STATEMENT OF
ADDITIONAL INFORMATION
JANUARY 31, 1997
(REVISED JULY 18, 1997)
BT PYRAMID MUTUAL FUNDS
u BT INVESTMENT EQUITY APPRECIATION FUND
INVESTMENT CLASS
ADVISOR CLASS
BT Pyramid Mutual Funds (the "Trust") is an open-end management investment
company that offers investors a selection of investment portfolios, each
having distinct investment objectives and policies. This Statement of
Additional Information relates to BT Investment Equity Appreciation Fund
(the "Fund") which seeks capital growth over the long-term through
investment primarily in companies with a strong profit growth orientation.
Current income is a secondary goal.
The Fund has two classes of shares, the Investment Class and the Advisor
Class (each a `Class'' and collectively the ``Classes''). The Classes are
sold by Edgewood Services, Inc. ("Edgewood"), the Trust's Distributor, to
clients and customers (including affiliates and correspondents) of Bankers
Trust Company ("Bankers Trust"), the Fund's investment adviser
(`Adviser''), and to clients and customers of other organizations.
This Statement of Additional Information is not a Prospectus and is only
authorized for distribution when preceded or accompanied by either the
Investment Class' or Advisor Class' Prospectus both dated January 31, 1997.
This Statement of Additional Information is intended to provide additional
information regarding the activities and operations of the Trust and should
be read in conjunction with either Prospectus. Each Prospectus provides
the basic information investors should know before investing, and may be
obtained without charge by calling the Trust at the telephone number listed
below or by contacting any Service Agent. Capitalized terms not otherwise
defined in this Statement of Additional Information have the meanings
accorded to them in the Fund's Prospectuses.
INVESTMENT ADVISER AND ADMINISTRATOR
BANKERS TRUST COMPANY
DISTRIBUTOR
EDGEWOOD SERVICES, INC.
CLEARING OPERATIONS PITTSBURGH, PENNSYLVANIA 15230-0897 (800) 730-
1313
P.O. BOX 897
TABLE OF CONTENTS
Investment Objectives, Policies and Restrictions.................1
Performance Information..........................................15
Valuation of Securities; Redemptions and Purchases in Kind.......17
Management of the Trust..........................................18
Organization of the Trust........................................22
Taxation.........................................................23
Financial Statements.............................................23
Appendix: Commercial Paper Ratings..............................A-1
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVES
The investment objective of the Fund is described in the Fund's Prospectus.
There can, of course, be no assurance that the Fund will achieve its
investment objective.
INVESTMENT POLICIES
The following is a discussion of the various investments of and techniques
employed by the Fund:
CERTIFICATES OF DEPOSIT AND BANKERS' ACCEPTANCES. Certificates of deposit
are receipts issued by a depository institution in exchange for the deposit
of funds. The issuer agrees to pay the amount deposited plus interest to
the bearer of the receipt on the date specified on the certificate. The
certificate usually can be traded in the secondary market prior to
maturity. Bankers' acceptances typically arise from short-term credit
arrangements designed to enable businesses to obtain funds to finance
commercial transactions. Generally, an acceptance is a time draft drawn on
a bank by an exporter or an importer to obtain a stated amount of funds to
pay for specific merchandise. The draft is then "accepted" by a bank that,
in effect, unconditionally guarantees to pay the face value of the
instrument on its maturity date. The acceptance may then be held by the
accepting bank as an earning asset or it may be sold in the secondary
market at the going rate of discount for a specific maturity. Although
maturities for acceptances can be as long as 270 days, most acceptances
have maturities of six months or less.
COMMERCIAL PAPER. Commercial paper consists of short-term (usually from 1
to 270 days) unsecured promissory notes issued by corporations in order to
finance their current operations. A variable amount master demand note
(which is a type of commercial paper) represents a direct borrowing
arrangement involving periodically fluctuating rates of interest under a
letter agreement between a commercial paper issuer and an institutional
lender pursuant to which the lender may determine to invest varying
amounts.
For a description of commercial paper ratings, see the Appendix to this
Statement of Additional Information.
SHORT-TERM INSTRUMENTS. When the Fund experiences large cash inflows
through the sale of securities and desirable equity securities, that are
consistent with the Fund's investment objective, which are unavailable in
sufficient quantities or at attractive prices, the Fund may hold short-term
investments for a limited time pending availability of such equity
securities. Short-term instruments consist of foreign and domestic: (i)
short-term obligations of sovereign governments, their agencies,
instrumentalities, authorities or political subdivisions; (ii) other
short-term debt securities rated AA or higher by S&P or Aa or higher by
Moody's or, if unrated, of comparable quality in the opinion of Bankers
Trust; (iii) commercial paper; (iv) bank obligations, including negotiable
certificates of deposit, time deposits and banker's acceptances; and (v)
repurchase agreements. At the time the Fund invests in commercial paper,
bank obligations or repurchase agreements, the issuer of the issuer's
parent must have outstanding debt rated AA or higher by S&P or Aa or higher
by Moody's or outstanding commercial paper or bank obligations rated A-1 by
S&P or Prime-1 by Moody's; or, if no such ratings are available, the
2
instrument must be of comparable quality in the opinion of Bankers Trust.
These instruments may be denominated in U.S. dollars or in foreign
currencies.
ILLIQUID SECURITIES. Historically, Illiquid securities have included
securities subject to contractual or legal restrictions on resale because
they have not been registered under the Securities Act of 1933, as amended
(the "1933 Act"), securities which are otherwise not readily marketable and
repurchase agreements having a remaining maturity of longer than seven
days. Securities which have not been registered under the 1933 Act are
referred to as private placements or restricted securities and are
purchased directly from the issuer or in the secondary market. Mutual
funds do not typically hold a significant amount of these restricted or
other illiquid securities because of the potential for delays on resale and
uncertainty in valuation. Limitations on resale may have an adverse effect
on the marketability of portfolio securities and a mutual fund might be
unable to dispose of restricted or other illiquid securities promptly or at
reasonable prices and might thereby experience difficulty satisfying
redemptions within seven days. A mutual fund might also have to register
such restricted securities in order to dispose of them resulting in
additional expense and delay. Adverse market conditions could impede such
a public offering of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the 1933 Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend
3
on an efficient institutional market in which the unregistered security can
be readily resold or on an issuer's ability to honor a demand for
repayment. The fact that there are contractual or legal restrictions on
resale of such investments to the general public or to certain institutions
may not be indicative of their liquidity.
The Securities and Exchange Commission (the "SEC") has adopted Rule 144A,
which allows a broader institutional trading market for securities
otherwise subject to restriction on their resale to the general public.
Rule 144A establishes a "safe harbor" from the registration requirements of
the 1933 Act of resales of certain securities to qualified institutional
buyers. The Adviser anticipates that the market for certain restricted
securities such as institutional commercial paper will expand further as a
result of this regulation and the development of automated systems for the
trading, clearance and settlement of unregistered securities of domestic
and foreign issuers, such as the PORTAL System sponsored by the National
Association of Securities Dealers, Inc. (`NASD'').
The Adviser will monitor the liquidity of Rule 144A securities in the
Fund's holdings under the supervision of the Trust's Board of Trustees. In
reaching liquidity decisions, the Adviser will consider, among other
things, the following factors: (i) the frequency of trades and quotes for
the security; (ii) the number of dealers and other potential purchasers or
sellers of the security; (iii) dealer undertakings to make a market in the
security; and (iv) the nature of the security and of the marketplace trades
(e.g., the time needed to dispose of the security, the method of soliciting
offers and the mechanics of the transfer).
4
LENDING OF PORTFOLIO SECURITIES. The Fund has the authority to lend
portfolio securities to brokers, dealers and other financial organizations.
The Fund will not lend securities to Bankers Trust, Edgewood or their
affiliates. By lending its securities, the Fund can increase its income by
continuing to receive interest on the loaned securities as well as by
either investing the cash collateral in short-term securities or obtaining
yield in the form of interest paid by the borrower when U.S. government
obligations are used as collateral. There may be risks of delay in
receiving additional collateral or risks of delay in recovery of the
securities or even loss of rights in the collateral should the borrower of
the securities fail financially. The Fund will adhere to the following
conditions whenever its securities are loaned: (i) the Fund must receive
at least 100 percent cash collateral or equivalent securities from the
borrower; (ii) the borrower must increase this collateral whenever the
market value of the securities including accrued interest rises above the
level of the collateral; (iii) the Fund must be able to terminate the loan
at any time; (iv) the Fund must receive reasonable interest on the loan, as
well as any dividends, interest or other distributions on the loaned
securities, and any increase in market value; (v) the Fund may pay only
reasonable custodian fees in connection with the loan; and (vi) voting
rights on the loaned securities may pass to the borrower; provided,
however, that if a material event adversely affecting the investment
occurs, the Board of Trustees must terminate the loan and regain the right
to vote the securities.
5
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
GENERAL. The successful use of such instruments draws upon the Adviser's
skill and experience with respect to such instruments and usually depends
on the Adviser's ability to forecast interest rate and currency exchange
rate movements correctly. Should interest or exchange rates move in an
unexpected manner, the Fund may not achieve the anticipated benefits of
futures contracts or options on futures contracts or may realize losses and
thus will be in a worse position than if such strategies had not been used.
In addition, the correlation between movements in the price of futures
contracts or options on futures contracts and movements in the price of the
securities and currencies hedged or used for cover will not be perfect and
could produce unanticipated losses.
FUTURES CONTRACTS. The Fund may enter into contracts for the purchase or
sale for future delivery of fixed-income securities, or contracts based on
financial indices including any index of U.S. Government Securities,
foreign government securities or corporate debt securities. U.S. futures
contracts have been designed by exchanges which have been designated
"contracts markets" by the Commodity Futures Trading Commission ("CFTC"),
and must be executed through a futures commission merchant, or brokerage
firm, which is a member of the relevant contract market. Futures contracts
trade on a number of exchange markets, and, through their clearing
corporations, the exchanges guarantee performance of the contracts as
between the clearing members of the exchange. The Fund may enter into
futures contracts which are based on debt securities that are backed by the
full faith and credit of the U.S. government, such as long-term U.S.
6
Treasury Bonds, Treasury Notes, government National Mortgage Association
modified pass-through mortgage-backed securities and three-month U.S.
Treasury Bills. The Fund may also enter into futures contracts which are
based on bonds issued by entities other than the U.S. government.
At the same time a futures contract is purchased or sold, the Fund must
allocate cash or securities as a deposit payment ("initial deposit"). It
is expected that the initial deposit would be approximately 1 1/2% to 5% of
a contract's face value. Daily thereafter, the futures contract is valued
and the payment of "variation margin" may be required, since each day the
Fund would provide or receive cash that reflects any decline or increase in
the contract's value.
At the time of delivery of securities pursuant to such a contract,
adjustments are made to recognize differences in value arising from the
delivery of securities with a different interest rate from that specified
in the contract. In some (but not many) cases, securities called for by a
futures contract may not have been issued when the contract was written.
