policy issued by a financial institution unaffiliated
with the issuer, or other credit enhancements may be present.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities do not have the benefit
of the same type of security interest in the related collateral. Credit card
receivables are generally unsecured, and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
give such debtors the right to avoid payment of certain amounts owed on the
credit cards, thereby reducing the balance due. There is the risk in connection
with automobile receivables that recoveries on repossessed collateral may not,
in some cases, be available to support payments on those securities.
FOREIGN SECURITIES. The Portfolio may invest a portion of its assets in the debt
securities of foreign companies. Investing in the securities of foreign
companies involves more risks than investing in securities of U.S. companies.
Their value is subject to economic and political developments in the countries
where the companies operate and to changes in foreign currency values. Values
may also be affected by foreign tax laws, changes in foreign economic or
monetary policies, exchange control regulations and regulations involving
prohibitions on the repatriation of foreign currencies.
In general, less information may be available about foreign companies than about
U.S. companies, and foreign companies are generally not subject to the same
accounting, auditing and financial reporting standards as are U.S. companies.
Foreign securities markets may be less liquid and subject to less regulation
than the U.S. securities markets. The costs of investing outside the United
States frequently are higher than those in the United States. These costs
include relatively higher brokerage commissions and foreign custody expenses.
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ZERO COUPON SECURITIES, including CATS, TIGRs and TRs, are the separate income
or principal components of a debt instrument. These involve risks that are
similar to those of other debt securities, although they may be more volatile,
and certain zero coupon securities moves in the same direction as interest
rates.
RULE 144A SECURITIES are securities that are not registered for sale under the
federal securities laws but can be resold to institutions pursuant to Rule 144A
under the Securities Act of 1933. Provided that a dealer or institutional
trading market in such securities exists, these restricted securities are
treated as exempt from the Portfolio's 15% limit on illiquid securities. Under
the supervision of the Board of Trustees of the Portfolio Trust (the "Portfolio
Trust Board"), Bankers Trust determines the liquidity of restricted securities;
and through reports from Bankers Trust, the Portfolio Trust Board monitors
trading activity in restricted securities. If institutional trading in
restricted securities were to decline, the liquidity of the Portfolio could be
adversely affected.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. Delivery of and payment
for these securities may take place as late as a month or more after the date of
the purchase commitment. The value of these securities is subject to market
fluctuations during this period, and no income accrues to the Portfolio until
settlement takes place.
SECURITIES LENDING. The Portfolio is permitted to lend up to 30% of the total
value of its assets. 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 Portfolio 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 that
occurs during the term of the loan inures to the Portfolio. In lending
securities to brokers, dealers and other financial organizations, the Portfolio
is subject to risks, which, like those associated with other extensions of
credit, include delays in recovery and possible loss of rights in the collateral
should the borrower fail financially.
REPURCHASE AGREEMENTS. In a repurchase agreement, the Portfolio buys a security
at one price and simultaneously agrees to sell it back to the seller on a
specific date and at a higher price reflecting a market rate of interest
unrelated to the coupon rate or maturity of the underlying security. Delays or
losses could result if the other party to the agreement defaults or becomes
insolvent.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS. In a reverse repurchase
agreement, the Portfolio temporarily transfers possession of a portfolio
instrument to another party in return for cash. This could increase the risk of
fluctuation in the Fund's yield or in the market value of its interest in the
Portfolio. In a dollar roll, the Portfolio sells mortgage-backed or other
securities for delivery in the current month and simultaneously contracts to
purchase substantially similar securities on a specified future date. Reverse
repurchase agreements and dollar rolls are forms of borrowing and will be
counted towards the Portfolio's borrowing restrictions.
See "Borrowing" below and the Fund's SAI.
SHORT-TERM INVESTMENTS. The Portfolio's assets may be invested in high quality
short-term investments with remaining maturities of 397 days or less to maintain
the Liquidity Reserve, to meet anticipated redemptions and expenses for
day-to-day operating purposes and when, in Bankers Trust's opinion, it is
advisable to adopt a temporary defensive position because of unusual and adverse
conditions affecting the respective markets.
BORROWING. The Portfolio will not borrow money (including through reverse
repurchase or dollar roll transactions) for any purpose in excess of 5% of its
total assets, except that it may borrow for temporary or emergency purposes up
to 1/3 of its total assets. Under the 1940 Act, the Portfolio is required to
maintain continuous asset coverage of 300% with respect to such borrowings and
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to sell (within three days) sufficient portfolio holdings to restore such
coverage if it should decline to less than 300% due to market fluctuations or
otherwise, even if such liquidation of the Portfolio's holdings may be
disadvantageous from an investment standpoint.
Leveraging by means of borrowing may exaggerate the effect of any increase or
decrease in the value of the Portfolio's securities and the Fund's NAV per
Share, and money borrowed by the Portfolio will be subject to interest and other
costs (which may include commitment fees and/or the cost of maintaining minimum
average balances) that may exceed the income received from the securities
purchased with the borrowed funds. It is not the intention of Bankers Trust to
use leverage as a normal practice in the investment of the Portfolio's assets.
HEDGING STRATEGIES. The Portfolio may use certain strategies designed to adjust
the overall risk of its investment portfolio. These "hedging" strategies involve
derivative contracts, including U.S. Treasury and Eurodollar futures contracts
and exchange-traded put and call options on such futures contracts. New
financial products and risk management techniques continue to be developed and
may be used if consistent with the Portfolio's investment objective and
policies. The SAI contains further information on these strategies.
The Portfolio might not use any hedging strategies, and there can be no
assurance that any strategy used will succeed. If Bankers Trust is incorrect in
its judgment on market values, interest rates or other economic factors in using
a hedging strategy, the Portfolio may have lower net income and a net loss on
the investment. Each of these strategies involves certain risks, which include:
o the fact that the skills needed to use hedging instruments are
different from those needed to select securities for the Portfolio;
o the possibility of imperfect correlation, or even no correlation,
between the price movements of hedging instruments and price movements
of the securities or currencies being hedged;
o possible constraints placed on the Portfolio's ability to purchase or
sell portfolio investments at advantageous times due to the need for
the Portfolio to maintain "cover" or to segregate securities; and
o the possibility that the Portfolio is unable to close out or liquidate
its hedged position.
ASSET COVERAGE. To assure that the Portfolio's use of futures contracts and
related options, as well as when- issued and delayed-delivery securities, are
not used to achieve investment leverage, the Portfolio will cover such
transactions, as required under applicable interpretations of the SEC, either by
owning the underlying securities or by segregating assets with the Portfolio's
custodian (Bankers Trust) containing liquid securities in an amount at all times
equal to or exceeding the Portfolio's commitment with respect to these
instruments or contracts. Assets that are segregated for purposes of providing
cover need not be physically segregated in a separate account provided that the
custodian notes on its books that such assets are segregated. The Portfolio will
also cover its use of Wrapper Agreements to the extent required to avoid the
creation of a "senior security" (as defined in the 1940 Act) in connection with
its use of such agreements.
OTHER CLASSES OF SHARES
The Fund offers two classes of Shares, Investment Class and Institutional Class
(each a "Class"). Neither Class is subject to initial sales charges. Investment
Class Shares are subject to shareholder servicing charges, while Institutional
Class Shares are not subject to these charges. The investment advisory fee
applicable (indirectly from the Portfolio) to both Classes of Shares is the
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same. The amount of dividends payable to Investment Class Shares will be less
than those payable to Institutional Class Shares by the amount of the difference
between the expenses borne by the Shares of each Class.
PERFORMANCE
The Portfolio's strategies, holdings and performance will be detailed twice a
year in the Fund's financial reports, which are sent to all Fund shareholders.
Mutual fund performance is commonly measured as total return and/or yield. The
Fund's performance is affected by its expenses and those of the Portfolio. The
Fund's performance may be used from time to time in advertisements, shareholder
reports or other communications to shareholders or prospective shareholders.
EXPLANATION OF TERMS
TOTAL RETURN is the change in value of an investment in the Fund over a given
period, assuming reinvestment of any dividends and capital gain distributions. A
CUMULATIVE total return reflects actual performance over a stated period of
time. An AVERAGE annual total return is a hypothetical rate of return that, if
achieved annually, would have produced the same cumulative total return if
performance had been constant over the entire period. Average annual total
return calculations smooth out variations in performance; they are not the same
as actual year-by-year results. Average annual total returns covering periods of
less than one year assume that performance will remain constant for the rest of
the year.
YIELD refers to the income generated by an investment in the Fund over a given
period of time, expressed as an annual percentage rate. Yields are calculated
according to a standard that is required for all stock and bond funds. Because
this differs from other accounting methods, the quoted yield may not equal the
income actually paid to shareholders.
Performance information or advertisements may include comparisons of the Fund's
investment results to various unmanaged indices or results of other mutual funds
or investment or savings vehicles. From time to time, the Fund's ranking may be
quoted from various sources, such as Lipper Analytical Services, Inc., Value
Line, Inc.
and Morningstar, Inc.
Unlike some bank deposits or other investments that pay a fixed yield for a
stated period of time, the total return of the Fund will vary depending upon
interest rates, the current market value of the Portfolio Securities and the
Wrapper Agreements and changes in the expenses of the Fund and the Portfolio. In
addition, during certain periods for which total return may be provided, Bankers
Trust may have voluntarily agreed to waive portions of its fees, or to reimburse
certain operating expenses of the Fund or the Portfolio, on a month-to-month
basis. Such waivers will have the effect of increasing the Fund's net income
(and therefore its yield and total return) during the period such waivers are in
effect.
TOTAL RETURNS AND YIELDS ARE BASED ON PAST RESULTS AND ARE NOT AN INDICATION OF
FUTURE PERFORMANCE.
MANAGEMENT OF THE TRUSTS
BOARDS OF TRUSTEES
The Trust and the Portfolio Trust (collectively the "Trusts") are each governed
by a Board of Trustees that is responsible for protecting the interests of
investors. A majority of the Trustees who are not "interested persons" (as
defined in the 1940 Act) of either Trust have adopted written procedures
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reasonably appropriate to deal with potential conflicts of interest arising from
the fact that some of the same individuals may be Trustees of both Trusts, up to
and including creating separate boards of trustees. See "Management of the
Trusts" in the SAI for more information with respect to the Trustees and
officers of the Trusts.
INVESTMENT ADVISER
The Fund has not retained the services of an investment adviser because it seeks
to achieve its investment objective by investing all of its net investable
assets in the Portfolio. The Portfolio has retained the services of Bankers
Trust as its investment adviser pursuant to an Investment Advisory Agreement
between the Portfolio Trust and Bankers Trust dated __________, 19__ (the
"Investment Advisory Agreement").
BANKERS TRUST COMPANY AND ITS AFFILIATES
Bankers Trust Company, a New York banking corporation with principal offices at
130 Liberty Street, New York, New York 10006, is a wholly owned subsidiary of
Bankers Trust New York Corporation. Bankers Trust conducts a variety of general
banking and trust activities and is a major wholesale supplier of financial
services to the international and domestic institutional market.
As of March 31, 1996, Bankers Trust New York Corporation was the eighth largest
bank holding company in the United States with total assets of approximately
$108 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 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 over $200
billion in assets under management globally.
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 brings Bankers Trust's extensive
investment management expertise -- once available to only the largest
institutions in the United States -- to individual investors. Bankers Trust's
officers have had extensive experience in managing investment portfolios having
objectives similar to those of the Fund and the Portfolio.
Bankers Trust, subject to the supervision and direction of the Portfolio Board,
manages the Portfolio in accordance with the Portfolio's investment objective
and stated investment policies, makes investment decisions for the Portfolio,
places orders to purchase and sell securities and other financial instruments on
behalf of the Portfolio and employs professional investment managers and
securities analysts who provide research services to the Portfolio. Bankers
Trust may utilize the expertise of any of its worldwide subsidiaries and
affiliates to assist it in its role as investment adviser. All orders for
investment transactions on behalf of the Portfolio are placed by Bankers Trust
with broker-dealers and other financial intermediaries that it selects,
including those affiliated with Bankers Trust. A Bankers Trust affiliate will be
used in connection with a purchase or sale of an investment for the Portfolio
only if Bankers Trust believes that the affiliate's charge for the transaction
does not exceed usual and customary levels. The Portfolio will not invest in
obligations, including Wrapper Agreements, for which Bankers Trust or any of its
affiliates is the ultimate obligor or accepting bank. The Portfolio may,
however, invest in the obligations of correspondents and customers of Bankers
Trust.
The Investment Advisory Agreement provides for the Portfolio Trust to pay
Bankers Trust a fee, accrued daily and paid monthly, equal to 0.35% per year of
the average daily net assets of the Portfolio. Bankers Trust has indicated that
it will voluntarily waive all but 0.25% of this fee.
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Bankers Trust has been advised by its counsel that, in counsel's opinion,
Bankers Trust currently may perform the services for the Trusts described in
this Prospectus and the SAI without violation of the Glass-Steagall Act or other
applicable banking laws or regulations. State laws on this issue may differ from
the interpretations of relevant federal law, and banks and financial
institutions may be required to register as dealers pursuant to state securities
law.
PORTFOLIO MANAGEMENT
Eric Kirsch (CFA), a Managing Director of Bankers Trust, is responsible for the
day-to-day investment management of the Portfolio. Mr. Kirsch heads the stable
value investment group of Bankers Trust's Global Investment Management business.
In this capacity, he manages stable value portfolios and coordinates fixed
income portfolio management and trading functions with regards to these
portfolios' investments. He joined Bankers Trust in 1980.
John H. Dolan, a Vice President of Bankers Trust, is head of the domestic fixed
income investment group that manages the Fixed Income Securities of the
Portfolio. From 1987 to 1995, Mr. Dolan was a Managing Director at Salomon
Brothers ("Salomon") where he managed the CMO structuring effort and coordinated
Salomon's trading/syndicate relationship with the Resolution Trust Corporation.