Although futures contracts by their terms call for the actual delivery or
acquisition of securities, in most cases the contractual obligation is
fulfilled before the date of the contract without having to make or take
delivery of the securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a commodities
exchange an identical futures contract calling for delivery in the same
month. Such a transaction, which is effected through a member of an
exchange, cancels the obligation to make or take delivery of the
securities. Since all transactions in the futures market are made, offset
7
or fulfilled through a clearinghouse associated with the exchange on which
the contracts are traded, the Fund will incur brokerage fees when it
purchases or sells futures contracts.
The purpose of the acquisition or sale of a futures contract, in cases
where the Fund holds or intends to acquire fixed-income securities, is to
attempt to protect the Fund from fluctuations in interest or foreign
exchange rates without actually buying or selling fixed-income securities
or foreign currencies. For example, if interest rates were expected to
increase, the Fund might enter into futures contracts for the sale of debt
securities. Such a sale would have much the same effect as selling an
equivalent value of the debt securities owned by the Fund. If interest
rates did increase, the value of the debt security in the Fund would
decline, but the value of the futures contracts to the Fund would increase
at approximately the same rate, thereby keeping the net asset value of the
Fund from declining as much as it otherwise would have. The Fund could
accomplish similar results by selling debt securities and investing in
bonds with short maturities when interest rates are expected to increase.
However, since the futures market is more liquid than the cash market, the
use of futures contracts as an investment technique allows the Fund to
maintain a defensive position without having to sell its portfolio
securities.
Similarly, when it is expected that interest rates may decline, futures
contracts may be purchased to attempt to hedge against anticipated
purchases of debt securities at higher prices. Since the fluctuations in
the value of futures contracts should be similar to those of debt
8
securities, the Fund could take advantage of the anticipated rise in the
value of debt securities without actually buying them until the market had
stabilized. At that time, the futures contracts could be liquidated and
the Fund could then buy debt securities on the cash market. To the extent
the Fund enters into futures contracts for this purpose, the assets in the
segregated asset account maintained to cover the Fund's obligations with
respect to such futures contracts will consist of cash, cash equivalents or
high quality liquid debt securities from its portfolio in an amount equal
to the difference between the fluctuating market value of such futures
contracts and the aggregate value of the initial and variation margin
payments made by the Fund with respect to such futures contracts.
The ordinary spreads between prices in the cash and futures market, due to
differences in the nature of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial
deposit and variation margin requirements. Rather than meeting additional
variation margin requirements, investors may close futures contracts
through offsetting transactions which could distort the normal relationship
between the cash and futures markets. Second, the 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
9
price distortions. Due to the possibility of distortion, a correct
forecast of general interest rate trends by the Adviser may still not
result in a successful transaction.
In addition, futures contracts entail risks. Although the Adviser believes
that use of such contracts will benefit the Fund, if the Adviser's
investment judgment about the general direction of interest rates is
incorrect, the Fund's overall performance would be poorer than if it had
not entered into any such contract. For example, if the Fund has hedged
against the possibility of an increase in interest rates which would
adversely affect the price of debt securities held in its portfolio and
interest rates decrease instead, the Fund will lose part or all of the
benefit of the increased value of its debt securities which it has hedged
because it will have offsetting losses in its futures positions. In
addition, in such situations, if the Fund has insufficient cash, it may
have to sell debt securities from its portfolio to meet daily variation
margin requirements. Such sales of bonds may be, but will not necessarily
be, at increased prices which reflect the rising market. The Fund may have
to sell securities at a time when it may be disadvantageous to do so.
OPTIONS ON FUTURES CONTRACTS. The Fund may purchase and write options on
futures contracts for hedging purposes. The purchase of a call option on a
futures contract is similar in some respects to the purchase of a call
option on an individual security. Depending on the pricing of the option
compared to either the price of the futures contract upon which it is based
or the price of the underlying debt securities, it may or may not be less
risky than ownership of the futures contract or underlying debt securities.
10
As with the purchase of futures contracts, when the Fund is not fully
invested it may purchase a call option on a futures contract to hedge
against a market advance due to declining interest rates.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the underlying security or foreign
currency which is deliverable upon exercise of the futures contract. If
the futures price at expiration of the option is below the exercise price,
the Fund will retain the full amount of the option premium which provides a
partial hedge against any decline that may have occurred in the Fund's
holdings. The writing of a put option on a futures contract constitutes a
partial hedge against increasing prices of the underlying security or
foreign currency which is deliverable upon exercise of the futures
contract. If the futures price at expiration of the option is higher than
the exercise price, the Fund will retain the full amount of the option
premium which provides a partial hedge against any increase in the price of
securities which the Fund intends to purchase. If a put or call option the
Fund has written is exercised, the Fund will incur a loss which will be
reduced by the amount of the premium it receives. Depending on the degree
of correlation between changes in the value of its portfolio securities and
changes in the value of its futures positions, the Fund's losses from
existing options on futures may to some extent be reduced or increased by
changes in the value of portfolio securities.
The purchase of a put option on a futures contract is similar in some
respects to the purchase of protective put options on portfolio securities.
11
For example, the Fund may purchase a put option on a futures contract to
hedge its portfolio against the risk of rising interest rates.
The amount of risk the Fund assumes when it purchases an option on a
futures contract is the premium paid for the option plus related
transaction costs. In addition to the correlation risks discussed above,
the purchase of an option also entails the risk that changes in the value
of the underlying futures contract will not be fully reflected in the value
of the option purchased.
The Board of Trustees has adopted the requirement that futures contracts
and options on futures contracts be used as a hedge and may also use stock
index futures on a continual basis to equitize cash so that the fund may
maintain 100% equity exposure. In addition to this requirement, the Board
of Trustees has also adopted a restriction that the Fund will not enter
into any futures contracts or options on futures contracts if immediately
thereafter the amount of margin deposits on all the futures contracts of
the Fund and premiums paid on outstanding options on futures contracts
owned by the Fund (other than those entered into for bona fide hedging
purposes) would exceed 5% of the market value of the total assets of the
Fund.
OPTIONS ON FOREIGN CURRENCIES. The Fund may purchase and write options on
foreign currencies for hedging purposes in a manner similar to that in
which futures contracts on foreign currencies, or forward contracts, will
be utilized. For example, a decline in the dollar value of a foreign
currency in which portfolio securities are denominated will reduce the
dollar value of such securities, even if their value in the foreign
12
currency remains constant. In order to protect against such diminutions in
the value of portfolio securities, the Fund may purchase put options on the
foreign currency. If the value of the currency does decline, the Fund will
have the right to sell such currency for a fixed amount in dollars and will
thereby offset, in whole or in part, the adverse effect on its portfolio
which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing
the cost of such securities, the Fund may purchase call options thereon.
The purchase of such options could offset, at least partially, the effects
of the adverse movements in exchange rates. As in the case of other types
of options, however, the benefit to the Fund deriving from purchases of
foreign currency options will be reduced by the amount of the premium and
related transaction costs. In addition, where currency exchange rates do
not move in the direction or to the extent anticipated, the Fund could
sustain losses on transactions in foreign currency options which would
require it to forego a portion or all of the benefits of advantageous
changes in such rates.
The Fund may write options on foreign currencies for the same types of
hedging purposes. For example, where the Fund anticipates a decline in the
dollar value of foreign currency denominated securities due to adverse
fluctuations in exchange rates it could, instead of purchasing a put
option, write a call option on the relevant currency. If the expected
decline occurs, the options will most likely not be exercised, and the
13
diminution in value of portfolio securities will be offset by the amount of
the premium received.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, the
Fund could write a put option on the relevant currency which, if rates move
in the manner projected, will expire unexercised and allow the Fund to
hedge such increased cost up to the amount of the premium. As in the case
of other types of options, however, the writing of a foreign currency
option will constitute only a partial hedge up to the amount of the
premium, and only if rates move in the expected direction. If this does
not occur, the option may be exercised and the Fund would be required to
purchase or sell the underlying currency at a loss which may not be offset
by the amount of the premium. Through the writing of options on foreign
currencies, the Fund also may be required to forego all or a portion of the
benefits which might otherwise have been obtained from favorable movements
in exchange rates.
The Fund may write covered call options on foreign currencies. A call
option written on a foreign currency by the Fund is "covered" if the Fund
owns the underlying foreign currency covered by the call or has an absolute
and immediate right to acquire that foreign currency without additional
cash consideration (or for additional cash consideration held in a
segregated account by its Custodian) upon conversion or exchange of other
foreign currency held in its portfolio. A call option is also covered if
the Fund has a call on the same foreign currency and in the same principal
amount as the call written where the exercise price of the call held (a) is
14
equal to or less than the exercise price of the call written or (b) is
greater than the exercise price of the call written if the difference is
maintained by the Fund in cash, U.S. government securities and other high
quality liquid debt securities in a segregated account with its custodian.
The Fund also may write call options on foreign currencies that are not
covered for cross-hedging purposes. A call option on a foreign currency is
for cross-hedging purposes if it is not covered, but is designed to provide
a hedge against a decline in the U.S. dollar value of a security which the
Fund owns or has the right to acquire and which is denominated in the
currency underlying the option due to an adverse change in the exchange
rate. In such circumstances, the Fund collateralizes the option by
maintaining in a segregated account with its custodian, cash or U.S.
government securities or other high quality liquid debt securities in an
amount not less than the value of the underlying foreign currency in U.S.
dollars marked to market daily.
ADDITIONAL RISKS OF OPTIONS ON FUTURES CONTRACTS, FORWARD CONTRACTS AND
OPTIONS ON FOREIGN CURRENCIES. Unlike transactions entered into by the
Fund in futures contracts, options on foreign currencies and forward
contracts are not traded on contract markets regulated by the CFTC or (with
the exception of certain foreign currency options) by the SEC. To the
contrary, such instruments are traded through financial institutions acting
as market-makers, although foreign currency options are also traded on
certain national securities exchanges, such as the Philadelphia Stock
Exchange and the Chicago Board Options Exchange, subject to SEC regulation.
Similarly, options on currencies may be traded over-the-counter. In an
15
over-the-counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there are no
daily price fluctuation limits, and adverse market movements could
therefore continue to an unlimited extent over a period of time. Although
the purchaser of an option cannot lose more than the amount of the premium
plus related transaction costs, this entire amount could be lost.
Moreover, the option writer and a trader of forward contracts could lose
amounts substantially in excess of their initial investments, due to the
margin and collateral requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on
organized exchanges will be available with respect to such transactions.
In particular, all foreign currency option positions entered into on a
national securities exchange are cleared and guaranteed by the Options
Clearing Corporation (the "OCC"), thereby reducing the risk of counterparty
default. Further, a liquid secondary market in options traded on a
national securities exchange may be more readily available than in the
over-the-counter market, potentially permitting the Fund to liquidate open
positions at a profit prior to exercise or expiration, or to limit losses
in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however,
is subject to the risks of the availability of a liquid secondary market
described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
16
possible intervention by governmental authorities and the effects of other
political and economic events. In addition, exchange-traded options on
foreign currencies involve certain risks not presented by the over-the-
counter market. For example, exercise and settlement of such options must
be made exclusively through the OCC, which has established banking
relationships in applicable foreign countries for this purpose. As a
result, the OCC may, if it determines that foreign governmental
restrictions or taxes would prevent the orderly settlement of foreign
currency option exercises, or would result in undue burdens on the OCC or
its clearing member, impose special procedures on exercise and settlement,
such as technical changes in the mechanics of delivery of currency, the
fixing of dollar settlement prices or prohibitions on exercise.
As in the case of forward contracts, certain options on foreign currencies
are traded over-the-counter and involve liquidity and credit risks which
may not be present in the case of exchange-traded currency options. The
Fund's ability to terminate over-the-counter options will be more limited
than with exchange-traded options. It is also possible that broker-dealers
participating in over-the-counter options transactions will not fulfill
their obligations. Until such time as the staff of the SEC changes its
position, the Fund will treat purchased over-the-counter options and assets
used to cover written over-the-counter options as illiquid securities.
With respect to options written with primary dealers in U.S. government
securities pursuant to an agreement requiring a closing purchase
transaction at a formula price, the amount of illiquid securities may be
calculated with reference to the repurchase formula.
17
In addition, futures contracts, options on futures contracts, forward
contracts and options on foreign currencies may be traded on foreign
exchanges. Such transactions are subject to the risk of governmental
actions affecting trading in or the prices of foreign currencies or
securities. The value of such positions also could be adversely affected
by: (i) other complex foreign political and economic factors; (ii) lesser
availability than in the United States of data on which to make trading
decisions; (iii) delays in the Portfolio's ability to act upon economic
events occurring in foreign markets during nonbusiness hours in the United
States; (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States; and
(v) lesser trading volume.
OPTIONS ON SECURITIES. The Fund may write (sell) covered call and put
options to a limited extent on its portfolio securities ("covered options")
in an attempt to increase income. However, the Fund may forgo the benefits
of appreciation on securities sold or may pay more than the market price on
securities acquired pursuant to call and put options written by the Fund.
When the Fund writes a covered call option, it gives the purchaser of the
option the right to buy the underlying security at the price specified in
the option (the "exercise price") by exercising the option at any time
during the option period. If the option expires unexercised, the Fund will
realize income in an amount equal to the premium received for writing the
option. If the option is exercised, a decision over which the Fund has no
control, the Fund must sell the underlying security to the option holder at
the exercise price. By writing a covered call option, the Fund forgoes, in
18
exchange for the premium less the commission ("net premium"), the
opportunity to profit during the option period from an increase in the
market value of the underlying security above the exercise price.
When the Fund writes a covered put option, it gives the purchaser of the
option the right to sell the underlying security to the Fund at the
specified exercise price at any time during the option period. If the
option expires unexercised, the Fund will realize income in the amount of
the premium received for writing the option. If the put option is
exercised, a decision over which the Fund has no control, the Fund must
purchase the underlying security from the option holder at the exercise
price. By writing a covered put option, the Fund, in exchange for the net
premium received, accepts the risk of a decline in the market value of the
underlying security below the exercise price. The Fund will only write put
options involving securities for which a determination is made at the time
the option is written that the Fund wishes to acquire the securities at the
exercise price.
The Fund may terminate its obligation as the writer of a call or put option
by purchasing an option with the same exercise price and expiration date as
the option previously written. This transaction is called a "closing
purchase transaction." The Fund will realize a profit or loss from a
closing purchase transaction if the amount paid to purchase an option is
less or more, as the case may be, than the amount received from the sale
thereof. To close out a position as a purchaser of an option, the Fund,
may make a "closing sale transaction" which involves liquidating the Fund's
position by selling the option previously purchased. Where the Fund cannot
19
effect a closing purchase transaction, it may be forced to incur brokerage
commissions or dealer spreads in selling securities it receives or it may
be forced to hold underlying securities until an option is exercised or
expires.
When the Fund writes an option, an amount equal to the net premium received
by the Fund is included in the liability section of the Fund's Statement of
Assets and Liabilities as a deferred credit. The amount of the deferred
credit will be subsequently marked to market to reflect the current market
value of the option written. The current market value of a traded option
is the last sale price or, in the absence of a sale, the mean between the
closing bid and asked price. If an option expires on its stipulated
expiration date or if the Fund enters into a closing purchase transaction,
the Fund will realize a gain (or loss if the cost of a closing purchase
transaction exceeds the premium received when the option was sold), and the
deferred credit related to such option will be eliminated. If a call
option is exercised, the Fund will realize a gain or loss from the sale of
the underlying security and the proceeds of the sale will be increased by
the premium originally received. The writing of covered call options may
be deemed to involve the pledge of the securities against which the option
is being written. Securities against which call options are written will
be segregated on the books of the custodian for the Fund.
The Fund may purchase call and put options on any securities in which it
may invest. The Fund would normally purchase a call option in anticipation
of an increase in the market value of such securities. The purchase of a
call option would entitle the Fund, in exchange for the premium paid, to
20
purchase a security at a specified price during the option period. The
Fund would ordinarily have a gain if the value of the securities increased
above the exercise price sufficiently to cover the premium and would have a
loss if the value of the securities remained at or below the exercise price
during the option period.
The Fund would normally purchase put options in anticipation of a decline
in the market value of securities in its portfolio ("protective puts") or
securities of the type in which it is permitted to invest. The purchase of
a put option would entitle the Fund, in exchange for the premium paid, to
sell a security, which may or may not be held in the Fund's holdings, at a
specified price during the option period. The purchase of protective puts
is designed merely to offset or hedge against a decline in the market value
of the Fund's holdings. Put options also may be purchased by the Fund for
the purpose of affirmatively benefiting from a decline in the price of
securities which the Fund does not own. The Fund would ordinarily
recognize a gain if the value of the securities decreased below the
exercise price sufficiently to cover the premium and would recognize a loss
if the value of the securities remained at or above the exercise price.
Gains and losses on the purchase of protective put options would tend to be
offset by countervailing changes in the value of underlying portfolio
securities.
The Fund has adopted certain other nonfundamental policies concerning
option transactions which are discussed below. The Fund's activities in
options may also be restricted by the requirements of the Internal Revenue
21
Code of 1986, as amended (the "Code"), for qualification as a regulated
investment company.
The hours of trading for options on securities may not conform to the hours
during which the underlying securities are traded. To the extent that the
option markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying
securities markets that cannot be reflected in the option markets. It is
impossible to predict the volume of trading that may exist in such options,
and there can be no assurance that viable exchange markets will develop or
continue.
The Fund may engage in over-the-counter options transactions with
broker-dealers who make markets in these options. At present,
approximately ten broker-dealers, including several of the largest primary
dealers in U.S. government securities, make these markets. The ability to
terminate over-the-counter option positions is more limited than with
exchange-traded option positions because the predominant market is the
issuing broker rather than an exchange, and may involve the risk that
broker-dealers participating in such transactions will not fulfill their
obligations. To reduce this risk, the Fund will purchase such options only
from broker-dealers who are primary government securities dealers
recognized by the Federal Reserve Bank of New York and who agree to (and
are expected to be capable of) entering into closing transactions, although
there can be no guarantee that any such option will be liquidated at a
favorable price prior to expiration. The Adviser will monitor the
creditworthiness of dealers with whom the Fund enters into such options
22
transactions under the general supervision of the Trust's Board of
Trustees.
OPTIONS ON SECURITIES INDICES. In addition to options on securities, the
Fund may also purchase and write (sell) call and put options on securities
indices. Such options give the holder the right to receive a cash
settlement during the term of the option based upon the difference between
the exercise price and the value of the index. Such options will be used
for the purposes described above under "Options on Securities."
Options on securities indices entail risks in addition to the risks of
options on securities. The absence of a liquid secondary market to close
out options positions on securities indices is more likely to occur,
although the Fund generally will only purchase or write such an option if
the Adviser believes the option can be closed out.
Use of options on securities indices also entails the risk that trading in
such options may be interrupted if trading in certain securities included
in the index is interrupted. The Fund will not purchase such options
unless the Adviser believes the market is sufficiently developed such that
the risk of trading in such options is no greater than the risk of trading
in options on securities.
Price movements in the Fund's holdings may not correlate precisely with
movements in the level of an index and, therefore, the use of options on
indices cannot serve as a complete hedge. Because options on securities
indices require settlement in cash, the Adviser may be forced to liquidate
portfolio securities to meet settlement obligations.
23
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Because the Fund may buy and
sell securities denominated in currencies other than the U.S. dollar and
receives interest, dividends and sale proceeds in currencies other than the
U.S. dollar, the Portfolio from time to time may enter into foreign
currency exchange transactions to convert to and from different foreign
currencies and to convert foreign currencies to and from the U.S. dollar.
The Fund either enters into these transactions on a spot (i.e., cash) basis
at the spot rate prevailing in the foreign currency exchange market or uses
forward contracts to purchase or sell foreign currencies.
A forward foreign currency exchange contract is an obligation by the Fund
to purchase or sell a specific currency at a future date, which may be any
fixed number of days from the date of the contract. Forward foreign
currency exchange contracts establish an exchange rate at a future date.
These contracts are transferable in the interbank market conducted directly
between currency traders (usually large commercial banks) and their
customers. A forward foreign currency exchange contract generally has no
deposit requirement and is traded at a net price without commission. The
Fund maintains with its custodian a segregated account of high grade liquid
assets in an amount at least equal to its obligations under each forward
foreign currency exchange contract. Neither spot transactions nor forward
foreign currency exchange contracts eliminate fluctuations in the prices of
the Fund's securities or in foreign exchange rates, or prevent loss if the
prices of these securities should decline.
The Fund may enter into foreign currency hedging transactions in an attempt
to protect against changes in foreign currency exchange rates between the
24
trade and settlement dates of specific securities transactions or changes
in foreign currency exchange rates that would adversely affect the
portfolio position or an anticipated investment position. Since
consideration of the prospect for currency parities will be incorporated
into Bankers Trust's long-term investment decisions, the Fund will not
routinely enter into foreign currency hedging transactions with respect to
security transactions; however, Bankers Trust believes that it is important
to have the flexibility to enter into foreign currency hedging transactions
when it determines that the transactions would be in the Fund's best
interest. Although these transactions tend to minimize the risk of loss
due to a decline in the value of the hedged currency, at the same time they
tend to limit any potential gain that might be realized should the value of
the hedged currency increase. The precise matching of the forward contract
amounts and the value of the securities involved will not generally be
possible because the future value of such securities in foreign currencies
will change as a consequence of market movements in the value of such
securities between the date the forward contract is entered into and the
date it matures. The projection of currency market movements is extremely
difficult, and the successful execution of a hedging strategy is highly
uncertain.
While these contracts are not presently regulated by the CFTC, the CFTC may
in the future assert authority to regulate forward contracts. In such
event, the Fund's ability to utilize forward contracts in the manner set
forth in the Prospectus may be restricted. Forward contracts may reduce
the potential gain from a positive change in the relationship between the
25
U.S. dollar and foreign currencies. Unanticipated changes in currency
prices may result in poorer overall performance for the Fund than if it had
not entered into such contracts. The use of foreign currency forward
contracts may not eliminate fluctuations in the underlying U.S. dollar
equivalent value of the prices or rates of return on the Fund's foreign
currency denominated portfolio securities and the use of such techniques
will subject the Fund to certain risks.