He joined Bankers Trust in 1995.
Stephen C. Freidheim, a Managing Director of Bankers Trust, is the head of fixed
income management for Bankers Trust. Mr. Friedheim is responsible for overseeing
both the stable value investment group and the domestic fixed income investment
group. He has been employed by Bankers Trust since August 1993. From July 1990
to July 1993 he was a Senior Vice President and Director of Research and Trading
at Nomura Securities International. Mr. Friedheim was also on the Board of
Directors of Nomura Corporate Research and Asset Management.
Bankers Trust investment personnel may invest in securities for their own
account pursuant to a code of ethics that establishes procedures for personal
investing and restricts certain transactions.
ADMINISTRATOR
Under an Administration and Services Agreement with the Trust, Bankers Trust
calculates the NAV per Share of the Fund and generally assists the Trust Board
in all aspects of the administration and operation of the Fund. This
Administration and Services Agreement provides for the Trust to pay Bankers
Trust a fee, accrued daily and paid monthly, to 0.07% per year of the average
daily net assets of the Fund.
Under an Administration and Services Agreement with the Portfolio Trust, Bankers
Trust calculates the NAV of the Portfolio and generally assists the Portfolio in
all aspects of the administration and operation of the Portfolio. This
Administration and Services Agreement provides for the Portfolio to pay Bankers
Trust a fee, accrued daily and paid monthly, equal to 0.02% per year of the
Portfolio's average daily net assets. Under this Administration and Services
Agreement, Bankers Trust may delegate one or more of its responsibilities to
others, including the Distributor, at Bankers Trust's expense.
DISTRIBUTOR
Edgewood, as Distributor, serves as the Trust's principal underwriter on a best
efforts basis. In addition, Edgewood and its affiliates provide the Trust with
office facilities, and currently provide administration and distribution
services for other registered investment companies. Edgewood is a New York
corporation and a wholly-owned subsidiary of Federated Investors. Its principal
offices are at Clearing Operations, P.O. Box 897, Pittsburgh, PA 15230.
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CUSTODIAN AND TRANSFER AGENT
Bankers Trust acts as custodian for the assets of the Portfolio and serves as
the Trust's transfer agent (the "Transfer Agent") under the Administration and
Services Agreement with the Trust. It is not separately compensated for these
services and may, at its own expense, delegate certain services to other service
providers.
NET ASSET VALUE
The NAV per Share 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 NAV per Share is calculated once on each Valuation Day as of the close of
regular trading on the NYSE (the "Valuation Time"), which is currently 4:00
p.m., New York time, or if the NYSE closes early, at the time of the early
closing. The NAV per Share is computed by dividing the value of the Fund's
assets (I.E., the value of its investment in the Portfolio and other assets, if
any), less all liabilities, by the total number of its Shares outstanding. The
Portfolio's securities and other assets are valued primarily on the basis of
market quotations or, if quotations are not readily available, by a method that
the Portfolio Trust Board believes accurately reflects fair value.
Pursuant to procedures adopted by the Portfolio Trust Board, the fair value
of a Wrapper Agreement ("Wrapper Value") generally will be equal to the
difference between the Book Value and the market value (plus accrued interest on
the underlying securities) of the applicable Covered Assets. If the market value
(plus accrued interest on the underlying securities) of the Covered Assets is
greater than their Book Value, the Wrapper Value will be reflected as a
liability of the Portfolio in the amount of the difference, I.E., a negative
value, reflecting the potential liability of the Portfolio to the Wrapper
Provider. If the market value (plus accrued interest on the underlying
securities) of the Covered Assets is less than their Book Value, the Wrapper
Value will be reflected as an asset of the Portfolio in the amount of the
difference, I.E., a positive value, reflecting the potential liability of the
Wrapper Provider to the Portfolio. In performing its fair value determination,
the Portfolio Trust Board expects to consider the creditworthiness and ability
of a Wrapper Provider to pay amounts due under the Wrapper Agreement. If the
Portfolio Trust Board determines that a Wrapper Provider is unable to make such
payments, that Board may assign a fair value to the Wrapper Agreement that is
less than the difference between the Book Value and the market value (plus
accrued interest on the underlying securities) of the applicable Covered Assets
and the Portfolio might be unable to maintain NAV stability.
Under procedures adopted by the Trust Board, an NAV per Share later determined
to have been inaccurate for any reason will be recalculated. Purchases and
redemptions made at an NAV per Share determined to have been inaccurate will be
adjusted, although in certain circumstances, such as where the difference
between the original NAV per Share and the recalculated NAV per Share divided by
the latter is 0.005 ( 1/2 of 1%) or less or shareholder transactions are
otherwise insubstantially affected, action is not required.
SHAREHOLDER AND ACCOUNT POLICIES
ACCOUNT INFORMATION
The Fund is offered solely to Plans that limit their participants' ability to
direct a withdrawal from the Fund to the following circumstances:
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o upon the Plan participant's death, retirement, disability or termination;
o to fund Plan participant loans and other "in service" withdrawals made
pursuant to the terms of the Plan; and
o for transfers to other Plan investment options that are not "competing funds."
"Competing funds" are any fixed income investment options with a targeted
average maturity of three years or less, including money market funds. Transfers
between the Fund and a non-competing fund will be required to remain in the non-
competing fund for a period of at least three months before transfer to a
competing fund.
Fund Shares will be owned by the Plans, which will in turn offer the Fund as an
investment option to their participants. Plan participants should contact their
Plan administrator or the organization that provides recordkeeping services if
they have questions concerning their account. Plan administrators and
fiduciaries should call 1-800-667-7596 for information regarding a Plan's
account with the Fund.
TRANSACTIONS IN FUND SHARES
Participant-directed purchases, exchanges and redemptions of Shares are handled
in accordance with each Plan's specific provisions. Plans may have different
provisions with respect to the timing and method of purchases, exchanges and
redemptions by Plan participants. Plan participants should contact their Plan
administrator for details concerning how they may direct transactions in Shares.
It is the responsibility of the Plan administrator or other Plan service
provider to forward instructions for these transactions to Bankers Trust.
Purchase orders for Shares that are received by Bankers Trust, as the Transfer
Agent, or other authorized agent of the Fund, prior to the Valuation Time
(currently 4:00 p.m., New York time) on any Valuation Day will be effective at
that Valuation Time. The Trust and the Distributor reserve the right to reject
any purchase order. Certificates for Shares will not be issued. Redemption
requests will be processed at the NAV next determined after a request for
redemption is received in good order by Bankers Trust. Normally, the Fund will
make payment for all Shares redeemed under this procedure within one business
day after a request is received. In no event will payment be made more than
seven days after receipt of a redemption request in good order. The Fund may
suspend the right of redemption or postpone the date at times when both the NYSE
and the Fund's custodian bank (Bankers Trust) are closed, or under any emergency
circumstances as determined by the SEC.
The Fund reserves the right to honor any request for redemption by making
payment in whole or in part in securities and in Wrapper Agreements (or
interests therein), selected solely in the discretion of Bankers Trust. To the
extent that payment is made in securities, a shareholder may incur brokerage
expenses in converting these securities into cash. Wrapper Agreements are not
liquid securities and may impose restrictions on termination, including notice
periods of one year. The maintenance of Wrapper Agreements distributed in kind
may require that a withdrawing Plan pay fees to the Wrapper Provider. The Fund
has elected, however, to redeem Shares solely in cash up to the lesser of
$250,000 or 1% of the NAV of the Fund during any 90-day period for any one
shareholder. The Fund anticipates that it will exercise this right to redeem in
kind in the case of redemptions of Shares that are not directed by Plan
participants and that are made on less than twelve months' prior written notice
to Bankers Trust. In such case, a redemption request by a withdrawing Plan will
not be considered received in good order unless that Plan has provided to
Bankers Trust: (i) its current name; (ii) a listing of its trustee(s); (iii)
copies of Plan documents or summaries thereof describing the investment options
available to and the restrictions imposed upon Plan participants; and (iv)
information indicating the allocation of Plan assets among available investment
options. Such redemptions will also be subject to a redemption fee, payable to
the Fund, of 2.0% of the proceeds of the redemption, whether in kind or in cash.
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<PAGE>
The Fund reserves the right to withhold from redemption proceeds the 2.0%
redemption fee if [__%] or more of Plan assets invested in the Fund are redeemed
within five business days pending a determination of whether the redemption fee
is applicable. The redemption price may be more or less than the shareholder's
cost, depending upon the market value of the Fund's assets (its interest in the
Portfolio) at the time.
The offering price is the NAV per Share. Neither Investment Class Shares nor
Institutional Class Shares are subject to any initial sales charge or 12b-1 fee.
Investment Class Shares are subject to shareholder servicing fees in the maximum
amount of 0.20% of the average daily net assets of the Class. The shareholder
services provided in exchange for these fees may include establishing and
maintaining shareholder and Plan participant accounts, processing purchase and
redemption transactions, arranging for bank wires, performing shareholder
sub-accounting, answering client inquiries regarding the Trust, providing
periodic statements showing the client's account balance and those of Plan
participants, 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 may reasonably be required. Institutional Class Shares are not
subject to shareholder servicing fees. Shares may be purchased only in those
states where they may be lawfully sold.
DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS
The Fund intends to distribute all of its net investment income and net capital
gains, if any, to its shareholders each year. Dividends from net investment
income are declared daily and are paid monthly, and any net capital gains are
distributed annually. An additional annual distribution ("Additional
Distribution") may be paid to satisfy the tax requirements (outlined below) that
the Fund distribute each year substantially all of its investment company
taxable income (see "Tax Considerations").
Dividends and other distributions paid on each Class of Shares are calculated at
the same time and in the same manner. Dividends on the Investment Class Shares
are expected to be lower than the dividends on Institutional Class Shares,
however, because the Investment Class Shares have higher expenses resulting from
the shareholder servicing fees paid by them. Dividends paid on the two Classes
also might be affected differently by the allocation of other Class-specific
expenses. Dividends and other distributions are automatically reinvested in
additional Shares of the distributing Class unless the Plan participant directs
otherwise.
The Fund may declare and pay dividends in amounts which are not equal to
the amount of the net investment income it actually earns. Consequently, in any
year the amount actually distributed may differ from the income earned. If, for
any year, those distributions exceed the income earned, the excess may be
considered a return of capital. On the other hand, if the income earned exceeds
the amount of the dividends distributed, the Fund may make an Additional
Distribution of that excess. To enable the Fund to maintain a stable NAV per
Share, the Trust Board may declare, effective on the ex-distribution date of an
Additional Distribution, a reverse split of the Shares in an amount that will
cause the total number of Shares held by each shareholder, including Shares
acquired on reinvestment of that distribution, to remain the same as before that
distribution was paid.
For example, if the Fund declares an Additional Distribution of 10(cent) per
Share at a time when the NAV per Share is $10.00, a shareholder holding one
Share would receive 0.01 additional Shares on reinvestment of that distribution.
If there were no reverse split, the per Share NAV of the 1.01 Shares held by the
shareholder would be approximately $9.90, and the aggregate value thereof would
be $10.00. If a 1.01-for-1 reverse Share split were declared, however, the
shareholder's holdings would be consolidated back into one Share having an NAV
of $10.00. Thus, a reverse Share split will not affect the value of the total
holdings of a shareholder.
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<PAGE>
TAX CONSIDERATIONS
The Fund intends to qualify to be treated as a regulated investment company
under the Internal Revenue Code of 1986, as amended.
As a regulated investment company, the Fund will not be subject to U.S. federal
income tax on its investment company taxable income (generally consisting of net
investment income and the excess of net short-term capital gain over net
long-term capital loss, if any) and net capital gain (the excess of net
long-term capital gain over net short-term capital loss), if any, that it
distributes to its shareholders. The Fund intends to distribute to its
shareholders all of its investment company taxable income and net capital gain
at least annually, if necessary through Additional Distributions, and therefore
does not anticipate incurring any federal income tax liability.
For Plan participants utilizing the Fund as an investment option under their
Plan, dividend and capital gain distributions from the Fund generally will not
be subject to current taxation, but will accumulate on a tax-deferred basis. In
general, Plans are governed by a complex set of tax rules. See your Plan
administrator, your plan's Summary Plan Description, and/or a professional tax
adviser regarding the tax consequences of your participation in your Plan and of
any Plan contributions or withdrawals.
ADDITIONAL INFORMATION ABOUT THE TRUSTS
The Fund is a mutual fund: an investment that pools shareholders' money and
invests it toward a specified goal. The Fund is a separate series of the Trust,
a Massachusetts business trust organized pursuant to a Declaration of Trust
dated February 28, 1992. The Portfolio is a separate subtrust of the Portfolio
Trust, a New York master trust fund organized pursuant to a Declaration of Trust
dated __________, 19__.
Each Trust reserves the right to add additional series/subtrusts in the future.
There are currently no other feeder funds investing in the Portfolio. Other
feeder funds investing in the Portfolio may have sales charges and/or different
expenses than the Fund, which may affect performance. The Trust also reserves
the right to issue additional classes of Shares of the Fund. The Fund currently
offers two Classes of Shares, Investment Class and Institutional Class. Each
Class represents an identical interest in the Fund's investment portfolio. As a
result, the Classes have the same rights, privileges and preferences, except
with respect to: (1) the designation of each Class; (2) the expenses allocated
exclusively to each Class; and (3) voting rights on matters exclusively
affecting a single Class. The Trust Board does not anticipate that there will be
any conflicts among the interests of the holders of the different Classes and
will take appropriate action if any such conflict arises. For more information
about the different Classes of Shares of the Fund, please call 1-800-667-7596.