26
The matching of the increase in value of a forward contract and the decline
in the U.S. dollar equivalent value of the foreign currency denominated
asset that is the subject of the hedge generally will not be precise. In
addition, the Fund may not always be able to enter into foreign currency
forward contracts at attractive prices and this will limit the Fund's
ability to use such contract to hedge or cross-hedge its assets. Also,
with regard to the Fund's use of cross-hedges, there can be no assurance
that historical correlations between the movement of certain foreign
currencies relative to the U.S. dollar will continue. Thus, at any time
poor correlation may exist between movements in the exchange rates of the
foreign currencies underlying the Fund's cross-hedges and the movements in
the exchange rates of the foreign currencies in which the Fund's assets
that are the subject of such cross-hedges are denominated.
RATING SERVICES
27
The ratings of rating services represent their opinions as to the quality
of the securities that they undertake to rate. It should be emphasized,
however, that ratings are relative and subjective and are not absolute
standards of quality. Although these ratings are an initial criterion for
selection of portfolio investments, Bankers Trust also makes its own
evaluation of these securities, subject to review by the Board of Trustees.
After purchase by the Fund, an obligation may cease to be rated or its
rating may be reduced below the minimum required for purchase by the Fund.
Neither event would require the Fund to eliminate the obligation from its
portfolio, but Bankers Trust will consider such an event in its
determination of whether the Fund should continue to hold the obligation.
A description of the ratings used herein and in the Prospectus is set forth
in the Appendix to this Statement of Additional Information.
INVESTMENT RESTRICTIONS
The following investment restrictions are "fundamental policies" of the
Fund and may not be changed without the approval of a "vote of a majority
of the outstanding voting securities" of the Fund. "A vote of a majority
of the outstanding voting securities" under the Investment Company Act of
1940, as amended (the "1940 Act"), and as used in this Statement of
Additional Information and the Prospectus, means, the lesser of (i) 67% or
more of the outstanding shares of the Fund present at a meeting, if the
holders of more than 50% of the outstanding shares of the Fund are present
or represented by proxy or (ii) more than 50% of the outstanding shares of
the Fund.
28
As a matter of fundamental policy, the Trust, with respect to the Fund, may
not (except that no investment restriction of the Fund shall prevent the
Fund from investing all of its investable assets in an open-end investment
company with substantially the same investment objective):
(1) borrow money or mortgage or hypothecate assets of the Fund, except
that in an amount not to exceed 1/3 of the current value of the Fund's
assets, it may borrow money as a temporary measure for extraordinary or
emergency purposes and enter into reverse repurchase agreements or dollar
roll transactions, and except that it may pledge, mortgage or hypothecate
not more than 1/3 of such assets to secure such borrowings (it is intended
that money would be borrowed only from banks and only either to accommodate
requests for the withdrawal of beneficial interests (redemption of shares)
while effecting an orderly liquidation of portfolio securities or to
maintain liquidity in the event of an unanticipated failure to complete the
portfolio security transaction or other similar situations) or reverse
repurchase agreements, provided that collateral arrangements with respect
to options and futures, including deposits of initial deposit and variation
margin, are not considered a pledge of assets for purposes of this
restriction and except that assets may be pledged to secure letters of
credit solely for the purpose of participating in a captive insurance
company sponsored by the Investment Company Institute; for additional
related restrictions, see clause (i) under the caption "Additional
Restrictions" below;
29
(2) underwrite securities issued by other persons except insofar as
the Trust or the Fund may technically be deemed an underwriter under the
1933 Act in selling the portfolio security;
(3) make loans to other persons except: (a) through the lending of the
Fund's portfolio securities and provided that any such loans not exceed 30%
of the Fund's net assets (taken at market value); (b) through the use of
repurchase agreements or the purchase of short-term obligations; or (c) by
purchasing a portion of an issue of debt securities of types distributed
publicly or privately;
(4) purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or interests
therein), interests in oil, gas or mineral leases, commodities or commodity
contracts (except futures and option contracts) in the ordinary course of
business (except that the Trust may hold and sell, for the Fund's
portfolio, real estate acquired as a result of the Fund's ownership of
securities);
(5) concentrate its investments in any particular industry (excluding
U.S. government securities), but if it is deemed appropriate for the
achievement of the Fund's investment objective, up to 25% of its total
assets may be invested in any one industry; and
(6) issue any senior security (as that term is defined in the
1940 Act) if such issuance is specifically prohibited by the 1940 Act or
the rules and regulations promulgated thereunder, provided that collateral
30
arrangements with respect to options and futures, including deposits of
initial deposit and variation margin, are not considered to be the issuance
of a senior security for purposes of this restriction.
ADDITIONAL RESTRICTIONS. In order to comply with certain statutes and
policies, the Trust, on behalf of the Fund will not as a matter of
operating policy:
(i) borrow money (including through reverse repurchase or forward
roll transactions) for any purpose in excess of 5% of the Fund's
total assets (taken at cost), except that the Fund may borrow for
temporary or emergency purposes up to 1/3 of its total assets;
(ii) pledge, mortgage or hypothecate for any purpose in excess of
10% of the Fund's total assets (taken at market value), provided
that collateral arrangements with respect to options and futures,
including deposits of initial deposit and variation margin, and
reverse repurchase agreements are not considered a pledge of
assets for purposes of this restriction;
(iii) purchase any security or evidence of interest therein on
margin, except that such short-term credit as may be necessary
for the clearance of purchases and sales of securities may be
obtained and except that deposits of initial deposit and
variation margin may be made in connection with the purchase,
ownership, holding or sale of futures;
31
(iv) sell securities it does not own (short sells) such that the
dollar amount of such short sales at any one time exceeds 25% of
the net equity of the Fund, and the value of securities of any
one issuer in which the Fund is short exceeds the lesser of 2.0%
of the value of the Fund's net assets or 2.0% of the securities
of any class of any U.S. issuer and, provided that short sales
may be made only in those securities which are fully listed on a
national securities exchange or a foreign exchange (This
provision does not include the sale of securities that the Fund
contemporaneously owns or where the Fund has the right to obtain
securities equivalent in kind and amount to those sold, i.e.,
short sales against the box.) (The Fund currently does not
engage in short selling.);
(v) invest for the purpose of exercising control or management of
another company;
(vi) purchase securities issued by any investment company except
by purchase in the open market where no commission or profit to a
sponsor or dealer results from such purchase other than the
customary broker's commission, or except when such purchase,
though not made in the open market, is part of a plan of merger
or consolidation; provided, however, that securities of any
investment company will not be purchased for the Fund if such
purchase at the time thereof would cause: (a) more than 10% of
the Fund's total assets (taken at the greater of cost or market
value) to be invested in the securities of such issuers; (b) more
32
than 5% of the Fund's total assets (taken at the greater of cost
or market value) to be invested in any one investment company; or
(c) more than 3% of the outstanding voting securities of any such
issuer to be held for the Fund; provided further that, except in
the case of a merger or consolidation, the Fund shall not
purchase any securities of any open-end investment company unless
(1) the investment adviser waives the investment advisory fee
with respect to assets invested in other open-end investment
companies and (2) the Fund incurs no sales charge in connection
with the investment;
(vii) invest more than 10% of the Fund's total assets (taken at
the greater of cost or market value) in securities (excluding
Rule 144A securities) that are restricted as to resale under the
1933 Act;
(viii) invest more than 5% in securities that are issued by issuers
which (including predecessors) have been in operation less than
three years (other than U.S. government securities);
(ix) invest more than 15% of the Fund's net assets (taken at the
greater of cost or market value) in securities that are illiquid
or not readily marketable excluding (a) Rule 144A securities
that have been determined to be liquid by the Board of Trustees;
and (b) commercial paper that is sold under section 4(2) of the
1933 Act which: (i) is not traded flat or in default as to
interest or principal; and (ii) is rated in one of the two
highest categories by at least two nationally recognized
33
statistical rating organizations and the Trust's Board of
Trustees have determined the commercial paper to be liquid; or
(iii) is rated in one of the two highest categories by one
nationally recognized statistical rating agency and the Trust's
Board of Trustees has determined that the commercial paper is of
equivalent quality and is liquid;
(x) invest in securities issued by an issuer any of whose
officers, directors, trustees or security holders is an officer
or Trustee of the Trust, or is an officer or director of the
Adviser, if after the purchase of the securities of such issuer
for the Fund one or more of such persons owns beneficially more
than 1/2 of 1% of the shares or securities, or both, all taken at
market value, of such issuer, and such persons owning more than
1/2 of 1% of such shares or securities together own beneficially
more than 5% of such shares or securities, or both, all taken at
market value;
(xi) invest in warrants (other than warrants acquired by the Fund
as part of a unit or attached to securities at the time of
purchase) if, as a result, the investments (valued at the lower
of cost or market) would exceed 5% of the value of the Fund's net
assets or if, as a result, more than 2% of the Fund's net assets
would be invested in warrants not listed on a recognized United
States or foreign stock exchange, to the extent permitted by
applicable state securities laws;
34
(xii) write puts and calls on securities unless each of the
following conditions are met: (a) the security underlying the
put or call is within the investment practices of the Fund and
the option is issued by the OCC, except for put and call options
issued by non-U.S. entities or listed on non-U.S. securities or
commodities exchanges; (b) the aggregate value of the obligations
underlying the puts determined as of the date the options are
sold shall not exceed 5% of the Fund's net assets; (c) the
securities subject to the exercise of the call written by the
Fund must be owned by the Fund at the time the call is sold and
must continue to be owned by the Fund until the call has been
exercised, has lapsed, or the Fund has purchased a closing call,
and such purchase has been confirmed, thereby extinguishing the
Fund's obligation to deliver securities pursuant to the call it
has sold; and (d) at the time a put is written, the Fund
establishes a segregated account with its custodian consisting of
cash or short-term U.S. government securities equal in value to
the amount the Fund will be obligated to pay upon exercise of the
put (this account must be maintained until the put is exercised,
has expired, or the Fund has purchased a closing put, which is a
put of the same series as the one previously written); and
(xiii) buy and sell puts and calls on securities, stock index
futures or options on stock index futures, or financial futures
or options on financial futures unless such options are written
by other persons and: (a) the options or futures are offered
35
through the facilities of a national securities association or
are listed on a national securities or commodities exchange,
except for put and call options issued by non-U.S. entities or
listed on non-U.S. securities or commodities exchanges; (b) the
aggregate premiums paid on all such options which are held at any
time do not exceed 20% of the Fund's total net assets; and (c)
the aggregate margin deposits required on all such futures or
options thereon held at any time do not exceed 5% of the Fund's
total assets.
There will be no violation of any investment restrictions or policies
(except with respect to illiquid securities) if that restriction is
complied with at the time the relevant action is taken, notwithstanding a
later change in the market value of an investment, in net or total assets,
or in the change of securities rating of the investment, or any other later
change.
36
BROKERAGE COMMISSIONS
The Adviser is responsible for decisions to buy and sell securities,
futures contracts and options on such securities and futures for the Fund,
the selection of brokers, dealers and futures commission merchants to
effect transactions and the negotiation of brokerage commissions, if any.
Broker-dealers may receive brokerage commissions on portfolio transactions,
including options, futures and options on futures transactions and the
purchase and sale of underlying securities upon the exercise of options.
Orders may be directed to any broker-dealer or futures commission merchant,
including to the extent and in the manner permitted by applicable law,
Bankers Trust or its subsidiaries or affiliates. Purchases and sales of
certain portfolio securities on behalf of the Fund are frequently placed by
the Adviser with the issuer or a primary or secondary market-maker for
these securities on a net basis, without any brokerage commission being
paid by the Fund. Trading does, however, involve transaction costs.
Transactions with dealers serving as market-makers reflect the spread
between the bid and asked prices. Transaction costs may also include fees
paid to third parties for information as to potential purchasers or sellers
of securities. Purchases of underwritten issues may be made which will
include an underwriting fee paid to the underwriter.
The Adviser seeks to evaluate the overall reasonableness of the brokerage
commissions paid (to the extent applicable) in placing orders for the
purchase and sale of securities for the Fund taking into account such
factors as price, commission (negotiable in the case of national securities
exchange transactions), if any, size of order, difficulty of execution and
37
skill required of the executing broker-dealer through familiarity with
commissions charged on comparable transactions, as well as by comparing
commissions paid by the Fund to reported commissions paid by others. The
Adviser reviews on a routine basis commission rates, execution and
settlement services performed, making internal and external comparisons.
The Adviser is authorized, consistent with Section 28(e) of the Securities
Exchange Act of 1934, as amended, when placing portfolio transactions for
the Fund with a broker to pay a brokerage commission (to the extent
applicable) in excess of that which another broker might have charged for
effecting the same transaction on account of the receipt of research,
market or statistical information. The term "research, market or
statistical information" includes advice as to the value of securities; the
advisability of investing in, purchasing or selling securities; the
availability of securities or purchasers or sellers of securities; and
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and the performance of
accounts.
Consistent with the policy stated above, the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. and such other policies as
the Trustees of the Trust may determine, the Adviser may consider sales of
shares of the Trust and of other investment company clients of Bankers
Trust as a factor in the selection of broker-dealers to execute portfolio
transactions. Bankers Trust will make such allocations if commissions are
comparable to those charged by nonaffiliated, qualified broker-dealers for
similar services.
38
Higher commissions may be paid to firms that provide research services to
the extent permitted by law. Bankers Trust may use this research
information in managing the Fund's assets, as well as the assets of other
clients.
Except for implementing the policies stated above, there is no intention to
place portfolio transactions with particular brokers or dealers or groups
thereof. In effecting transactions in over-the-counter securities, orders
are placed with the principal market-makers for the security being traded
unless, after exercising care, it appears that more favorable results are
available otherwise.
Although certain research, market and statistical information from brokers
and dealers can be useful to the Fund and to the Adviser, it is the opinion
of the management of the Fund that such information is only supplementary
to the Adviser's own research effort, since the information must still be
analyzed, weighed and reviewed by the Adviser's staff. Such information
may be useful to the Adviser in providing services to clients other than
the Fund, and not all such information is used by the Adviser in connection
with the Fund. Conversely, such information provided to the Adviser by
brokers and dealers through whom other clients of the Adviser effect
securities transactions may be useful to the Adviser in providing services
to the Fund.
In certain instances there may be securities which are suitable for the
Fund as well as for one or more of the Adviser's other clients. Investment
decisions for the Fund and for the Adviser's other clients are made with a
view to achieving their respective investment objectives. It may develop
39
that a particular security is bought or sold for only one client even
though it might be held by, or bought or sold for, other clients.
Likewise, a particular security may be bought for one or more clients when
one or more clients are selling that same security. Some simultaneous
transactions are inevitable when several clients receive investment advice
from the same investment adviser, particularly when the same security is
suitable for the investment objectives of more than one client. When two
or more clients are simultaneously engaged in the purchase or sale of the
same security, the securities are allocated among clients in a manner
believed to be equitable to each. It is recognized that in some cases this
system could have a detrimental effect on the price or volume of the
security as far as the Fund in concerned. However, it is believed that the
ability of the Fund to participate in volume transactions will produce
better executions for the Fund.
Prior to September 27, 1996, the Fund sought to achieve the investment
objective by investing all of its investable assets in the Capital
Appreciation Portfolio (the "Portfolio"), which is a separate registered
investment company with an identical investment objective. The Fund's
fiscal year end is September 30. Formerly, both the Fund's and the
Portfolio's fiscal year end was December 31. For the fiscal year ended
September 30, 1996, the period from January 1, 1995 to September 30, 1995,
and the fiscal year ended December 31, 1994, the Portfolio paid brokerage
commissions in the amount of $648,897, $247,868, and $162,941
respectively.
40
PERFORMANCE INFORMATION
STANDARD PERFORMANCE INFORMATION
From time to time, quotations of the Class' performance may be included in
advertisements, sales literature or shareholder reports. These performance
figures are calculated in the following manner:
TOTAL RETURN: A Class' average annual total return is calculated for
certain periods by determining the average annual compounded rates of
return over those periods that would cause an investment of $1,000 (made at
the maximum public offering price with all distributions reinvested) to
reach the value of that investment at the end of the periods. A Class may
also calculate total return figures which represent aggregate performance
over a period or year-by-year performance.
Prior to September 27, 1996, the Fund did not offer classes of shares and
the performance of the Investment Class was that of the Fund's.
The Fund's average annual total returns for Investment Class shares for the
one-year period ended September 30, 1996, and for the period from October
12, 1993, (commencement of operations), through September 30, 1996, were
12.45%, and 16.91%, respectively.
PERFORMANCE RESULTS: Any total return quotation provided for the Fund
should not be considered as representative of the performance of the Fund
in the future since the net asset value and public offering price of shares
of the Fund will vary based not only on the type, quality and maturities of
the securities held in its portfolio, but also on changes in the current
value of such securities and on changes in the expenses of the Fund. These
factors and possible differences in the methods used to calculate total
41
return should be considered when comparing the total return of the Fund to
total returns published for other investment companies or other investment
vehicles. Total return reflects the performance of both principal and
income.
COMPARISON OF FUND PERFORMANCE
Comparison of the quoted nonstandardized performance of various investments
is valid only if performance is calculated in the same manner. Since there
are different methods of calculating performance, investors should consider
the effect of the methods used to calculate performance when comparing
performance of the Fund with performance quoted with respect to other
investment companies or types of investments.
In connection with communicating its performance to current or prospective
shareholders, the Fund also may compare these figures to the performance of
other mutual funds tracked by mutual fund rating services or to unmanaged
indices which may assume reinvestment of dividends but generally do not
reflect deductions for administrative and management costs. Evaluations of
the Fund's performance made by independent sources may also be used in
advertisements concerning the Fund. Sources for the Fund's performance
information could include the following:
Asian Wall Street Journal, a weekly Asian newspaper that often reviews U.S.
mutual funds investing internationally.
Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
42
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds investing
abroad.
Changing Times, The Kiplinger Magazine, a monthly investment advisory
publication that periodically features the performance of a variety of
securities.
Consumer Digest, a monthly business/financial magazine that includes a
"Money Watch" section featuring financial news.
Financial Times, Europe's business newspaper, which features from time to
time articles on international or country-specific funds.
Financial World, a general business/financial magazine that includes a
"Market Watch" department reporting on activities in the mutual fund
industry.
Forbes, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the
performance of a variety of mutual funds.
Global Investor, a European publication that periodically reviews the
performance of U.S. mutual funds investing internationally.
Investor's Daily, a daily newspaper that features financial, economic and
business news.
Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a
weekly publication of industry-wide mutual fund averages by type of fund.
Money, a monthly magazine that from time to time features both specific
funds and the mutual fund industry as a whole.
43
Morningstar Inc., a publisher of financial information and mutual fund
research.
New York Times, a nationally distributed newspaper which regularly covers
financial news.
Personal Investing News, a monthly news publication that often reports on
investment opportunities and market conditions.
Personal Investor, a monthly investment advisory publication that includes
a "Mutual Funds Outlook" section reporting on mutual fund performance
measures, yields, indices and portfolio holdings.
Success, a monthly magazine targeted to the world of entrepreneurs and
growing business, often featuring mutual fund performance data.
U.S. News and World Report, a national business weekly that periodically
reports mutual fund performance data.
Value Line, a biweekly publication that reports on the largest 15,000
mutual funds.
Wall Street Journal, a Dow Jones and Company, Inc. newspaper which
regularly covers financial news.
Weisenberger Investment Companies Services, an annual compendium of
information about mutual funds and other investment companies, including
comparative data on funds' backgrounds, management policies, salient
features, management results, income and dividend records, and price
ranges.
Working Women, a monthly publication that features a "Financial Workshop"
section reporting on the mutual fund/financial industry.
44
VALUATION OF SECURITIES; REDEMPTIONS AND PURCHASES IN KIND
Equity and debt securities (other than short-term debt obligations maturing
in 60 days or less), including listed securities and securities for which
price quotations are available, will normally be valued on the basis of
market valuations furnished by a pricing service. Short-term debt
obligations and money market securities maturing in 60 days or less are
valued at amortized cost, which approximates market.
Securities for which market quotations are not readily available are valued
by Bankers Trust pursuant to procedures adopted by the Trust's Board of
Trustees. It is generally agreed that securities for which market
quotations are not readily available should not be valued at the same value
as that carried by an equivalent security which is readily marketable.
The problems inherent in making a good faith determination of value are
recognized in the codification effected by SEC Financial Reporting Release
No. 1 ("FRR 1" (formerly Accounting Series Release No. 113)) which
concludes that there is "no automatic formula" for calculating the value of
restricted securities. It recommends that the best method simply is to
consider all relevant factors before making any calculation. According to
FRR 1 such factors would include consideration of the:
type of security involved, financial statements, cost at date of
purchase, size of holding, discount from market value of unrestricted
securities of the same class at the time of purchase, special reports
prepared by analysts, information as to any transactions or offers
with respect to the security, existence of merger proposals or tender
offers affecting the security, price and extent of public trading in
45
similar securities of the issuer or comparable companies, and other
relevant matters.
To the extent that the Fund purchases securities which are restricted as to
resale or for which current market quotations are not readily available,
the Adviser will value such securities based upon all relevant factors as
outlined in FRR 1.
The Trust, on behalf of the Fund, reserves the right, if conditions exist
which make cash payments undesirable, to honor any request for redemption
or withdrawal by making payment in whole or in part in readily marketable
securities chosen by the Trust, and valued as they are for purposes of
computing the Class' net asset values (a redemption in kind). If payment
is made to a Fund shareholder in securities, an investor, including the
Fund, may incur transaction expenses in converting these securities into
cash. The Trust, on behalf of the Fund, has elected, however, to be
governed by Rule 18f-1 under the 1940 Act as a result of which the Fund is
obligated to redeem shares with respect to any one investor during any
90-day period, solely in cash up to the lesser of $250,000 or 1% of the net
asset value of the Fund's Classes at the beginning of the period.