Each Trust may hold special meetings and mail proxy materials. These meetings
may be called to elect or remove Trustees, change fundamental policies, approve
the Portfolio's investment advisory agreement, or for other purposes.
Shareholders not attending a Trust meeting are encouraged to vote by proxy. The
Transfer Agent will mail proxy materials in advance, including a voting card and
information about the proposals to be voted on.
When matters are submitted for shareholder vote, shareholders of the Fund will
have one vote for each full Share held and proportionate, fractional votes for
fractional Shares held. A separate vote of the Fund is required on any matter
affecting only the Fund on which shareholders are entitled to vote; shareholders
of the Fund are not entitled to vote on Trust matters that do not affect the
Fund and do not require a separate vote of the Fund. All series of the Trust
will vote together on certain matters, such as electing Trustees or approving
independent public auditors. Under certain circumstances, the shareholders of
one of series of the Trust could control the outcome of these votes. There
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<PAGE>
normally will be no meetings of shareholders for the purpose of electing
Trustees unless and until such time as less than a majority of Trustees holding
office has been elected by shareholders, at which time the Trustees then in
office will call a shareholders' meeting for the election of Trustees. Any
Trustee may be removed from office upon the vote of shareholders holding at
least two-thirds of the Trust's outstanding shares at a meeting called for that
purpose. The Trustees are required to call such a meeting upon the written
request of shareholders holding at least 10% of the Trust's outstanding shares.
The Trust will also assist shareholders in communicating with one another as
provided for in the 1940 Act.
Each subtrust of the Portfolio Trust, including the Portfolio, will vote
separately on any matter involving that subtrust. Holders of interests in all
the subtrusts of the Portfolio Trust, however, will vote together to elect
Trustees of the Portfolio Trust and for certain other matters. The subtrusts of
the Portfolio Trust will vote together or separately on matters in the same
manner, and in the same circumstances, as do the series of the Trust. As with
the Trust, the investors in one or more subtrusts of the Portfolio Trust could
control the outcome of these votes. No subtrust of the Portfolio Trust has any
preference over any other subtrust.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a business trust may,
under certain circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder's incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the Trust itself was unable to meet its
obligations.
The Portfolio Trust was organized as a trust under the laws of the State of New
York. The Portfolio Trust's Declaration of Trust provides that the entities
investing in the Portfolio (E.G., investment companies such as the Fund and
common and commingled trust funds) will each be liable for all obligations of
the Portfolio. However, the risk of the Fund's incurring financial loss on
account of such liability is limited to circumstances in which both inadequate
insurance existed and the Portfolio itself was unable to meet its obligations.
Accordingly, the Trustees of the Trust believe that neither the Fund nor its
shareholders will be adversely affected by reason of the Fund's investing in the
Portfolio.
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<PAGE>
INVESTMENT ADVISER OF THE PORTFOLIO AND ADMINISTRATOR
BANKERS TRUST COMPANY
DISTRIBUTOR
EDGEWOOD SERVICES, INC.
CUSTODIAN AND TRANSFER AGENT
BANKERS TRUST COMPANY
INDEPENDENT ACCOUNTANTS
ERNST & YOUNG LLP
COUNSEL
WILLKIE FARR & GALLAGHER
............................................................
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus, the SAI or the
Fund's official sales literature in connection with the offering of the Shares
and, if given or made, such other information or representations must not be
relied on as having been authorized by the Fund. This Prospectus does not
constitute an offer in any state in which, or to any person to whom, such offer
may not lawfully be made.
............................................................
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<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION SHALL NOT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE
OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD
BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
Subject to completion, dated December 20, 1996
STATEMENT OF
ADDITIONAL INFORMATION
________________, 1996
BT PYRAMID MUTUAL FUNDS:
BT RETIREMENTPLUS FUND
BT RetirementPlus Fund (the "Fund") is a separate series of BT Pyramid
Mutual Funds (the "Trust"), an open-end, management investment company (mutual
fund). The Shares of the Fund are described herein.
TABLE OF CONTENTS
Investment Objective, Policies and Restrictions.......................
Performance Information...............................................
Valuation of Assets; Redemptions in Kind..............................
Management of the Trusts..............................................
Organization of the Trust.............................................
Taxation..............................................................
Appendix..............................................................
As described in the Prospectus, the Fund seeks to achieve its
investment objective by investing all its net investable assets in BT
RetirementPlus Portfolio (the "Portfolio"), a diversified open-end management
investment company having the same investment objective as the Fund. The
Portfolio is a separate subtrust of BT Investment Portfolios, a New York master
trust fund (the "Portfolio Trust").
Because the investment characteristics of the Fund correspond directly
to those of the Portfolio (in which the Fund invests all of its assets), the
following is a discussion of the various investments of and techniques employed
by the Portfolio.
Shares are sold by Edgewood Services, Inc., the Trust's distributor
(the "Distributor"), to participant-directed employee benefit plans meeting
specified criteria. Bankers Trust Company ("Bankers Trust") is the Portfolio's
investment adviser.
The Fund's Prospectus (the "Prospectus") is dated ____________, 1996.
The Prospectus provides the basic information investors should know before
investing and may be obtained without charge by calling the Trust at the
telephone number listed below. This Statement of Additional Information, which
is not a prospectus, is intended to provide additional information regarding the
activities and operations of the Fund and the Portfolio and should be read in
conjunction with the Prospectus. This Statement of Additional Information is not
an offer by
<PAGE>
the Fund to an investor that has not received a Prospectus. Capitalized terms
not otherwise defined in this Statement of Additional Information have the
meanings accorded to them in the Prospectus.
BANKERS TRUST COMPANY
INVESTMENT ADVISER OF THE PORTFOLIO AND ADMINISTRATOR
EDGEWOOD SERVICES, INC.
DISTRIBUTOR
Clearing Operations
P.O. Box 897 Pittsburgh, Pennsylvania 15230-0897 (800) 730-1313
- 2 -
<PAGE>
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVE
The investment objective of the Fund is a high level of current income
while seeking to maintain a stable per share value. There can, of course, be no
assurance that the Fund will achieve its investment objective.
INVESTMENT POLICIES
The Fund seeks to achieve its investment objective by investing all of
its net investable assets in the Portfolio. The Trust may withdraw the Fund's
investment from the Portfolio at any time if the Trust Board determines that it
is in the best interests of the Fund to do so.
The following is a discussion of the various investments of and
techniques employed by the Portfolio.
SHORT-TERM INSTRUMENTS. The Portfolio may hold short-term investments
consisting of foreign and domestic (i) short-term obligations of sovereign
governments, their agencies, instrumentalities, authorities or political
subdivisions; (ii) other short-term debt securities rated in one of the top two
short-term rating categories by an NRSRO or, if unrated, of comparable quality
in the opinion of Bankers Trust; (iii) commercial paper; (iv) bank obligations,
including negotiable certificates of deposit, time deposits and bankers'
acceptances; and (v) repurchase agreements. At the time the Portfolio invests in
commercial paper, bank obligations or repurchase agreements, the issuer or the
issuer's parent must have an outstanding long-term debt rating of A or higher by
S&P or A-2 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.
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.
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<PAGE>
COMMERCIAL PAPER. Commercial paper consists of short-term (usually from
one to 270 days) unsecured promissory notes issued by corporations in order to
finance their current operations. A variable amount master demand note (which is
a type of commercial paper) represents a direct borrowing arrangement involving
periodically fluctuating rates of interest under a letter agreement between a
commercial paper issuer and an institutional lender pursuant to which the lender
may determine to invest varying amounts.
For a description of commercial paper ratings, see the Appendix.
MORTGAGE- AND ASSET-BACKED SECURITIES. The yield characteristics of the
mortgage- and asset-backed securities in which the Portfolio may invest differ
from those of traditional debt securities. Among the major differences are that
interest and principal payments are made more frequently on mortgage- and
asset-backed securities (usually monthly) and that principal may be prepaid at
any time because the underlying mortgage loans or other assets generally may be
prepaid at any time. As a result, if the Portfolio purchases these securities at
a premium, a prepayment rate that is faster than expected will reduce their
yield, while a prepayment rate that is slower than expected will have the
opposite effect of increasing yield. Conversely, if the Portfolio purchases
these securities at a discount, faster than expected prepayments will increase,
while slower than expected prepayments will reduce, their yield. Amounts
available for reinvestment by the Portfolio are likely to be greater during a
period of declining interest rates and, as a result, are likely to be reinvested
at lower interest rates than during a period of rising interest rates.
In general, the prepayment rate for mortgage-backed securities
decreases as interest rates rise and increases as interest rates fall. However,
rising interest rates will tend to decrease the value of these securities. In
addition, an increase in interest rates may affect the volatility of these
securities by effectively changing a security that was considered a short-term
security at the time of purchase into a long-term security. Long-term securities
generally fluctuate more widely in response to changes in interest rates than
short- or intermediate-term securities.
The market for privately issued mortgage- and asset-backed securities
is smaller and less liquid than the market for U.S. government mortgage-backed
securities. CMO classes may be specially structured in a manner that provides
any of a wide variety of investment characteristics, such as yield, effective
maturity and interest rate sensitivity. As market conditions change, however,
and particularly during periods of rapid or unanticipated changes in market
interest rates, the attractiveness of the CMO classes and the ability of the
structure to provide the anticipated investment characteristics may be
significantly reduced. These changes can result in volatility in the market
value, and in some instances reduced liquidity, of the CMO class.
ZERO-COUPON SECURITIES. The Portfolio may invest in certain zero coupon
securities that are "stripped" U.S. Treasury notes and bonds. Zero coupon
securities usually trade at a substantial discount from their face or par value.
Zero coupon securities are subject to greater fluctuations of market value in
response to changing interest rates than debt obligations of comparable
maturities that make current distributions of interest in cash.
- 4 -
<PAGE>
WRAPPER AGREEMENTS. Wrapper Agreements are structured with a number of
different features. Wrapper Agreements purchased by the Portfolio are of three
basic types: (1) non-participating, (2) participating and (3) "hybrid." In
addition, the Wrapper Agreements will either be of fixed-maturity or open-end
maturity ("evergreen"). The Portfolio enters into particular types of Wrapper
Agreements depending upon their respective cost to the Portfolio and the Wrapper
Provider's creditworthiness, as well as upon other factors.
Under a NON-PARTICIPATING WRAPPER AGREEMENT, the Wrapper Provider
becomes obligated to make a payment to the Portfolio whenever the Portfolio
sells Covered Assets at a price below Book Value to meet withdrawals of a type
covered by the Wrapper Agreement (a "Benefit Event"). Conversely, the Portfolio
becomes obligated to make a payment to the Wrapper Provider whenever the
Portfolio sells Covered Assets at a price above their Book Value in response to
a Benefit Event. In neither case is the Crediting Rate adjusted at the time of
the Benefit Event. Accordingly, under this type of Wrapper Agreement, while the
Portfolio is protected against decreases in the market value of the Covered
Assets below Book Value, it does not realize increases in the market value of
the Covered Assets above Book Value; those increases are realized by the Wrapper
Providers.
Under a PARTICIPATING WRAPPER AGREEMENT, the obligation of the Wrapper
Provider or the Portfolio to make payments to each other typically does not
arise until all of the Covered Assets have been liquidated. Instead of payments
being made on the occurrence of each Benefit Event, these obligations are a
factor in the periodic adjustment of the Crediting Rate.
Under a HYBRID WRAPPER AGREEMENT, the obligation of the Wrapper
Provider or the Portfolio to make payments does not arise until withdrawals
exceed a specified percentage of the Covered Assets, after which time payment
covering the difference between market value and Book Value will occur.
A FIXED-MATURITY WRAPPER AGREEMENT terminates at a specified date, at
which time settlement of any difference between Book Value and market value of
the Covered Assets occurs. A fixed-maturity Wrapper Agreement tends to ensure
that the Covered Assets provide a relatively fixed rate of return over a
specified period of time through bond immunization, which targets the duration
of the Covered Assets to the remaining life of the Wrapper Agreement.
An EVERGREEN WRAPPER AGREEMENT has no fixed maturity date on which
payment must be made, and the rate of return on the Covered Assets accordingly
tends to vary. Unlike the rate of return under a fixed-maturity Wrapper
Agreement, the rate of return on assets covered by an evergreen Wrapper
Agreement tends to more closely track prevailing market interest rates and thus
tends to rise when interest rates rise and fall when interest rates fall. An
evergreen Wrapper Agreement may be converted into a fixed-maturity Wrapper
Agreement that will mature in the number of years equal to the duration of the
Covered Assets.
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<PAGE>
Wrapper Providers are banks, insurance companies and other financial
institutions. The number of Wrapper Providers has been increasing in recent
years. As of November 1996, there were approximately fifteen Wrapper Providers
rated in the top two long-term rating categories by Moody's, S&P or another
NRSRO. The cost of Wrapper Agreements is typically 0.10% to 0.25% per dollar of
Covered Assets per annum.
In the event of the default of a Wrapper Provider, the Portfolio could
potentially lose the Book Value protections provided by the Wrapper Agreements
with that Wrapper Provider. However, the impact of such a default on the
Portfolio as a whole may be minimal or non-existent if the market value of the
Covered Assets thereunder is greater than their Book Value at the time of the
default, because the Wrapper Provider would have no obligation to make payments
to the Portfolio under those circumstances. In addition, the Portfolio may be
able to obtain another Wrapper Agreement from another Wrapper Provider to
provide Book Value protections with respect to those Covered Assets. The cost of
the replacement Wrapper Agreement might be higher than the initial Wrapper
Agreement if the market value (plus accrued interest on the underlying
securities) of those Covered Assets is less than their Book Value at the time of
entering into the replacement agreement. If the Portfolio were unable to obtain
a replacement Wrapper Agreement, the Book Value of the Covered Assets would be
marked up or down to their market value. Participants redeeming Shares after
such a Book Value adjustment might experience losses if the market value of the
Covered Assets is below Book Value. The combination of the default of a Wrapper
Provider and an inability to obtain a replacement agreement could render the
Portfolio and the Fund unable to achieve their investment objective.