The Fund may, at its own option, accept securities in payment for shares of
a class. The securities delivered in payment for shares are valued by the
method described under "Net Asset Value" as of the day the Fund receives
the securities. This may be a taxable transaction to the shareholder.
(Consult your tax adviser for future tax guidance.) Securities may be
accepted in payment for shares only if they are, in the judgment of Bankers
Trust, appropriate investments for the Fund. In addition, securities
46
accepted in payment for shares must: (i) meet the investment objective and
policies of the acquiring Fund; (ii) be acquired by the applicable Fund for
investment and not for resale (other than for resale to the Fund); (iii) be
liquid securities which are not restricted as to transfer either by law or
liquidity of the market; and (iv) if stock, have a value which is readily
ascertainable as evidenced by a listing on a stock exchange, over-the-
counter market or by readily available market quotations from a dealer in
such securities. The Fund reserves the right to accept or reject at its
own option any and all securities offered in payment for its shares.
{PRIVATE }MANAGEMENT OF THE TRUST{TC "MANAGEMENT OF THE TRUST"}
The Board of Trustees is composed of persons experienced in financial
matters who meet throughout the year to oversee the activities of the Fund.
In addition, the Trustees review contractual arrangements with companies
that provide services to the Fund and review the Fund's performance.
The Trustees and officers of the Trust, their birthdates and their
principal occupations during the past five years are set forth below.
Their titles may have varied during that period. Unless otherwise
indicated, the address of each officer is Clearing Operations, P.O. Box
897, Pittsburgh, Pennsylvania 15230-0897.
TRUSTEES OF THE TRUST
HARRY VAN BENSCHOTEN (birthdate: February 18, 1928) -- Trustee; retired
(since 1987); Director, Canada Life Insurance Corporation of New York and
Competitive Technologies, Inc., a public company listed on the American
Stock Exchange; Corporate Vice President, Newmont Mining Corporation (prior
to 1987). His address is 6581 Ridgewood Drive, Naples, Florida 33963.
47
MARTIN J. GRUBER (birthdate: July 15, 1937) -- Trustee; Chairman of the
Finance Department and Nomura Professor of Finance, Leonard N. Stern School
of Business, New York University (since 1964). His address is 229 S.
Irving Street, Ridgewood, New Jersey 07450.
KELVIN J. LANCASTER (birthdate: December 10, 1924) -- Trustee; Professor,
Department of Economics, Columbia University. His address is 35 Claremont
Avenue, New York, New York 10027.
PHILIP W. COOLIDGE* (birthdate: September 2, 1951) -- President and
Trustee; Chairman, Chief Executive Officer and President, Signature
Financial Group, Inc. ("SFG") (since December, 1988) and Signature (since
April, 1989). His address is 6 St. James Avenue, Boston, Massachusetts
02116.
*Indicates an ``nterested person'' (as defined by the 1940 Act) of the
Trust.
OFFICERS OF THE TRUST
RONALD M. PETNUCH (birthdate: February 27, 1960) -- President and
Treasurer; Senior Vice President, Federated Services Company (``SC'');
formerly, Director of Proprietary Client Services, Federated Administrative
Services (``AS''), and Associate Corporate Counsel, Federated Investors
(``I'').
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.
48
Messrs. Coolidge, Petnuch, Davis, and Neuman also hold similar positions
for other investment companies for which Signature or Edgewood,
respectively, serves as the principal underwriter.
For the fiscal year ended September 30, 1996, the Fund incurred Trustees
fees equal to $7,716 and during the same period the Portfolio incurred
Trustees fees equal to $2,628.
The following table reflects fees paid to the Trustees for the year ended
September 30, 1996.
TRUSTEE COMPENSATION TABLE
Name, Aggregate Total
Position With Compensation Compensation
Trust/Portfolio From Trust From Fund Complex**
Harry Van Benschoten $13,000 $23.000
Trustee of Trust
Philip W. Coolidge none none
Trustee of Trust
and Portfolio
Martin J. Gruber $13,000 $23,000
Trustee of Trust
Kelvin J. Lancaster $13,000 $23,000
Trustee of Trust
Charles P. Biggar none none
Trustee of Portfolio
S. Leland Dill none none
49
Trustee of Portfolio
Philip Saunders, Jr. none none
Trustee of Portfolio
** Aggregated information is furnished for the BT Family of Funds which
consists of the following: BT Investment Funds, BT Institutional
Funds, BT Pyramid Funds, BT Advisor Funds, BT Investment Portfolios,
Cash Management Portfolio, Treasury Money Portfolio, Tax Free Money
Portfolio, NY Tax Free Money Portfolio, International Equity
Portfolio, Utility Portfolio, Short Intermediate US Government
Securities Portfolio, Intermediate Tax Free Portfolio, Asset
Management Portfolio, Equity 500 Index Portfolio, and Capital
Appreciation Portfolio.
Bankers Trust reimbursed the Fund and Portfolio for a portion of their
Trustees fees for the period above. See "Investment Adviser" and
"Administrator" below.
As of December 31, 1996, the Trustees and officers of the Trust owned in
the aggregate less than 1% of the shares of the Fund or Trust (all series
taken together).
As of December 31, 1996, the following Shareholders of record owned 5% or
more of the outstanding Shares of the Fund: Northern Telecom Omnibus ACCO,
Jersey City, New Jersey, owned approximately 5,330,866 shares (48.42%);
Bankers Trust Company as Trustee for Hanson Industries Plan 401(k), Jersey
City, New Jersey, owned approximately 1,560,045 shares (14.17%); Bankers
Trust Company as Trustee for Westinghouse Savannah River/BE Savannah River,
Inc., Jersey City New Jersey, owned approximately 1,555,193 shares
50
(14.13%); Bankers Trust Company as Trustee for Millennium Chemicals 401(k),
Jersey City, New Jersey, owned approximately 992,921 shares (9.02%); and
Bankers Trust Company as Trustee for U.S. Industries Plan 401(k), Jersey
City, New Jersey, owned approximately 779,482 shares (7.08%).
INVESTMENT ADVISER
Under the terms of the investment advisory agreement with Bankers Trust
(the "Advisory Agreement"), Bankers Trust manages the Fund subject to the
supervision and direction of the Board of Trustees of the Trust. Bankers
Trust will: (i) act in strict conformity with the Trust's Declaration of
Trust, the 1940 Act and the Investment Advisers Act of 1940, as the same
may from time to time be amended; (ii) manage the Fund in accordance with
the Fund's investment objective, restrictions and policies; (iii) make
investment decisions for the Fund; and (iv) place purchase and sale orders
for securities and other financial instruments on behalf of the Fund.
Bankers Trust bears all expenses in connection with the performance of
services under the Advisory Agreement. The Trust bears certain other
expenses incurred in its operation, including: taxes, interest, brokerage
fees and commissions, if any; fees of Trustees of the Trust who are not
officers, directors or employees of Bankers Trust, Edgewood or any of their
affiliates; SEC fees and state Blue Sky qualification fees; 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
51
shareholders; costs of shareholders' reports and meetings of shareholders,
officers and Trustees of the Trust; and any extraordinary expenses.
For the fiscal year ended September 30, 1996, the period from January 1,
1995, to September 30, 1995, and the year ended December 31, 1994, Bankers
Trust earned $1,225,764, $482,453, and $329,399, respectively, as
compensation for investment advisory services provided to the Portfolio.
During the same periods, Bankers Trust reimbursed $319,524, $131,702, and
$114,930, respectively, to the Portfolio to cover expenses.
Bankers Trust may have deposit, loan and other commercial banking
relationships with the issuers of obligations which may be purchased on
behalf of the Fund, including outstanding loans to such issuers which could
be repaid in whole or in part with the proceeds of securities so purchased.
Such affiliates deal, trade and invest for their own accounts in such
obligations and are among the leading dealers of various types of such
obligations. Bankers Trust has informed the Fund that, in making its
investment decisions, it does not obtain or use material inside information
in its possession or in the possession of any of its affiliates. In making
investment recommendations for the Fund, Bankers Trust will not inquire or
take into consideration whether an issuer of securities proposed for
purchase or sale by the Fund is a customer of Bankers Trust, its parent or
its subsidiaries or affiliates and, in dealing with its customers, Bankers
Trust, its parent, subsidiaries and affiliates will not inquire or take
into consideration whether securities of such customers are held by any
fund managed by Bankers Trust or any such affiliate.
52
Each Class' prospectus contains disclosure as to the amount of Bankers
Trust's investment advisory and administration and services fees, including
waivers thereof. Bankers Trust may not recoup any of its waived investment
advisory or administration and services fees. Such waivers by Bankers
Trust shall stay in effect for at least 12 months.
53
ADMINISTRATOR
Under the administration and services agreements, Bankers Trust is
obligated on a continuous basis to provide such administrative services as
the Board of Trustees of the Trust reasonably deem necessary for the proper
administration of the Trust. Bankers Trust will: generally assist in all
aspects of the Fund's operations; supply and maintain office facilities
(which may be in Bankers Trust's own offices), statistical and research
data, data processing services, clerical, accounting, bookkeeping and
recordkeeping services (including without limitation the maintenance of
such books and records as are required under the 1940 Act and the rules
thereunder, except as maintained by other agents), custodial and transfer
agency services, executive and administrative services, and stationery and
office supplies; prepare reports to shareholders or investors; 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 as
from time to time may be agreed upon by Bankers Trust and FSC. The Sub-
54
Administration Agreement provides that FSC will receive such compensation
as from time to time may be agreed upon by FSC and Bankers Trust. All such
compensation will be paid by Bankers Trust.
For the fiscal year ended September 30, 1996, the period from January 1,
1995 to September 30, 1995, and the fiscal year ended December 31, 1994,
Bankers Trust earned $502,895, $155,327, and $101,002, respectively, as
compensation for administrative and other services provided to the Fund.
During the same periods, Bankers Trust reimbursed $94,051, $57,346, and
$59,973, respectively, to the Fund to cover expenses.
For the fiscal year ended September 30, 1996,, the period from January 1,
1995 to September 30, 1995, and the year ended December 31, 1994, Bankers
Trust earned $188,579, $74,224, and $50,677, respectively, as compensation
for administrative and other services provided to the Portfolio.
Bankers Trust has agreed that if in any fiscal year the aggregate expenses
of the Fund (including fees pursuant to the Advisory Agreement, but
excluding interest, taxes, brokerage and, if permitted by the relevant
state securities commissions, extraordinary expenses) exceed the expense
limitation of any state having jurisdiction over the Fund, Bankers Trust
will reimburse the Fund for the excess expense to the extent required by
state law. As of the date of this Statement of Additional Information, the
most restrictive annual expense limitation applicable to any Fund or Class
is 2.50% of the Fund's or Class' 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.