For a description of Wrapper Provider ratings, see the Appendix.
ILLIQUID SECURITIES. Mutual funds do not typically hold a significant
amount of illiquid securities because of the potential for delays on resale and
uncertainty in valuation. Limitations on resale may have an adverse effect on
the marketability of portfolio securities, and a mutual fund might be unable to
dispose of illiquid securities promptly or at reasonable prices and might
thereby experience difficulty satisfying redemptions within seven days. A mutual
fund might also have to register restricted securities in order to dispose of
them, resulting in additional expense and delay. Adverse market conditions could
impede such a public offering of securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the 1933 Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale of such investments to the
general public or to certain institutions may not be indicative of their
liquidity.
The SEC has adopted Rule 144A under the 1933 Act, which allows a
broader institutional trading market for securities otherwise subject to
restriction on their resale to the general public. Rule 144A establishes a "safe
- 6 -
<PAGE>
harbor" from the registration requirements of the 1933 Act for resales of
certain securities to qualified institutional buyers. Bankers Trust anticipates
that the market for certain restricted securities such as institutional
commercial paper will expand further as a result of this rule and the
development of automated systems for the trading, clearance and settlement of
unregistered securities of domestic and foreign issuers, such as the PORTAL
System sponsored by the National Association of Securities Dealers, Inc.
Bankers Trust will monitor the liquidity of Rule 144A securities held
by the Portfolio under the supervision of the Portfolio Trust Board. In reaching
liquidity decisions, Bankers Trust will consider, among other things, the
following factors: (1) the frequency of trades and quotes for the security; (2)
the number of dealers and other potential purchasers or sellers of the security;
(3) dealer undertakings to make a market in the security; and (4) the nature of
the security and of the marketplace trades (e.g., the time needed to dispose of
the security, the method of soliciting offers and the mechanics of the
transfer).
LENDING OF PORTFOLIO SECURITIES. The Portfolio has the authority to
lend portfolio securities to brokers, dealers and other financial organizations.
The Portfolio will not lend securities to Bankers Trust, the Distributor 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 in recovery of the securities or even loss of rights in the
collateral should the borrower of the securities fail financially. The Portfolio
will adhere to the following conditions whenever its securities are loaned: (1)
the Portfolio must receive at least 100 percent cash collateral or equivalent
securities from the borrower; (2) the borrower must increase this collateral
whenever the market value of the loaned securities including accrued interest
rises above the value of the collateral; (3) the Portfolio must be able to
terminate the loan at any time; (4) the Portfolio must receive reasonable
interest on the loan, as well as any interest, dividends or other distributions
on the loaned securities and any increase in their market value; (5) the
Portfolio may pay only reasonable custodian fees in connection with the loan;
and (6) voting rights on the loaned securities may pass to the borrower;
provided, however, that if a material event adversely affecting the investment
occurs, the Portfolio Trust Board must terminate the loan and regain the right
to vote the securities.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. Delivery of and payment
for these securities can take place a month or more after the date of the
purchase commitment. The purchase price and the interest rate payable, if any,
on the securities are fixed on the purchase commitment date or at the time the
settlement date is fixed. The value of such securities is subject to market
fluctuation, and no interest accrues to the Portfolio until settlement takes
place. At the time the Portfolio makes the commitment to purchase securities on
a when-issued or delayed delivery basis, it will record the transaction, reflect
the value each day of such securities in determining its NAV and, if applicable,
calculate the maturity for the purposes of average maturity from that date. At
the time of settlement, a when-issued security may be valued at less than the
purchase price. To facilitate such acquisitions, the Portfolio will maintain
- 7 -
<PAGE>
with its custodian (Bankers Trust) a segregated account with liquid assets,
consisting of cash, U.S. Government securities or other appropriate securities,
in an amount at least equal to such commitments. On delivery dates for such
transactions, the Portfolio will meet its obligations from maturities or sales
of the securities held in the segregated account and/or from cash flow. If the
Portfolio chooses to dispose of the right to acquire a when-issued security
prior to its acquisition, it could, as with the disposition of any other
portfolio obligation, realize a gain or loss due to market fluctuation. It is
the current policy of the Portfolio not to enter into when-issued commitments
exceeding in the aggregate 15% of the market value of its total assets, less
liabilities other than the obligations created by when-issued commitments.
ADDITIONAL U.S. GOVERNMENT OBLIGATIONS. The Portfolio may invest in
obligations issued or guaranteed by U.S. Government agencies or
instrumentalities. These obligations may or may not be backed by the "full faith
and credit" of the United States. In the case of securities not backed by the
full faith and credit of the United States, the Portfolio must look principally
to the federal agency issuing or guaranteeing the obligation for ultimate
repayment and may not be able to assert a claim against the United States itself
in the event the agency or instrumentality does not meet its commitments.
Securities in which the Portfolio may invest that are not backed by the full
faith and credit of the United States include obligations of the Tennessee
Valley Authority, the Federal Home Loan Mortgage Corporation and the U.S. Postal
Service, each of which has the right to borrow from the U.S. Treasury to meet
its obligations, and obligations of the Federal Farm Credit System and the
Federal Home Loan Banks, both of whose obligations may be satisfied only by the
individual credit of the issuing agency. Securities that are backed by the full
faith and credit of the United States include obligations of the Government
National Mortgage Association (the "GNMA"), the Farmers Home Administration and
the Export-Import Bank.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS -- IN GENERAL. The
successful use of these instruments draws upon Bankers Trust's skill and
experience with respect to such instruments and usually depends on its ability
to forecast interest rate movements correctly. If interest rates move in an
unexpected manner, the Portfolio may not achieve the anticipated benefits of
futures contracts or options thereon or may realize losses and thus will be in a
worse position than if such strategies had not been used. In addition, the
correlation between movements in the price of futures contracts or options
thereon and movements in the price of the securities hedged or used for cover
will not be perfect and could produce unanticipated losses.
FUTURES CONTRACTS. The Portfolio may enter into contracts for the
purchase or sale for future delivery of fixed-income securities or contracts
based on financial indices, including any index of U.S. Government securities,
foreign government securities or corporate debt securities. U.S. futures
contracts have been designed by exchanges that have been designated "contracts
markets" by the Commodity Futures Trading Commission ("CFTC") and must be
executed through a futures commission merchant, or brokerage firm, that is a
member of the relevant contract market. Futures contracts trade on a number of
exchange markets, and, through their clearing corporations, the exchanges
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guarantee performance of the contracts as between the clearing members of the
exchange. The Portfolio may enter into futures contracts based on debt
securities that are backed by the full faith and credit of the U.S. Government,
such as long-term U.S. Treasury bonds, U.S. Treasury notes, GNMA modified
pass-through mortgage-backed securities and three-month U.S. Treasury bills. The
Portfolio may also enter into futures contracts that are based on bonds issued
by entities other than the U.S. Government.
At the same time a futures contract is purchased or sold, the Portfolio
must allocate cash or securities as a deposit payment ("initial margin"). It is
expected that the initial margin would be approximately 1 1/2% to 5% of a
contract's face value. Daily thereafter, the futures contract is valued and
"variation margin" may be required (that is, the Portfolio may have to provide
or may receive cash that reflects any decline or increase in the contract's
value).
At the time of delivery of securities pursuant to a futures contract,
adjustments are made to recognize differences in value arising from the delivery
of securities with a different interest rate from that specified in the
contract. In some (but not many) cases, securities called for by a futures
contract may not have been issued when the contract was written.
Although futures contracts by their terms call for the actual delivery
or acquisition of securities, in most cases the contractual obligation is
fulfilled before the termination date of the contract without having to make or
take delivery of the securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a commodities
exchange an identical futures contract calling for delivery in the same month.
Such a transaction, which is effected through a member of an exchange, cancels
the obligation to make or take delivery of the securities. Since all
transactions in the futures market are made, offset or fulfilled through a
clearinghouse associated with the exchange on which the contracts are traded,
the Portfolio will incur brokerage fees when it purchases or sells futures
contracts.
The purpose of the Portfolio's acquisition or sale of a futures
contract is to attempt to protect the Portfolio from fluctuations in interest
rates without actually buying or selling fixed-income securities. For example,
if interest rates were expected to increase (which thus would cause the prices
of debt securities to decline), the Portfolio might enter into futures contracts
for the sale of debt securities. Such a sale would have much the same effect as
selling an equivalent value of the debt securities owned by the Portfolio. If
interest rates did increase, the value of the debt securities held by the
Portfolio would decline, but the value of the futures contracts to the Portfolio
would increase at approximately the same rate, thereby keeping the Portfolio's
NAV from declining as much as it otherwise would have. The Portfolio could
accomplish similar results by selling debt securities and investing in bonds
with short maturities when interest rates are expected to increase. However,
since the futures market is more liquid than the cash market, the use of futures
contracts as an investment technique allows the Portfolio to maintain a
defensive position without having to sell its portfolio securities.
Similarly, when it is expected that interest rates may decline (thus
increasing the value of debt securities), futures contracts for the acquisition
of debt securities may be purchased to attempt to hedge against anticipated
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purchases of debt securities at higher prices. Since the fluctuations in the
value of futures contracts should be similar to those of the underlying debt
securities, the Portfolio could take advantage of the anticipated rise in the
value of debt securities without actually buying them until the market had
stabilized. At that time, the futures contracts could be liquidated and the
Portfolio could then buy debt securities on the cash market. To the extent the
Portfolio enters into futures contracts for this purpose, the assets in the
segregated asset account maintained to cover the Portfolio's obligations with
respect to such futures contracts will consist of cash, cash equivalents or high
quality liquid debt securities from its portfolio in an amount equal to the
difference between the fluctuating market value of such futures contracts and
the aggregate value of the initial and variation margin payments made by the
Portfolio with respect to such futures contracts.
The ordinary spreads between prices in the cash and futures market, due
to differences in the nature of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions that could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by Bankers Trust may still not
result in a successful transaction.
In addition, futures contracts entail risks. Although Bankers Trust
believes that use of such contracts will benefit the Portfolio, if its
investment judgment about the general direction of interest rates is incorrect,
the Portfolio's overall performance would be poorer than if it had not entered
into any such contract. For example, if the Portfolio has hedged against the
possibility of an increase in interest rates that would adversely affect the
price of debt securities held in its portfolio and interest rates decrease
instead, the Portfolio will lose part or all of the benefit of the increased
value of its debt securities that it has hedged because it will have offsetting
losses in its futures positions. In addition, in such situations, if the
Portfolio has insufficient cash, it may have to sell debt securities from its
portfolio to meet daily variation margin requirements. Such sales of securities
may be, but will not necessarily be, at increased prices that reflect the rising
market. The Portfolio may have to sell securities at a time when it may be
disadvantageous to do so.
OPTIONS ON FUTURES CONTRACTS. The Portfolio may purchase and write
(sell) options on futures contracts for hedging purposes. The purchase of a call
option on a futures contract is similar in some respects to the purchase of a
call option on an individual security. Depending on the pricing of the option
compared to either the price of the futures contract upon which it is based or
the price of the underlying debt securities, it may or may not be less risky
than ownership of the futures contract or underlying debt securities. As with
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the purchase of futures contracts, when the Portfolio is not fully invested it
may purchase a call option on a futures contract to hedge against a market
advance due to declining interest rates.
The writing of a call option on a futures contract constitutes a
partial hedge against declining prices of the security that is deliverable upon
exercise of the futures contract. If the futures price at expiration of the
option is below the price specified in the option ("exercise price"), the
Portfolio will retain the full amount of the net premium (the premium received
for writing the option less any commission), which will provide a partial hedge
against any decline that may have occurred in its portfolio holdings. The
writing of a put option on a futures contract constitutes a partial hedge
against increasing prices of the security that is deliverable upon exercise of
the futures contract. If the futures price at expiration of the option is higher
than the exercise price, the Portfolio will retain the full amount of the option
net premium, which will provide a partial hedge against any increase in the
price of securities that the Portfolio intends to purchase. If a put or call
option the Portfolio has written is exercised, the Portfolio may incur a loss
that will be reduced by the amount of the net premium it receives. Depending on
the degree of correlation between changes in the value of its portfolio
securities and changes in the value of its futures positions, such losses from
existing options on futures may to some extent be reduced or increased by
changes in the value of portfolio securities.
The purchase of a put option on a futures contract is similar in some
respects to the purchase of put options on portfolio securities. For example,
the Portfolio may purchase a put option on a futures contract to hedge its
portfolio against the risk of rising interest rates. The amount of risk the
Portfolio assumes when it purchases an option on a futures contract is the
premium paid for the option plus related transaction costs. In addition to the
correlation risks discussed above, the purchase of an option also entails the
risk that changes in the value of the underlying futures contract will not be
fully reflected in the value of the option purchased.
The Portfolio Trust Board has adopted a restriction that the Portfolio
will not enter into any futures contract or option on a futures contract if
immediately thereafter the amount of margin deposits on all the futures
contracts held by the Portfolio and premiums paid on outstanding options on its
futures contracts (other than those entered into for BONA FIDE hedging purposes)
would exceed 5% of the market value of the Portfolio's total assets.
OPTIONS ON SECURITIES. The Portfolio may write (sell) covered call and
put options on its portfolio securities ("covered options") to a limited extent
in an attempt to increase income. However, the Portfolio may forgo the benefits
of appreciation on securities sold or may pay more than the market price on
securities acquired pursuant to call and put options it writes. A call option
written by a Portfolio is "covered" if the Portfolio owns the underlying
security covered by the call or has an absolute and immediate right to acquire
that security without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion or
exchange of other securities held in its portfolio. A call option is also
covered if the Portfolio holds a call option on the same security and in the
same principal amount as the written call option where the exercise price of the
call option so held (a) is equal to or less than the exercise price of the
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written call option or (b) is greater than the exercise price of the written
call option if the difference is maintained by the Portfolio in cash, U.S.
Government securities and other high quality liquid securities in a segregated
account with its custodian.
When the Portfolio writes a covered call option, it gives the purchaser
of the option the right to buy the underlying security at the exercise price by
exercising the option at any time during the option period. If the option
expires unexercised, the Portfolio will realize income in an amount equal to the
premium received for writing the option. If the option is exercised, a decision
over which the Portfolio has no control, the Portfolio must sell the underlying
security to the option holder at the exercise price. By writing a covered call
option, the Portfolio forgoes, in exchange for the net premium, the opportunity
to profit during the option period from an increase in the market value of the
underlying security above the exercise price.
When the Portfolio writes a covered put option, it gives the purchaser
of the option the right to sell the underlying security to the Portfolio at the
exercise price at any time during the option period. If the option expires
unexercised, the Portfolio will realize income in the amount of the net premium
received for writing the option. If the put option is exercised, a decision over
which the Portfolio has no control, the Portfolio must purchase the underlying
security from the option holder at the exercise price. By writing a covered put
option, the Portfolio, in exchange for the net premium, accepts the risk of a
decline in the market value of the underlying security below the exercise price.
The Portfolio will only write put options involving securities for which a
determination is made at the time the option is written that the Portfolio
wishes to acquire the securities at the exercise price.
The Portfolio may terminate its obligation as the writer of a call or
put option by purchasing an option with the same exercise price and expiration
date as the option previously written. This transaction is called a "closing
purchase transaction." The Portfolio will realize a profit or loss on a closing
purchase transaction if the amount paid to purchase the option is less or more,
as the case may be, than the amount received from the sale thereof. To close out
a position as a purchaser of an option, the Portfolio may enter into a "closing
sale transaction," which involves liquidating the Portfolio's position by
selling the option previously purchased. Where the Portfolio cannot effect a
closing purchase transaction, it may be forced to incur brokerage commissions or
dealer spreads in selling securities it receives or it may be forced to hold
underlying securities until an option is exercised or expires.
When the Portfolio writes an option, an amount equal to the net premium
received is included in the liability section of its Statement of Assets and
Liabilities as a deferred credit. The amount of the deferred credit will be
subsequently marked to market to reflect the current market value of the option.
The current market value of a traded option is the last sale price or, in the
absence of a sale, the mean between the closing bid and asked prices. If an
option expires or if the Portfolio enters into a closing purchase transaction,
the Portfolio will realize a gain (or loss if the cost of the closing purchase
transaction exceeds the net premium received when the option was sold), and the
deferred credit related to such option will be eliminated. If a call option is
exercised, the Portfolio will realize a gain or loss from the sale of the
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underlying security and the proceeds of the sale will be increased by the
premium originally received. The writing of covered call options may be deemed
to involve the pledge of the securities against which the option is being
written. Securities against which call options are written will be segregated on
the books of the custodian for the Portfolio.
The Portfolio may purchase call and put options on any securities in
which it may invest. The Portfolio would normally purchase a call option in
anticipation of an increase in the market value of such securities. The purchase
of a call option would entitle the Portfolio, in exchange for the premium paid,
to purchase a security at a specified price during the option period. The
Portfolio would ordinarily have a gain if the value of the securities increased
above the exercise price sufficiently to cover the premium and would have a loss
if the value of the securities remained at or below the exercise price during
the option period.
The Portfolio would normally purchase put options in anticipation of a
decline in the market value of securities in its portfolio ("protective puts")
or securities of the type in which it is permitted to invest. The purchase of a
put option would entitle the Portfolio, in exchange for the premium paid, to
sell a security, which may or may not be held in the Portfolio's holdings, at a
specified price during the option period. The purchase of protective puts is
designed merely to offset or hedge against a decline in the market value of the
Portfolio's holdings. Put options also may be purchased by the Portfolio for the
purpose of benefiting from a decline in the price of securities that the
Portfolio does not own. The Portfolio would ordinarily recognize a gain if the
value of the securities decreased below the exercise price sufficiently to cover
the premium and would recognize a loss if the value of the securities remained
at or above the exercise price. Gains and losses on the purchase of protective
put options would tend to be offset by countervailing changes in the value of
underlying portfolio securities.
The Portfolio has adopted certain non-fundamental policies concerning
option transactions that are discussed below. The Portfolio's activities in
options may also be restricted by the requirements of the Internal Revenue Code
of 1986, as amended (the "Code"), for qualification as a regulated investment
company.
The hours of trading for options on securities may not conform to the
hours during which the underlying securities are traded if the option markets
close before the markets for the underlying securities, significant price and
rate movements can take place in the underlying securities markets that will not
be reflected in the option markets. It is impossible to predict the volume of
trading that may exist in such options, and there can be no assurance that
viable exchange markets will develop or continue.
The Portfolio may engage in over-the-counter options transactions with
broker-dealers who make markets in these options. At present, approximately ten
broker-dealers, including several of the largest primary dealers in U.S.
Government securities, make these markets. The ability to terminate
over-the-counter option positions is more limited than with exchange-traded
option positions because the predominant market is the issuing broker rather
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than an exchange and may involve the risk that broker-dealers participating in
such transactions will not fulfill their obligations. To reduce this risk, the
Portfolio will purchase such options only from broker-dealers who are primary
U.S. Government securities dealers recognized by the Federal Reserve Bank of New
York and who agree to (and are expected to be capable of) entering into closing
transactions, although there can be no guarantee that any such option will be
liquidated at a favorable price prior to expiration. Bankers Trust will monitor
the creditworthiness of dealers with whom the Portfolio enters into such options
transactions under the general supervision of the Portfolio Trust Board.
OPTIONS ON SECURITIES INDICES. In addition to options on securities,
the Portfolio may also purchase and write (sell) call and put options on
securities indices. Such options give the holder the right to receive a cash
settlement on expiration of the option based upon the difference between the
exercise price and the value of the index.
Options on securities indices entail risks in addition to the risks of
options on securities. The absence of a liquid secondary market to close out
options positions on securities indices is more likely to occur, although the
Portfolio generally will only purchase or write such an option if Bankers Trust
believes the option can be closed out.
Use of options on securities indices also entails the risk that trading
in such options may be interrupted if trading in certain securities included in
the index is interrupted. The Portfolio will not purchase such options unless
Bankers Trust believes the market is sufficiently developed such that the risk
of trading in such options is no greater than the risk of trading in options on
securities.
Price movements in the Portfolio's holdings may not correlate precisely
with movements in the level of an index, and, therefore, the use of options on
indices cannot serve as a complete hedge. Because options on securities indices
require settlement in cash, Bankers Trust may be forced to liquidate portfolio
securities to meet settlement obligations.
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 Portfolio Trust Board. After purchase by
the Portfolio, an obligation may cease to be rated or its rating may be reduced
below the minimum required for purchase by the Portfolio. Neither event would
require the Portfolio to eliminate the obligation from its portfolio, but
Bankers Trust will consider such an event in its determination of whether the
Portfolio should continue to hold the obligation. A description of the ratings
referred to herein and in the Prospectus is set forth in the Appendix.
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INVESTMENT RESTRICTIONS
The following investment restrictions are "fundamental policies" of the
Fund and the Portfolio and may not be changed without the approval of a
"majority of the outstanding voting securities" of the Fund or the Portfolio, as
the case may be. "Majority of the outstanding voting securities" under the 1940
Act, and as used in this Statement of Additional Information and the Prospectus,
means, with respect to the Fund (or the Portfolio), the lesser of (1) 67% or
more of the outstanding voting securities of the Fund (or of the total
beneficial interests of the Portfolio) present at a meeting, if the holders of
more than 50% of the outstanding voting securities of the Fund (or of the total
beneficial interests of the Portfolio) are present or represented by proxy or
(2) more than 50% of the outstanding voting securities of the Fund (or of the
total beneficial interests of the Portfolio). Whenever the Trust is requested to
vote on a fundamental policy of the Portfolio, the Trust will hold a meeting of
the Fund's shareholders and will cast its vote as instructed by them. Fund
shareholders who do not vote will not affect the Trust's votes at the Portfolio
meeting. The Trust's votes representing Fund shareholders not voting will be
voted by the Trustees of the Trust in the same proportion as the Fund
shareholders who do, in fact, vote.
None of the fundamental and non-fundamental policies described below
shall prevent the Fund from investing all of its assets in an open-end
investment company with substantially the same investment objective. Because the
Fund and the Portfolio have the same fundamental policies and the Fund invests
all of its net investable assets in the Portfolio, the following discussion
(though speaking only of the Portfolio) applies to the Fund as well.
FUNDAMENTAL RESTRICTIONS. As a matter of fundamental policy, the
Portfolio may not:
(1) Borrow money (including through reverse repurchase or dollar roll
transactions) in excess of 5% of the Portfolio's total assets (taken at cost),
except that the Portfolio may borrow for temporary or emergency purposes up to
1/3 of its total assets. The Portfolio may pledge, mortgage or hypothecate not
more than 1/3 of such assets to secure such borrowings provided that collateral
arrangements with respect to options and futures, including deposits of initial
and variation margin, are not considered a pledge of assets for purposes of this
restriction and except that assets may be pledged to secure letters of credit
solely for the purpose of participating in a captive insurance company sponsored
by the Investment Company Institute;
(2) Underwrite securities issued by other persons except insofar as the
Portfolio may be deemed an underwriter under the 1933 Act in selling a portfolio
security;
(3) Make loans to other persons except (a) through the lending of the
Portfolio's portfolio securities and provided that any such loans not exceed 30%
of its total assets (taken at market value); (b) through the use of repurchase
agreements or the purchase of short-term obligations; or (c) by purchasing a
portion of an issue of debt securities of types distributed publicly or
privately;
(4) Purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or interests therein),
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interests in oil, gas or mineral leases, commodities or commodity contracts
(except futures and option contracts) in the ordinary course of business (except
that the Portfolio may hold and sell, for its portfolio, real estate acquired as
a result of the Portfolio's ownership of securities);
(5) Concentrate its investments in any particular industry (excluding
U.S. Government securities), but if it is deemed appropriate for the achievement
of the Portfolio's investment objective, up to 25% of its total assets may be
invested in any one industry;
(6) Issue any senior security (as that term is defined in the 1940 Act)
if such issuance is specifically prohibited by the 1940 Act or the rules and
regulations promulgated thereunder, provided that collateral arrangements with
respect to options and futures contracts, including deposits of initial and
variation margin, are not considered to be the issuance of a senior security for
purposes of this restriction;
(7) Purchase, with respect to 75% of the Portfolio's total assets,
securities of any issuer if such purchase at the time thereof would cause the
Portfolio to hold more than 10% of any class of securities of such issuer, for
which purposes all indebtedness of an issuer shall be deemed a single class and
all preferred stock of an issuer shall be deemed a single class, except that
options or futures contracts shall not be subject to this restriction; and
(8) Invest, with respect to 75% of the Portfolio's total assets, more
than 5% of its total assets in the securities (excluding U.S. Government
securities) of any one issuer.
NON-FUNDAMENTAL RESTRICTIONS. In order to comply with certain federal
statutes and policies and for other reasons, the Portfolio will not, as a matter
of operating policy (these restrictions may be changed by a vote of the Trustees
or the Portfolio Trust or the Trust as applicable without shareholder approval):
(i) purchase any security or evidence of interest therein on
margin, except that short-term credit necessary for the
clearance of purchases and sales of securities may be obtained
and deposits of initial and variation margin may be made in
connection with the purchase, ownership, holding or sale of
futures contracts;
(ii) sell securities it does not own (short sales). (This
restriction does not preclude short sales "against the box"
(that is, sales of securities (a) the Portfolio
contemporaneously owns or (b) where the Portfolio has the
right to obtain securities equivalent in kind and amount to
those sold). The Portfolio has no current intention to engage
in short selling);
(iii) purchase securities issued by any investment company except to
the extent permitted by the 1940 Act, except that this
limitation does not apply to securities received or acquired
as dividends, through offers of exchange, or as a result of
reorganization, consolidation or merger; and
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(iv) invest more than 15% of the Portfolio's net assets (taken at
the greater of cost or market value) in securities that are
illiquid or not readily marketable (excluding Rule 144A
securities deemed by the Portfolio Board to be liquid).
An investment restriction will not be considered violated if that
restriction is complied with at the time the relevant action is taken,
notwithstanding a later change in the market value of an investment, in net or
total assets or in the change of securities rating of the investment or any
other later change.
The Portfolio will comply with the permitted investments and investment
limitations in the securities laws and regulations of all states in which the
corresponding Fund, or any other registered investment company investing in the
Portfolio, is registered.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Bankers Trust is responsible for decisions to buy and sell securities,
futures contracts and options thereon for the Portfolio, the selection of
brokers, dealers and futures commission merchants to effect transactions and the
negotiation of brokerage commissions, if any. Broker- dealers may receive
brokerage commissions on portfolio transactions, including options, futures
contracts and options on futures transactions and the purchase and sale of
underlying securities upon the exercise of options. Orders may be directed to
any broker-dealer or futures commission merchant, including, to the extent and
in the manner permitted by applicable law, Bankers Trust or its subsidiaries or
affiliates. Purchases and sales of certain portfolio securities on behalf of the
Portfolio are frequently placed by Bankers Trust with the issuer or a primary or
secondary market-maker for these securities on a net basis, without any
brokerage commission being paid by the Portfolio. Trading does, however, involve
transaction costs. Transactions with dealers serving as market-makers reflect
the spread between the bid and asked prices. Transaction costs may also include
fees paid to third parties for information as to potential purchasers or sellers
of securities. Purchases of underwritten issues may be made that will include an
underwriting fee paid to the underwriter.