55
CUSTODIAN AND TRANSFER AGENT
Bankers Trust, 280 Park Avenue, New York, New York 10017, serves as
Custodian for the Trust pursuant to the administration and services
agreements. As Custodian, it holds the Fund's assets. Bankers Trust also
serves as transfer agent of the Trust pursuant to the respective
administration and services agreement. Under its transfer agency agreement
with the Trust, Bankers Trust maintains the shareholder account records for
each Class of Shares of the Fund, handles certain communications between
shareholders and the Trust and causes to be distributed any dividends and
distributions payable by the Trust. Bankers Trust may be reimbursed by the
Fund for its out-of-pocket expenses. Bankers Trust will comply with the
self-custodian provisions of Rule 17f-2 under the 1940 Act.
USE OF NAME
The Trust and Bankers Trust have agreed that the Trust may use "BT" as
part of its name for so long as Bankers Trust serves as investment adviser
to the Portfolio. The Trust has acknowledged that the term "BT" is used by
and is a property right of certain subsidiaries of Bankers Trust and that
those subsidiaries and/or Bankers Trust may at any time permit others to
use that term.
The Trust may be required, on 60 days' notice from Bankers Trust at any
time, to abandon use of the acronym "BT" as part of its name. If this were
to occur, the Trustees would select an appropriate new name for the Trust,
but there would be no other material effect on the Trust, its shareholders
or activities.
56
BANKING REGULATORY MATTERS
Bankers Trust has been advised by its counsel that in its opinion Bankers
Trust may perform the services for the Fund contemplated by the Advisory
Agreement and other activities for the Fund described in the Prospectus and
this Statement of Additional Information without violation of the
Glass-Steagall Act or other applicable banking laws or regulations.
However, counsel has pointed out that future changes in either Federal or
state statutes and regulations concerning the permissible activities of
banks or trust companies, as well as future judicial or administrative
decisions or interpretations of present and future statutes and
regulations, might prevent Bankers Trust from continuing to perform those
services for the Trust. State laws on this issue may differ from the
interpretations of relevant Federal law and banks and financial
institutions may be required to register as dealers pursuant to state
securities law. If the circumstances described above should change, the
Board of Trustees would review the relationship with Bankers Trust and
consider taking all actions necessary in the circumstances.
COUNSEL AND INDEPENDENT ACCOUNTANTS
Willkie Farr & Gallagher, One Citicorp Center, 153 East 53rd Street, New
York, New York 10022-4669, serves as Counsel to the Trust. Coopers &
Lybrand L.L.P., 1100 Main Street, Suite 900, Kansas City, Missouri 64105
acts as Independent Accountants of the Trust.
57
ORGANIZATION OF THE TRUST
Shares of the Trust do not have cumulative voting rights, which means that
holders of more than 50% of the shares voting for the election of Trustees
can elect all Trustees. Shares are transferable but have no preemptive,
conversion or subscription rights. Shareholders generally vote by Fund,
except with respect to the election of Trustees and the ratification of the
selection of independent accountants.
Massachusetts law provides that shareholders could under certain
circumstances be held personally liable for the obligations of the Trust.
However, the Trust's Declaration of Trust disclaims shareholder liability
for acts or obligations of the Trust and requires that notice of this
disclaimer be given in each agreement, obligation or instrument entered
into or executed by the Trust or a Trustee. The Declaration of Trust
provides for indemnification from the Trust's property for all losses and
expenses of any shareholder held personally liable for the obligations of
the Trust. Thus, the risk of a shareholder's incurring financial loss on
account of shareholder liability is limited to circumstances in which the
Trust itself would be unable to meet its obligations, a possibility that
the Trust believes is remote. Upon payment of any liability incurred by
the Trust, the shareholder paying the liability will be entitled to
reimbursement from the general assets of the Trust. The Trustees intend to
conduct the operations of the Trust in a manner so as to avoid, as far as
possible, ultimate liability of the shareholders for liabilities of the
Trust.
The Trust was organized on February 28, 1992.
58
TAXATION
TAXATION OF THE FUND
The Trust intends to qualify annually and to elect the Fund to be treated
as a regulated investment company under the Code.
As a regulated investment company, the Fund will not be subject to U.S.
Federal income tax on its investment company taxable income and net capital
gains (the excess of net long-term capital gains over net short-term
capital losses), if any, that it distributes to shareholders. The Fund
intends to distribute to its shareholders, at least annually, substantially
all of its investment company taxable income and net capital gains, and
therefore does not anticipate incurring a Federal income tax liability.
OTHER TAXATION
The Trust is organized as a Massachusetts business trust and, under current
law, neither the Trust nor the Fund is liable for any income or franchise
tax in the Commonwealth of Massachusetts, provided that the Fund continues
to qualify as a regulated investment company under Subchapter M of the
Code.
Fund shareholders may be subject to state and local taxes on the Fund
distributions. Shareholders are advised to consult their own tax advisers
with respect to the particular tax consequences to them of an investment in
the Fund.
FINANCIAL STATEMENTS
The financial statements for the Fund for the period ended September 30,
1996, are incorporated herein by reference to the Fund's Annual Report
dated September 30, 1996 (File Nos. 33-45973 and 811-06576). A copy of the
Annual Report may be obtained without charge by contacting the Fund.
59
APPENDIX
COMMERCIAL PAPER RATINGS
S&P'S COMMERCIAL PAPER RATINGS
A is the highest commercial paper rating category utilized by S&P, which
uses the numbers 1+, 1, 2 and 3 to denote relative strength within its A
classification. Commercial paper issues rated A by S&P have the following
characteristics: Liquidity ratios are better than industry average. Long-
term debt rating is A or better. The issuer has access to at least two
additional channels of borrowing. Basic earnings and cash flow are in an
upward trend. Typically, the issuer is a strong company in a well-
established industry and has superior management.
MOODY'S COMMERCIAL PAPER RATINGS
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well-established industries;
high rates of return on funds employed; conservative capitalization
structures with moderate reliance on debt and ample asset protection; broad
margins in earnings coverage of fixed financial charges and high internal
cash generation; well-established access to a range of financial markets
and assured sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be
more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations.
The effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and the requirement
for relatively high financial leverage. Adequate alternate liquidity is
maintained.
FITCH INVESTORS SERVICE AND DUFF & PHELPS COMMERCIAL PAPER RATINGS
Commercial paper rated "Fitch-1" is considered to be the highest grade
paper and is regarded as having the strongest degree of assurance for
timely payment. "Fitch-2" is considered very good grade paper and reflects
an assurance of timely payment only slightly less in degree than the
strangest issue.
Commercial paper issues rated "Duff 1" by Duff & Phelps, Inc. have the
following characteristics: very high certainty of timely payment,
excellent liquidity factors supported by strong fundamental protection
factors, and risk factors which are very small. Issues rated "Duff 2" have
a good certainty of timely payment, sound liquidity factors and company
fundamentals, small risk factors, and good access to capital markets.
A-2
INVESTMENT ADVISER AND ADMINISTRATOR
BANKERS TRUST COMPANY
DISTRIBUTOR
EDGEWOOD SERVICES, INC.
CUSTODIAN AND TRANSFER AGENT
BANKERS TRUST COMPANY
INDEPENDENT ACCOUNTANTS
COOPERS & LYBRAND L.L.P.
COUNSEL
WILLKIE FARR & GALLAGHER
No person has been authorized to give any information or to make any
representations other than those contained in the Trust's Prospectus, its
Statement of Additional Information or the Trust's official sales
literature in connection with the offering of the Trust's shares and, if
given or made, such other information or representations must not be relied
on as having been authorized by the Trust. Neither the Prospectus nor this
Statement of Additional Information constitutes an offer in any state in
which, or to any person to whom, such offer may not lawfully be made.
STATEMENT OF
ADDITIONAL INFORMATION
JANUARY 31, 1997
(REVISED JULY 18, 1997)
CUSIP # 055922751
STA518400 (7/97)
BT PYRAMID MUTUAL FUNDS
u BT INVESTMENT LIMITED TERM U.S. GOVERNMENT SECURITIES FUND
BT Pyramid Mutual Funds (the "Trust") is an open-end management investment
company that offers investors a selection of investment portfolios, each
having distinct investment objectives and policies. This Statement of
Additional Information relates only to the BT Investment Limited Term U.S.
Government Securities Fund (the `Fund'').
The Fund seeks a high level of current income through investment in short-
term and intermediate-term U.S. government securities.
As described in the Prospectus, the Trust seeks to achieve the investment
objective of the Fund by investing all the investable assets of the Fund
in the Short/Intermediate U.S. Government Securities Portfolio (the
`Portfolio''), an open-end management investment company having the same
investment objective as the Fund.
Shares of the Fund are sold by Edgewood Services, Inc. (`Edgewood'') , the
Trust's Distributor, to clients and customers (including affiliates and
correspondents) of Bankers Trust Company ("Bankers Trust"), the Portfolio's
investment adviser (`Adviser'') , and to clients and customers of other
organizations.
The Trust's Prospectus relating to the Fund is dated January 31, 1997,
and provides the basic information investors should know before investing.
The Prospectus may be obtained without charge by calling the Trust at the
telephone number listed below or by contacting any Service Agent. This
Statement of Additional Information, which is not a Prospectus, is intended
to provide additional information regarding the activities and operations
of the Trust and should be read in conjunction with the Prospectus.
Capitalized terms not otherwise defined in this Statement of Additional
Information have the meanings accorded to them in the Trust's Prospectus.
INVESTMENT ADVISER OF THE PORTFOLIO AND ADMINISTRATOR
BANKERS TRUST COMPANY
DISTRIBUTOR
EDGEWOOD SERVICES, INC.
CLEARING OPERATIONS PITTSBURGH, PENNSYLVANIA
15230-0897 (800) 730-1313
P.O BOX 897
TABLE OF CONTENTS
Investment Objectives, Policies and Restrictions.................1
Performance Information..........................................13
Valuation of Securities; Redemptions and Purchases in Kind.......16
Management of the Trust and Portfolio............................17
Organization of the Trust........................................22
Taxation.........................................................23
Financial Statements.............................................24
Appendix.........................................................A-1
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVES
The investment objective of the Fund is described in the Fund's Prospectus.
There can, of course, be no assurance that the Fund will achieve its
investment objective.
INVESTMENT POLICIES
The Fund seeks to achieve its investment objective by investing all of its
Assets in the Portfolio. The Trust may withdraw the Fund's investment from
the Portfolio at any time if the Board of Trustees of the Trust determines
that it is in the best interests of the Fund to do so.
Since the investment characteristics of the Fund will correspond directly
to those of the Portfolio, the following is a discussion of the various
investments of and techniques employed by the Portfolio.