Bankers Trust seeks to evaluate the overall reasonableness of the
brokerage commissions paid (to the extent applicable) in placing orders for the
purchase and sale of securities for the Portfolio taking into account such
factors as price, commission (negotiable in the case of national securities
exchange transactions), if any, size of order, difficulty of execution and skill
required of the executing broker-dealer through familiarity with commissions
charged on comparable transactions, as well as by comparing commissions paid by
the Portfolio to reported commissions paid by others. Bankers Trust reviews on a
routine basis commission rates, execution and settlement services performed,
making internal and external comparisons.
Bankers Trust is authorized, consistent with Section 28(e) of the
Securities Exchange Act of 1934, as amended, when placing portfolio transactions
for the Portfolio with a broker to pay a brokerage commission (to the extent
applicable) in excess of that which another broker might have charged for
effecting the same transaction on account of the receipt of research, market or
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statistical information. The term "research, market or statistical information"
includes (a) advice as to (i) the value of securities, (ii) the advisability of
investing in, purchasing or selling securities, and (iii) the availability of
securities or purchasers or sellers of securities and (b) furnishing analyses
and reports concerning issuers, industries, securities, economic factors and
trends, portfolio strategy and the performance of accounts. Higher commissions
may be paid to firms that provide research services to the extent permitted by
law. Bankers Trust may use this research information in managing the Portfolio's
assets, as well as the assets of other clients.
Consistent with the policy stated above, the Conduct Rules of the
National Association of Securities Dealers, Inc. and such other policies as the
Portfolio Trust Board may determine, Bankers Trust may consider sales of shares
of the Fund 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.
Except for implementing the policies stated above, there is no
intention to place portfolio transactions with particular brokers or dealers or
groups thereof. In effecting transactions in over-the-counter securities, orders
are placed with the principal market-makers for the security being traded
unless, after exercising care, it appears that more favorable results are
available otherwise.
Although certain research, market or statistical information from
brokers and dealers can be useful to the Portfolio and to Bankers Trust, it is
the opinion of the Portfolio's management that such information is only
supplementary to Bankers Trust's own research effort, since the information must
still be analyzed, weighed and reviewed by Bankers Trust's staff. Such
information may be useful to Bankers Trust in providing services to clients
other than the Portfolio, and not all such information is used by Bankers Trust
in connection with the Portfolio. Conversely, such information provided to
Bankers Trust by brokers and dealers through whom other clients of Bankers Trust
effect securities transactions may be useful to Bankers Trust in providing
services to the Portfolio.
In certain instances there may be securities that are suitable for the
Portfolio, as well as for one or more of Bankers Trust's other clients.
Investment decisions for the Portfolio and for Bankers Trust's other clients are
made with a view to achieving their respective investment objectives. It may
develop that a particular security is bought or sold for only one client even
though it might be held by, or bought or sold for, other clients. Likewise, a
particular security may be bought for one or more clients when one or more
clients are selling that same security. Some simultaneous transactions are
inevitable when several clients receive investment advice from the same
investment adviser, particularly when the same security is suitable for the
investment objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same security, the
securities are allocated between (among) clients in a manner believed to be
equitable to each. It is recognized that in some cases this system could have a
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detrimental effect on the price or volume of the security as far as the
Portfolio is concerned. However, it is believed that the ability of the
Portfolio to participate in volume transactions will produce better executions
for the Portfolio.
PERFORMANCE INFORMATION
STANDARD PERFORMANCE INFORMATION
From time to time, quotations of the Fund's performance may be included
in advertisements, sales literature or shareholder reports. These performance
figures are calculated in the following manner:
YIELD: Yield refers to the income generated by an investment in the
Fund over a given period of time, expressed as an annual percentage
rate. Yields are calculated according to a standard that is required
for all stock and bond mutual funds. Because this differs from other
accounting methods, the quoted yield may not equal the income actually
paid to shareholders.
Performance information or advertisements may include comparisons of
the Fund's investment results to various unmanaged indices or results
of other mutual funds or investment or savings vehicles. From time to
time, the Fund's ranking may be quoted from various sources, such as
Lipper Analytical Services, Inc., Value Line, Inc. and Morningstar,
Inc.
Unlike some bank deposits or other investments that pay a fixed yield
for a stated period of time, the total return of the Fund will vary
depending upon interest rates, the current market value of the
securities held by the Portfolio and the Wrapper Agreements and changes
in the expenses of the Fund and the Portfolio. In addition, during
certain periods for which total return may be provided, Bankers Trust
may have voluntarily agreed to waive portions of its fees, or to
reimburse certain operating expenses of the Fund or the Portfolio, on a
month-to-month basis. Such waivers will have the effect of increasing
the Fund's net income (and therefore its yield and total return) during
the period such waivers are in effect.
TOTAL RETURN: The Fund's average annual total return is calculated for
certain periods by determining the average annual compounded rates of
return over those periods that would cause an investment of $1,000
(made at the maximum public offering price with all distributions
reinvested) to reach the value of that investment at the end of the
periods. The Fund may also calculate total return figures that
represent aggregate performance over a period or year-by-year
performance.
PERFORMANCE RESULTS: Any performance information provided for the Fund
should not be considered as representative of its performance in the
future, because the NAV and public offering price of Shares will vary
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based not only on the type, quality and maturities of the securities
held by the Portfolio but also on changes in the current value of such
securities and on changes in the expenses of the Fund and the
Portfolio. Total return reflects the performance of both principal and
income.
COMPARISON OF FUND PERFORMANCE
Comparison of the quoted nonstandardized performance of various
investments is valid only if performance is calculated in the same manner. Since
there are different methods of calculating performance, investors should
consider the effect of the methods used to calculate performance when comparing
performance of the Fund with performance quoted with respect to other investment
companies or types of investments.
In connection with communicating its performance to current or
prospective shareholders, the Fund also may compare these figures to the
performance of other mutual funds tracked by mutual fund rating services or to
unmanaged indices that may assume reinvestment of dividends but generally do not
reflect deductions for administrative and management costs. Evaluations of the
Fund's performance made by independent sources may also be used in
advertisements concerning the Fund. Sources for the Fund's performance
information could include the following: ASIAN WALL STREET JOURNAL, BARRON'S,
BUSINESS WEEK, CHANGING TIMES THE KIPLINGER MAGAZINE, CONSUMER DIGEST, FINANCIAL
TIMES, FINANCIAL WORLD, FORBES, FORTUNE, GLOBAL INVESTOR, INVESTOR'S DAILY,
LIPPER ANALYTICAL SERVICES. INC.'S MUTUAL FUND PERFORMANCE ANALYSIS, MONEY,
MORNINGSTAR INC., NEW YORK TIMES, PERSONAL INVESTING NEWS, PERSONAL INVESTOR,
SUCCESS, U.S. NEWS AND WORLD REPORT, VALUELINE, WALL STREET JOURNAL,
WEISENBERGER INVESTMENT COMPANIES SERVICES, WORKING WOMEN and WORTH.
VALUATION OF ASSETS; REDEMPTIONS IN KIND
Debt securities (other than short-term debt obligations maturing in 60
days or less), including listed securities and securities for which price
quotations are available, will normally be valued on the basis of market
valuations furnished by a pricing service. Such market valuations may represent
the last quoted price on the securities' major trading exchange or quotes
received from dealers or market makers in the relevant securities or may be
determined through the use of matrix pricing. In matrix pricing, pricing
services may use various pricing models, involving comparable securities,
historic relative price movements, economic factors and dealer quotations.
Over-the-counter securities will normally be valued at the bid price. Short-term
debt obligations and money market securities maturing in 60 days or less are
valued at amortized cost.
Securities for which market quotations are not readily available are
valued by Bankers Trust pursuant to procedures adopted by the Portfolio Trust
Board.
The NAV per Share is calculated once on each Valuation Day as of the
Valuation Time, which is currently 4:00 p.m., New York time, or if the NYSE
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closes early, at the time of such early closing. The NAV per Share is computed
by dividing the value of the Fund's assets (I.E., the value of its investment in
the Portfolio and other assets, if any), less all liabilities, by the total
number of its Shares outstanding. The Portfolio's securities and other assets
are valued primarily on the basis of market quotations or, if quotations are not
readily available, by a method that Portfolio Trust Board believes accurately
reflects fair value.
Pursuant to procedures adopted by the Portfolio Trust Board, the Wrapper
Value generally will be equal to the difference between the Book Value and the
market value (plus accrued interest on the underlying securities) of the
applicable Covered Assets. If the market value (plus accrued interest on the
underlying securities) of the Covered Assets is greater than their Book Value,
the Wrapper Value will be reflected as a liability of the Portfolio in the
amount of the difference, I.E., a negative value, reflecting the potential
liability of the Portfolio to the Wrapper Provider. If the market value (plus
accrued interest on the underlying securities) of the Covered Assets is less
than their Book Value, the Wrapper Value will be reflected as an asset of the
Portfolio in the amount of the difference, I.E., a positive value, reflecting
the potential liability of the Wrapper Provider to the Portfolio. In performing
its fair value determination, the Portfolio Trust Board expects to consider the
creditworthiness and ability of a Wrapper Provider to pay amounts due under the
Wrapper Agreement. If the Portfolio Trust Board determine that a Wrapper
Provider is unable to make such payments, that Board may assign a fair value to
the Wrapper Agreement that is less than the difference between the Book Value
and the market value (plus accrued interest on the underlying securities) of the
applicable Covered Assets and the Portfolio might be unable to maintain NAV
stability.
The problems inherent in making a good faith determination of value are
recognized in the codification effected by SEC Financial Reporting Release No. 1
(formerly Accounting Series Release No. 113) ("FRR 1"), which concludes that
there is "no automatic formula" for calculating the value of restricted
securities. It recommends that the best method simply is to consider all
relevant factors before making any calculation. According to FRR 1, such factors
would include consideration of the --
type of security involved, financial statements, cost at date
of purchase, size of holding, discount from market value of
unrestricted securities of the same class at the time of
purchase, special reports prepared by analysts, information as
to any transactions or offers with respect to the security,
existence of merger proposals or tender offers affecting the
security, price and extent of public trading in similar
securities of the issuer or comparable companies, and other
relevant matters.
If the Portfolio purchases securities that are restricted as to resale
or for which current market quotations are not readily available, Bankers Trust
will value such securities based upon all relevant factors as outlined in FRR 1.
Each Trust, on behalf of the Fund, and the Portfolio reserves the
right, if conditions exist that make cash payments undesirable, or for other
reasons, to honor any request for redemption or withdrawal, respectively, by
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making payment wholly or partly in Portfolio Securities and in Wrapper
Agreements, as the same may be chosen by Bankers Trust in its sole discretion (a
"redemption in kind"). Such securities and Wrapper Agreements shall be valued as
they are for purposes of computing the Fund's or the Portfolio's NAV, as the
case may be. If payment is made to a Fund shareholder in securities, the
shareholder may incur transaction expenses in converting those securities into
cash. Wrapper Agreements are not liquid securities and may impose restrictions
on termination, including notice periods of one year. The continued maintenance
of Wrapper Agreements given in kind may require the payment of fees to the
Wrapper Provider. The Trust, on behalf of the Fund, and the Portfolio have
elected to be governed by Rule 18f-1 under the 1940 Act, as a result of which
they are obligated to redeem Shares or beneficial interests, respectively, with
respect to any one investor during any 90-day period solely in cash up to the
lesser of $250,000 or 1% of the NAV of the Fund or the Portfolio, as the case
may be, at the beginning of the period. The Trust, on behalf of the Fund, is
also seeking an exemptive order from the SEC with respect to redemptions in kind
made to 5% or greater shareholders of the Fund.
The Portfolio has agreed to make a redemption in kind to the Fund
whenever the Fund wishes to make a redemption in kind to a shareholder thereof,
and therefore Fund shareholders that receive redemptions in kind will receive
Portfolio Securities and Wrapper Agreements of the Portfolio and in no case will
they receive a security issued by the Portfolio. The Portfolio has advised the
Trust that the Portfolio will not redeem in kind except in circumstances in
which the Fund is permitted to redeem in kind or unless requested by the Fund.
Each investor in the Portfolio, including the Fund, may add to or
reduce its investment in the Portfolio on each business day the Portfolio
determines its NAV. At the close of business on each such day, the value of each
investor's beneficial interest in the Portfolio will be determined by
multiplying the NAV of the Portfolio by the percentage effective for that day
that represents that investor's share of the aggregate beneficial interests in
the Portfolio. Any additions or withdrawals that are to be effected as of the
close of business on that day will then be effected. The investor's percentage
of the aggregate beneficial interests in the Portfolio will then be recomputed
as the percentage equal to a fraction (a) the numerator of which is the value of
the investor's investment in the Portfolio as of the close of business on that
day plus or minus, as the case may be, the amount of net additions to or
withdrawals from the investor's investment in the Portfolio effected as of the
close of business on that day, and (b) the denominator of which is the aggregate
NAV of the Portfolio as of the close of business on that day plus or minus, as
the case may be, the amount of net additions to or withdrawals from the
aggregate investments in the Portfolio by all investors therein. The percentage
so determined will then be applied to determine the value of the investor's
interest in the Portfolio as the close of business on the following business
day.
MANAGEMENT OF THE TRUSTS
Each Board of Trustees is composed of persons experienced in financial
matters who meet throughout the year to oversee the activities of the Fund or
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the Portfolio, as the case may be. In addition, the Trustees review contractual
arrangements with companies that provide services to the Fund/Portfolio and
review the Fund's performance.
The Trustees and officers of the Trusts, their birthdates, and their
principal occupations during the past five years are set forth below. Their
titles may have varied during that period. Unless otherwise indicated, the
address of each is Clearing Operations, P.O. Box 897, Pittsburgh, Pennsylvania
15230-0897. An asterisk indicates that Trustee who is an "interested person" (as
defined in the 1940 Act) of either Trust.
TRUSTEES OF THE TRUST
PHILIP W. COOLIDGE* (birthdate: 9/2/1951) - Chairman, Chief Executive
Officer and President, Signature Financial Group, Inc. ("SFG") (since December,
1988) and Signature Broker-Dealer Services, Inc. ("Signature") (since April,
1989). His address is 6 St. James Avenue, Boston, Massachusetts 02116.
MARTIN J. GRUBER (birthdate: 7/15/1937) - Trustee; Chairman of the
Finance Department and Nomura Professor of Finance, Leonard N. Stern School of
Business, New York University (since 1964).
KELVIN J. LANCASTER (birthdate: 12/10/1924) - Trustee; Professor,
Department of Economics, Columbia University. His address is 35 Claremont
Avenue, New York, New York 10027.
HARRY VAN BENSCHOTEN (birthdate: 2/18/1928) - Trustee; Director, Canada
Life Insurance Company of New York; Director, Competitive Technologies, Inc., a
public company listed on the American Stock Exchange; Retired (since 1987);
Corporate Vice President, Newmont Mining Corporation (prior to 1987). His
address is 6581 Ridgewood Drive, Naples, Florida 33963.
TRUSTEES OF THE PORTFOLIO TRUST
CHARLES P. BIGGAR (birthdate: 10/13/1930) - Trustee; Retired; Director
of Chase/NBW Bank Advisory Board; Director, Batemen, Eichler, Hill Richards
Inc.; formerly Vice President of International Business Machines and President
of the National Services and the Field Engineering Divisions of IBM. His address
is 12 Hitching Post Lane, Chappaqua, New York 10514.
PHILIP W. COOLIDGE* (birthdate: 9/2/1951) - Chairman, Chief Executive
Officer and President, SFG (since December, 1988) and Signature (since April,
1989).
S. LELAND DILL (birthdate: 3/28/1930) - Trustee; Retired; Director,
Coutts & Company Group; Coutts & Co. (U.S.A.) International; Director, Zweig
Series Trust; formerly Partner of KPMG Peat Marwick; Director, Vinters
International Company Inc.; General Partner
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<PAGE>
of Pemco (an investment company registered under the 1940 Act). His address is
5070 North Ocean Drive, Singer Island, Florida 33404.
PHILIP SAUNDERS, JR. (birthdate: 10/11/1935) - Trustee; Principal,
Philip Saunders Associates (Consulting); former Director of Financial Industry
Consulting, Wolf & Company; President, John Hancock Home Mortgage Corporation;
and Senior Vice President of Treasury and Financial Services, John Hancock
Mutual Life Insurance Company, Inc. His address is 445 Glen Road, Weston,
Massachusetts 02193.
OFFICERS OF THE TRUSTS
Unless otherwise specified, each officer listed below holds the same
position with each Trust.
RONALD M. PETNUCH (birthdate: February 27, 1960) - President and
Treasurer, Senior Vice President; Federated Services Company ("FSC"); formerly,
Director of Proprietary Client Services, Federated Administrative Services
("FAS"), and Associate Corporate Counsel, Federal Investors ("FI").
CHARLES L. DAVIS, JR. (birthdate: March 23, 1960) - Vice President and
Assistant Treasurer; Vice President, FAS.
JAY S. NEUMAN (birthdate: April 22, 1950) - Secretary; Corporate
Counsel, FI.
Messrs. Coolidge, Petnuch, Davis and Neuman also hold similar positions
for other investment companies for which Signature or Edgewood Services, Inc.,
respectively, or an affiliate, serves as the principal underwriter.
TRUSTEES' COMPENSATION
Compensation Compensation
NAME OF TRUSTEE FROM TRUST* from Portfolio Fund Complex**
Harry Van Benschoten $ N/A $
Trustee of Trust
Philip W. Coolidge None None None
Trustee of Trust and
Portfolio Trust
Martin J. Gruber $ $ $
Trustee of Trust
Kelvin J. Lancaster $ N/A $
Trustee of Trust
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<PAGE>
Compensation Compensation
NAME OF TRUSTEE FROM TRUST* from Portfolio Fund Complex**
Charles P. Biggar N/A $ $
Trustee of
Portfolio Trust
S. Leland Dill N/A $ $
Trustee of
Portfolio Trust
Philip Saunders, Jr. N/A $ $
Trustee of
Portfolio Trust
* The aggregate compensation is provided for the Trust which is
comprised of 6 funds. Information is furnished for the fiscal year ended
[_______________, 19__].
** Information provided for last calendar year.
As of _________, 1996, the Trustees and officers of the Trusts and the
Fund owned in the aggregate less than 1% of the shares of any fund or the Trust
(all series taken together).
INVESTMENT ADVISER
Under the terms of the Portfolio's investment advisory agreement with
Bankers Trust (the "Advisory Agreement"), Bankers Trust manages the Portfolio
subject to the supervision and direction of the Board of Trustees of the
Portfolio. Bankers Trust will: (i) act in strict conformity with the Portfolio's
Declaration of Trust, the 1940 Act and the Investment Advisers Act of 1940, as
the same may from time to time be amended; (ii) manage the Portfolio in
accordance with the Portfolio's investment objectives, restrictions and
policies; (iii) make investment decisions for the Portfolio; and (iv) place
purchase and sale orders for securities and other financial instruments on
behalf of the Portfolio.
Bankers Trust bears all expenses in connection with the performance of
services under the Advisory Agreement. The Trust and the Portfolio bears certain
other expenses incurred in its operation, including: taxes, interest, brokerage
fees and commissions, if any; fees of Trustees of the Trust or the Portfolio who
are not officers, directors or employees of Bankers Trust, Edgewood or any of
their affiliates; SEC fees and state Blue Sky qualification fees; charges of
custodians and transfer and dividend disbursing agents; certain insurance
premiums; outside auditing and legal expenses; costs of maintenance of corporate
existence; costs attributable to investor services, including, without
limitation, telephone and personnel expenses; costs of preparing and printing
prospectuses and statements of additional information for regulatory purposes
and for distribution to existing shareholders; costs of shareholders' reports
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<PAGE>
and meetings of shareholders, officers and Trustees of the Trust or the
Portfolio; and any extraordinary expenses.
As of _________________________, the Portfolio had not commenced
investment operations and did not accrue investment advisory fees.
Bankers Trust may have deposit, loan and other commercial banking
relationships with the issuers of obligations which may be purchased on behalf
of the Portfolio, including outstanding loans to such issuers which could be
repaid in whole or in part with the proceeds of securities so purchased. Such
affiliates deal, trade and invest for their own accounts in such obligations and
are among the leading dealers of various types of such obligations. Bankers
Trust has informed the Portfolio that, in making its investment decisions, it
does not obtain or use material inside information in its possession or in the
possession of any of its affiliates. In making investment recommendations for
the Portfolio, Bankers Trust will not inquire or take into consideration whether
an issuer of securities proposed for purchase or sale by the Portfolio is a
customer of Bankers Trust, its parent or its subsidiaries or affiliates and, in
dealing with its customers, Bankers Trust, its parent, subsidiaries and
affiliates will not inquire or take into consideration whether securities of
such customers are held by any fund managed by Bankers Trust or any such
affiliate.
ADMINISTRATOR
Under the administration and services agreements, Bankers Trust is
obligated on a continuous basis to provide such administrative services as the
Board of Trustees of the Trust and the Portfolio reasonably deem necessary for
the proper administration of the Trust or the Portfolio. Bankers Trust will
generally assist in all aspects of the Fund's and Portfolio's operations; supply
and maintain office facilities (which may be in Bankers Trust's own offices),
statistical and research data, data processing services, clerical, accounting,
bookkeeping and record keeping services (including without limitation the
maintenance of such books and records as are required under the 1940 Act and the
rules thereunder, except as maintained by other agents), executive and
administrative services, and stationery and office supplies; prepare reports to
shareholders or investors; prepare and file tax returns; supply financial
information and supporting data for reports to and filings with the SEC and
various state Blue Sky authorities; supply supporting documentation for meetings
of the Board of Trustees; provide monitoring reports and assistance regarding
compliance with Declarations of Trust, by-laws, investment objectives and
policies and with Federal and state securities laws; arrange for appropriate
insurance coverage; calculate net asset values, net income and realized capital
gains or losses; and negotiate arrangements with, and supervise and coordinate
the activities of, agents and others to supply services.
Pursuant to a sub-administration agreement (the "Sub-Administration
Agreement"), FSC performs such sub-administration duties for the Trust and the
Portfolio as from time to time may be agreed upon by Bankers Trust and the FSC.
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The Sub-Administration Agreement provides that FSC will receive such
compensation as from time to time may be agreed upon by FSC and Bankers Trust.
All such compensation will be paid by Bankers Trust.
As of ____________________, the Portfolio had not commenced investment
operations and did not accrue administrative fees.
Bankers Trust has agreed that if in any fiscal year the aggregate
expenses of the Fund and the Portfolio (including fees pursuant to the Advisory
Agreement, but excluding interest, taxes, brokerage and, if permitted by the
relevant state securities commissions, extraordinary expenses) exceed the
expense limitation of any state having jurisdiction over 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 the Fund is 2.50% of the
Fund's 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, 130 Liberty Street, New York, New York 10006, serves as
Custodian for the Trust and for the Portfolio pursuant to the administration and
services agreements. As Custodian, it holds the Fund's and the Portfolio's
assets. Bankers Trust also serves as transfer agent of the Trust and of the
Portfolio pursuant to the respective administration and services agreement.
Under its transfer agency agreement with the Trust, Bankers Trust maintains the
shareholder account records for the Fund, handles certain communications between
shareholders and the Trust and causes to be distributed any dividends and
distributions payable by the Trust. Bankers Trust may be reimbursed by the Fund
or the Portfolio for its out-of-pocket expenses. Bankers Trust will comply with
the self-custodian provisions of Rule 17f-2 under the 1940 Act.
USE OF NAME
The Trust and Bankers Trust have agreed that the Trust may use the
letters "BT" as part of its name for so long as Bankers Trust serves as
investment adviser to the Portfolio. The Trust has acknowledged that the letters
"BT" is used by and is a property right of certain subsidiaries of Bankers Trust
and that those subsidiaries and/or Bankers Trust may at any time permit others
to use that term.
The Trust may be required, on 60 days' notice from Bankers Trust at any
time, to abandon use of the letters "BT" as part of its name. If this were to
occur, the Trustees would select an appropriate new name for the Trust, but
there would be no other material effect on the Trust, its shareholders or
activities.
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BANKING REGULATORY MATTERS
Bankers Trust has been advised by its counsel that in its opinion
Bankers Trust may perform the services for the Portfolio contemplated by the
Advisory Agreement and other activities for the Fund and the Portfolio described
in the Prospectus and this 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 and the
Portfolio. State laws on this issue may differ from the interpretations of
relevant Federal law and banks and financial institutions may be required to
register as dealers pursuant to state securities law. If the circumstances
described above should change, the Boards of Trustees would review the
relationships with Bankers Trust and consider taking all actions necessary in
the circumstances.
COUNSEL AND INDEPENDENT ACCOUNTANTS
Willkie Farr & Gallagher, One Citicorp Center, 153 East 53rd Street,
New York, New York 10022-4669, serves as counsel to the Trusts. Ernst & Young
LLP, 787 Seventh Avenue, New York, New York 10019, acts as independent
accountants of the Fund and the Portfolio.
ORGANIZATION OF THE TRUST
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 that liabilities of
each series of the Trust (including the Fund) are chargeable only against assets
of that series and that a creditor of one series may not seek satisfaction from
the assets of another series. The Declaration of Trust also provides for
indemnification from the Fund's property for all losses and expenses of any
shareholder held personally liable for the obligations of the Fund. Thus, the
risk of a shareholder's incurring financial loss on account of shareholder
liability is limited to circumstances in which the Fund itself would be unable
to meet its obligations, a possibility that the Trust believes is remote. Upon
payment of any liability incurred by the Fund, the shareholder paying the
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<PAGE>
liability would be entitled to reimbursement from the general assets of the
Fund. The Trustees intend to conduct the operations of the Fund in a manner so
as to avoid, as far as possible, ultimate liability of the shareholders for
liabilities of the Fund.
The Trust was organized on February 28, 1992.
Except as described below, whenever the Fund is requested to vote on
matters pertaining to the Portfolio, the Fund will hold a meeting of its
shareholders and will cast its votes proportionately as instructed by Fund
shareholders. However, subject to applicable statutory and regulatory
requirements, the Fund will not request a vote of its shareholders with respect
to any proposal relating to the Portfolio that (a) if made with respect to the
Fund, would not require the vote of the shareholders of the Fund, or (b) is
identical in all material respects to a proposal that has previously been
approved by the Fund's shareholders. Any proposal submitted to holders in the
Portfolio, and that is not required to be voted on by the Fund's shareholders,
will nonetheless be voted on by the Trust Board.
TAXATION
TAXATION OF THE FUND
The Fund intends to qualify annually to be treated as a regulated
investment company under the Code. To qualify for that treatment, the Fund must,
among other things, (a) derive at least 90% of its gross income each taxable
year from dividends, interest, payments with respect to securities loans and
gains from the sale or other disposition of securities, or other income
(including gains from options or futures contracts) derived with respect to its
business of investing in securities (the "Income Requirement"), (b) derive less
than 30% of its gross income each taxable year from the sale or other
disposition of securities, options or futures contracts held less than three
months (the "30% Limitation"), (c) diversify its holdings so that, at the end of
each quarter of its taxable year, (i) at least 50% of the value of its assets is
represented by cash and cash items (including receivables), U.S. Government
securities, securities of other regulated investment companies and other
securities, with such other securities of any one issuer limited to an amount
not greater than 5% of the value of the Fund's total assets and not greater than
10% of the issuer's outstanding voting securities and (ii) not more than 25% of
the value of its total assets is invested in the securities of any one issuer
(other than U.S. Government securities or the securities of other regulated
investment companies), and (d) distribute for each taxable year at least 90% of
its investment company taxable income (generally consisting of interest,
dividends and the excess of net short-term capital gain over net long-term
capital loss).
The Fund will be subject to a nondeductible 4% excise tax to the extent
it fails to distribute by the end of any calendar year substantially all of its
ordinary income for that year and capital gain net income for the one-year
period ending on October 31 of that year, plus any undistributed amount from the
prior year.
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The Fund, as an investor in the Portfolio, will be deemed to own a
proportionate share of the Portfolio's assets, and to earn a proportionate share
of the Portfolio's income, for purposes of determining whether the Fund
satisfies all the requirements described above to qualify as a regulated
investment company. See the next section for a discussion of the tax
consequences to the Fund of hedging transactions engaged in by the Portfolio.
The Trust is organized as a Massachusetts business trust, and neither
the Trust nor the Fund is liable for any income or franchise tax in the
Commonwealth of Massachusetts, provided the Fund continues to qualify as a
regulated investment company under Subchapter M of the Code. The investment by
the Fund in the Portfolio will not cause the Fund to be liable for any income or
franchise tax in the State of New York.
TAXATION OF THE PORTFOLIO
The Portfolio will be treated as a separate partnership for federal
income tax purposes and will not be a "publicly traded partnership." As a
result, the Portfolio will not be subject to federal income tax. Instead, the
Fund and other investors in the Portfolio will be required to take into account,
in computing their federal income tax liability, their respective shares of the
Portfolio's income, gains, losses, deductions and credits, without regard to
whether they have received any cash distributions from the Portfolio. The
Portfolio also will not be subject to state income or franchise tax.
Because, as noted above, the Fund will be deemed to own a proportionate
share of the Portfolio's assets, and to earn a proportionate share of the
Portfolio's income, for purposes of determining whether the Fund satisfies the
requirements to qualify as a regulated investment company, the Portfolio intends
to conduct its operations so that the Fund will be able to satisfy all those
requirements.
Distributions received by the Fund from the Portfolio (whether pursuant
to a partial or complete withdrawal or otherwise) generally will not result in
the Fund's recognizing any gain or loss for federal income tax purposes, except
that (a) gain will be recognized to the extent any cash that is distributed
exceeds the Fund's basis for its interest in the Portfolio prior to the
distribution, (b) income or gain will be realized if the distribution is in
liquidation of the Fund's entire interest in the Portfolio and includes a
disproportionate share of any unrealized receivables held by the Portfolio, and
(c) loss will be recognized if a liquidation distribution consists solely of
cash and/or unrealized receivables. The Fund's basis for its interest in the
Portfolio generally will equal the amount of cash and the basis of any property
the Fund invests in the Portfolio, increased by the Fund's share of the
Portfolio's net income and gains and decreased by (i) the amount of any cash and
the basis of any property distributed from the Portfolio to the Fund and (ii)
the Fund's share of the Portfolio's losses, if any.
The Portfolio's use of hedging strategies, such as writing (selling)
and purchasing options and futures contracts, involves complex rules that will
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determine for income tax purposes the character and timing of recognition of the
gains and losses it realizes in connection therewith. Gains from options and
futures contracts derived by the Portfolio with respect to its business of
investing in securities will qualify as permissible income for the Fund under
the Income Requirement. However, income from the disposition of options and
futures contracts will be subject to the 30% Limitation for the Fund if they are
held for less than three months.
SALE OF SHARES
Any gain or loss realized by a shareholder on the sale or other
disposition of Shares, or on receipt of a distribution in complete liquidation
of the Fund, generally will be a capital gain or loss that will be long-term or
short-term, 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 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 Shares held 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 those Shares.
FOREIGN WITHHOLDING TAXES
Income received by the Portfolio from sources within foreign countries
may be subject to withholding and other taxes imposed by those countries that
would reduce the yield on its securities. Tax conventions between certain
countries and the United States may reduce or eliminate these foreign taxes,
however, and many foreign countries do not impose taxes on capital gains in
respect of investments by foreign investors.
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APPENDIX
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS:
Aaa- Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edge."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa securities.
A - Bonds rated A possess many favorable investment attributes and are to be
considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa - Bonds rated Baa are considered as medium-grade obligations, i.e. they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such, bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba - Bonds rated Ba are judged to have speculative elements. Their future cannot
be considered as well assured. Often the protection of interest and principal
payments may be very moderate and thereby not well safeguarded during both (good
and bad times over the future). Uncertainty of position characterizes bonds in
this class.
B - Bonds rated B generally lack characteristics of a desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked short-comings.
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C - Bonds rated C are the lowest-rated class of bonds and issued so rated can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
Moody's applies numerical modifiers, 1, 2, and 3, in each generic rating
classification from Aa through B in its corporate bond system. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
DESCRIPTION OF S&P'S CORPORATE BOND RATINGS:
AAA- Debt rated AAA has the highest rating assigned by Standard & Poor's to a
debt obligation. Capacity to pay interest and repay principal is extremely
strong.
AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher-rated issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to weakened capacity to pay interest and repay principal for debt
in this category than in higher-rated categories.
BB - Debt rate BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments.
B - Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB- rating.
CCC - Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal.
CC - Debt rated CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating.
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C - The rating C is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC- debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed but debt service
payments are continued.
CI - The rating CI is reserved for income bonds on which no interest is being
paid.
D - Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating will also be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
DUFF & PHELPS' LONG-TERM DEBT RATINGS:
- -------------------------------------
- --------------------------------------------------------------------------------
AAA Highest credit quality. The risk factors are negligible,
being only slightly more than for risk-free U.S. Treasury
debt.
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AA+ High credit quality. Protection factors are strong. Risk
AA is modest but may vary slightly from time to time because
AA- of economic conditions.
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A+ Protection factors are average but adequate. However, risk
A factors are more variable and greater in periods of
A- economic stress.
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BBB+ Below-average protection factors but still considered
BBB sufficient for prudent investment. Considerable
BBB- variability in risk during economic cycles.
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BB+ Below investment grade but deemed likely to meet
BB obligation when due. Present or prospective financial
BB- protection factors fluctuate according to industry
conditions or company fortunes. Overall quality may move
up or down frequently within this category.
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<PAGE>
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B+ Below investment grade and possessing risk that
B obligations will not be met when due. Financial protection
B- factors will fluctuate widely according to economic
cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within
this category or into a higher or lower rating grade.
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CCC Well below investment-grade securities. Considerable
uncertainty exists as to timely payment of principal,
interest or preferred dividends. Protection factors are
narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable
company developments.
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DD Defaulted debt obligations. Issuer failed to meet
scheduled principal and/or interest payments.
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DP Preferred stock with dividend arrearages.
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DESCRIPTION OF MOODY'S SHORT-TERM DEBT RATINGS:
- ----------------------------------------------
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics: leasing
market positions in well-established industries; high rates of return on funds
employed; conservative capitalization structures with moderate reliance on debt
and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; well-established access to
a range of financial markets and assured sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound,will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rates Prime-3 (or related supporting institutions) have an acceptable
capacity for repayment of short-term promissory obligations. The effect of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
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DESCRIPTION OF S&P SHORT-TERM ISSUER CREDIT RATINGS:
A-1 An obligor rated 'A-1' has STRONG capacity to meet its financial
commitments. It is rated in the highest category by Standard & Poor's. Within
this category, certain obligors are designated with a plus sign (+). This
indicates that the obligor's capacity to meet its financial commitments is
EXTREMELY STRONG.
A-2 An obligor rated 'A-2' has SATISFACTORY capacity to meet its financial
commitments. However, it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligors in the highest
rating category.
A-3 An obligor rated 'A-3' has ADEQUATE capacity to meet its financial
obligations. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitments.
DESCRIPTION OF DUFF & PHELPS' COMMERCIAL PAPER RATINGS:
D-1+ Highest certainty of timely payment. Short term liquidity, including
internal operating factors and/or access to alternative sources of funds, is
outstanding, and safety is just below risk free U.S. Treasury short term
obligations.
D-1 Very high certainty of timely payment. Liquidity factors are excellent and
supported by good fundamental protection factors. Risk factors are minor.
D-1- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
D-2 Good certainty of timely payment. Liquidity factors and company fundamentals
are sound. Although ongoing funding needs may enlarge total financing
requirements, access to capital markets is good. Risk factors are small.
D-3 Satisfactory liquidity and other protection factors qualify issues as to
investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
DESCRIPTION OF MOODY'S INSURANCE FINANCIAL STRENGTH RATINGS:
AAA
Insurance companies rated Aaa offer exceptional financial security. While the
financial strength of these companies is likely to change, such changes as can
be visualized are most unlikely to impair their fundamentally strong position.
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<PAGE>
AA
Insurance companies rated Aa offer excellent financial security. Together with
the Aaa group they constitute what are generally known as high grade companies.
They are rated lower than Aaa companies because long-term risks appear somewhat
larger.
A
Insurance companies rated A offer good financial security. However, elements may
be present which suggest a susceptibility to impairment sometime in the future.
BAA
Insurance companies rated Baa offer adequate financial security. However,
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time.
BA
Insurance companies rated Ba offer questionable financial security. Often the
ability of these companies to meet policyholder obligations maybe very moderate
and thereby not well safeguarded in the future.
B
Insurance companies rated B offer poor financial security. Assurance of punctual
payment of policyholder obligations over any long period of time is small.
CAA
Insurance companies rated Caa offer very poor financial security. They may be in
default on their policyholder obligations or there may be present elements of
danger with respect to punctual payment of policyholder obligations and claims.
CA
Insurance companies rated Ca offer extremely poor financial security. Such
companies are often in default on their policyholder obligations or have other
marked shortcomings.
C
Insurance companies rated C are the lowest rated class of insurance company and
can be regarded as having extremely poor prospects of ever offering financial
security.
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<PAGE>
Numeric modifiers: Numeric modifiers are used to refer to the ranking within the
group -- one being the highest and three being the lowest. However, the
financial strength of companies within a generic rating symbol (Aa, for example)
is broadly the same.
DESCRIPTION OF S&P CLAIMS PAYING ABILITY RATING DEFINITIONS:
Secure Range: AAA to BBB
"AAA" Superior financial security on an absolute and relative basis. Capacity to
meet policyholder obligations is overwhelming under a variety of economic and
underwriting conditions.
"AA" Excellent financial security. Capacity to meet policyholder obligations is
strong under a variety of economic and underwriting conditions.
"A" Good financial security, but capacity to meet policyholder obligations is
somewhat susceptible to adverse economic and underwriting conditions.
"BBB" Adequate financial security, but capacity to meet policyholder obligations
is susceptible to adverse economic and underwriting conditions.
Vulnerable Range: BB to CCC
"BB" Financial security may be adequate, but capacity to meet policyholder
obligations, particularly with respect to long-term or "long-tail" policies, is
vulnerable to adverse economic and underwriting conditions.
"B" Vulnerable financial security. Currently able to meet policyholder
obligations, but capacity to meet policyholder obligations is particularly
vulnerable to adverse economic and underwriting conditions.
"CCC" Extremely vulnerable financial security. Continued capacity to meet
policyholder obligations is highly questionable unless favorable economic and
underwriting conditions prevail.
"R" Regulatory action. As of the date indicated, the insurer is under
supervision of insurance regulators following rehabilitation, receivership,
liquidation, or any other action that reflects regulatory concern about the
insurer's financial condition. Information on this status is provided by the
National Association of Insurance Commissioners and other regulatory bodies.
Although believed to be accurate, this information is not guaranteed. The "R"
rating does not apply to insurers subject only to nonfinancial actions such as
market conduct violations.
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<PAGE>
Plus (+) or minus (-) Ratings from "AA" to "B" may be modified by the addition
of a plus or minus sign to show relative standing within the major rating
categories.
DUFF & PHELPS' CLAIMS PAYING ABILITY RATINGS:
- --------------------------------------------
================================================================================
AAA Highest claims paying ability. Risk factors are negligible.
- --------------------------------------------------------------------------------
AA+ Very high claims paying ability. Protection factors are
AA strong. Risk is modest, but may vary slightly over time due to
AA- economic and/or underwriting conditions.
- --------------------------------------------------------------------------------
A+ High claims paying ability. Protection factors are average and
A there is an expectation of variability in risk over time due
A- to economic and/or underwriting conditions.
- --------------------------------------------------------------------------------
BBB+ Adequate claims paying ability. Protection factors are
BBB adequate. There is considerable variability in risk over time
BBB- due to economic and/or underwriting conditions.
- --------------------------------------------------------------------------------
B+ Uncertain claims paying ability and less than investment grade
B quality. However, the company is deemed likely to meet these
B- obligations when due. Protection factors will vary widely with
changes in economic and/or underwriting conditions.
- --------------------------------------------------------------------------------
B+ Possessing risk that policyholder and contractholder
B obligations will not be paid when due. Protection factors will
B- vary widely with changes in economic and underwriting
conditions or company fortunes.
- --------------------------------------------------------------------------------
CCC There is substantial risk that policyholder and contractholder
obligations will not be paid when due. Company has been or is
likely to be placed under state insurance department
supervision.
- --------------------------------------------------------------------------------
DD Company is under an order of liquidation.
================================================================================
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