ILLIQUID SECURITIES. Historically, illiquid securities have included
securities subject to contractual or legal restrictions on resale because
they have not been registered under the Securities Act of 1933, as amended
(the "1933 Act"), securities which are otherwise not readily marketable and
repurchase agreements having a remaining maturity of longer than seven
calendar days. Securities which have not been registered under the 1933 Act
are referred to as private placements or restricted securities and are
purchased directly from the issuer or in the secondary market. Mutual funds
do not typically hold a significant amount of these restricted or other
illiquid securities because of the potential for delays on resale and
uncertainty in valuation. Limitations on resale may have an adverse effect
on the marketability of portfolio securities and a mutual fund might be
unable to dispose of restricted or other illiquid securities promptly or at
reasonable prices and might thereby experience difficulty satisfying
redemptions within seven calendar days. A mutual fund might also have to
register such restricted securities in order to dispose of them resulting
in additional expense and delay. Adverse market conditions could impede
such a public offering of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the 1933 Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on
an efficient institutional market in which the unregistered security can be
readily resold or on an issuer's ability to honor a demand for repayment.
The fact that there are contractual or legal restrictions on resale of such
investments to the general public or to certain institutions may not be
indicative of their liquidity.
The Securities and Exchange Commission (the "SEC") has adopted Rule 144A,
which allows a broader institutional trading market for securities
otherwise subject to restriction on their resale to the general public.
Rule 144A establishes a "safe harbor" from the registration requirements of
the 1933 Act of resales of certain securities to qualified institutional
buyers. The Adviser anticipates that the market for certain restricted
securities such as institutional commercial paper will expand further as a
result of this regulation and the development of automated systems for the
trading, clearance and settlement of unregistered securities of domestic
and foreign issuers, such as the PORTAL System sponsored by the National
Association of Securities Dealers, Inc. (`NASD'').
The Adviser will monitor the liquidity of Rule 144A securities in the
Portfolio's portfolio holdings under the supervision of the Portfolio's
Board of Trustees. In reaching liquidity decisions, the Adviser will
consider, among other things, the following factors: (1) the frequency of
trades and quotes for the security; (2) the number of dealers and other
potential purchasers wishing to purchase or sell the security; (3) dealer
undertakings to make a market in the security; and (4) the nature of the
security and of the marketplace trades (e.g., the time needed to dispose of
the security, the method of soliciting offers and the mechanics of the
transfer).
LENDING OF PORTFOLIO SECURITIES. The Portfolio has the authority to lend
portfolio securities to brokers, dealers and other financial organizations.
The Portfolio will not lend securities to Bankers Trust, Edgewood or their
affiliates. By lending its securities, the Fund can increase its income by
continuing to receive interest on the loaned securities as well as by
either investing the cash collateral in short-term securities or obtaining
yield in the form of interest paid by the borrower when U.S. government
obligations are used as collateral. There may be risks of delay in
receiving additional collateral or risks of delay in recovery of the
securities or even loss of rights in the collateral should the borrower of
the securities fail financially. The Portfolio will adhere to the
following conditions whenever its securities are loaned: (i) the Portfolio
must receive at least 100 percent cash collateral or equivalent securities
from the borrower; (ii) the borrower must increase this collateral whenever
the market value of the securities including accrued interest rises above
the level of the collateral; (iii) the Portfolio must be able to terminate
the loan at any time; (iv) the Portfolio must receive reasonable interest
on the loan, as well as any dividends, interest or other distributions on
the loaned securities, and any increase in market value; (v) the Portfolio
may pay only reasonable custodian fees in connection with the loan; and
(vi) voting rights on the loaned securities may pass to the borrower;
provided, however, that if a material event adversely affecting the
investment occurs, the Board of Trustees must terminate the loan and regain
the right to vote the securities.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
GENERAL. The successful use of such instruments draws upon the Adviser's
skill and experience with respect to such instruments and usually depends
on the Adviser's ability to forecast interest rate and currency exchange
rate movements correctly. Should interest or exchange rates move in an
unexpected manner, the Portfolio may not achieve the anticipated benefits
of futures contracts or options on futures contracts or may realize losses
and thus will be in a worse position than if such strategies had not been
used. In addition, the correlation between movements in the price of
futures contracts or options on futures contracts and movements in the
price of the securities and currencies hedged or used for cover will not be
perfect and could produce unanticipated losses.
FUTURES CONTRACTS. 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, and
foreign government debt securities. U.S. futures contracts have been
designed by exchanges which have been designated "contracts markets" by the
Commodity Futures Trading Commission ("CFTC"), and must be executed through
a futures commission merchant, or brokerage firm, which is a member of the
relevant contract market. Futures contracts trade on a number of exchange
markets, and, through their clearing corporations, the exchanges guarantee
performance of the contracts as between the clearing members of the
exchange. The Portfolio may enter into futures contracts which are based on
debt securities that are backed by the full faith and credit of the U.S.
government, such as which are based on debt securities that are backed by
the full faith and credit of the U.S. governemtn, such as long-term U.S.
Treasury Bonds, Treasury Notes, Government National Mortgage Association
(`GNMA'') modified pass-through mortgage-backed securities and three-month
U.S. Treasury Bills. The Portfolio may also enter into futures contracts
which are based on bonds issued by entities other than the U.S. government.
At the same time a futures contract is purchased or sold, the Portfolio
must allocate cash or securities as a deposit payment ("initial deposit").
It is expected that the initial deposit would be approximately 1 1/2% to 5%
of a contract's face value. Daily thereafter, the futures contract is
valued and the payment of "variation margin" may be required, since each
day the Portfolio would provide or receive cash that reflects any decline
or increase in the contract's value.
At the time of delivery of securities pursuant to such a contract,
adjustments are made to recognize differences in value arising from the
delivery of securities with a different interest rate from that specified
in the contract. In some (but not many) cases, securities called for by a
futures contract may not have been issued when the contract was written.
Although futures contracts by their terms call for the actual delivery or
acquisition of securities, in most cases the contractual obligation is
fulfilled before the date of the contract without having to make or take
delivery of the securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a commodities
exchange an identical futures contract calling for delivery in the same
month. Such a transaction, which is effected through a member of an
exchange, cancels the obligation to make or take delivery of the
securities. Since all transactions in the futures market are made, offset
or fulfilled through a clearinghouse associated with the exchange on which
the contracts are traded, the Portfolio will incur brokerage fees when it
purchases or sells futures contracts.
The ordinary spreads between prices in the cash and futures market, due to
differences in the nature of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial
deposit and variation margin requirements. Rather than meeting additional
variation margin requirements, investors may close futures contracts
through offsetting transactions which could distort the normal relationship
between the cash and futures markets. Second, the liquidity of the futures
market depends on participants entering into offsetting transactions rather
than making or taking delivery. To the extent participants decide to make
or take delivery, liquidity in the futures market could be reduced, thus
producing distortion. Third, from the point of view of speculators, the
margin deposit requirements in the futures market are less onerous than
margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may cause temporary
price distortions. Due to the possibility of distortion, a correct forecast
of general interest rate trends by the Adviser may still not result in a
successful transaction.
In addition, futures contracts entail risks. Although the Adviser believes
that use of such contracts will benefit the Portfolio, if the Adviser's
investment judgment about the general direction of interest rates is
incorrect, 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 which would
adversely affect the price of debt securities held in its portfolio and
interest rates decrease instead, the Portfolio will lose part or all of the
benefit of the increased value of its debt securities which it has hedged
because it will have offsetting losses in its futures positions. In
addition, in such situations, if the Portfolio has insufficient cash, it
may have to sell debt securities from its portfolio to meet daily variation
margin requirements. Such sales of bonds may be, but will not necessarily
be, at increased prices which reflect the rising market. 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 options
on futures contracts for hedging purposes. The purchase of a call option on
a futures contract is similar in some respects to the purchase of a call
option on an individual security. Depending on the pricing of the option
compared to either the price of the futures contract upon which it is based
or the price of the underlying debt securities, it may or may not be less
risky than ownership of the futures contract or underlying debt securities.
As with the purchase of futures contracts, when the Portfolio is not fully
invested it may purchase a call option on a futures contract to hedge
against a market advance due to declining interest rates.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the security or foreign currency which is
deliverable upon exercise of the futures contract. If the futures price at
expiration of the option is below the exercise price, the Portfolio will
retain the full amount of the option premium which provides a partial hedge
against any decline that may have occurred in the Portfolio's portfolio
holdings. The writing of a put option on a futures contract constitutes a
partial hedge against increasing prices of the security or foreign currency
which is deliverable upon exercise of the futures contract. If the futures
price at expiration of the option is higher than the exercise price, the
Portfolio will retain the full amount of the option premium which provides
a partial hedge against any increase in the price of securities which the
Portfolio intends to purchase. If a put or call option the Portfolio has
written is exercised, the Portfolio will incur a loss which will be reduced
by the amount of the premium it receives. Depending on the degree of
correlation between changes in the value of its portfolio securities and
changes in the value of its futures positions, the Portfolio's losses from
existing options on futures may to some extent be reduced or increased by
changes in the value of portfolio securities.
The purchase of a put option on a futures contract is similar in some
respects to the purchase of protective put options on portfolio securities.
For example, 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 Board of Trustees of the has adopted the requirement that futures
contracts and options on futures contracts be used only as a hedge and not
for speculation. In addition, the Portfolio will not enter into any futures
contracts or options on futures contracts if immediately thereafter the
amount of margin deposits on all the futures contracts of the Portfolio and
premiums paid on outstanding options on futures contracts owned by the
Portfolio would exceed 5% of the market value of the total assets of the
Portfolio.
ADDITIONAL RISKS OF OPTIONS ON FUTURES CONTRACTS, FORWARD CONTRACTS AND
OPTIONS ON FOREIGN CURRENCIES. Unlike transactions entered into by the
Portfolio in futures contracts, options on foreign currencies and forward
contracts are not traded on contract markets regulated by the CFTC or (with
the exception of certain foreign currency options) by the SEC. To the
contrary, such instruments are traded through financial institutions acting
as market-makers, although foreign currency options are also traded on
certain national securities exchanges, such as the Philadelphia Stock
Exchange and the Chicago Board Options Exchange, subject to SEC regulation.
Similarly, options on currencies may be traded over-the-counter. In an
over-the-counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there are no
daily price fluctuation limits, and adverse market movements could
therefore continue to an unlimited extent over a period of time. Although
the purchaser of an option cannot lose more than the amount of the premium
plus related transaction costs, this entire amount could be lost. Moreover,
the option writer and a trader of forward contracts could lose amounts
substantially in excess of their initial investments, due to the margin and
collateral requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on
organized exchanges will be available with respect to such transactions. In
particular, all foreign currency option positions entered into on a
national securities exchange are cleared and guaranteed by the Options
Clearing Corporation ("OCC"), thereby reducing the risk of counterparty
default. Further, a liquid secondary market in options traded on a national
securities exchange may be more readily available than in the over-the-
counter market, potentially permitting a Portfolio to liquidate open
positions at a profit prior to exercise or expiration, or to limit losses
in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however,
is subject to the risks of the availability of a liquid secondary market
described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effects of other
political and economic events. In addition, exchange-traded options on
foreign currencies involve certain risks not presented by the over-the-
counter market. For example, exercise and settlement of such options must
be made exclusively through the OCC, which has established banking
relationships in applicable foreign countries for this purpose. As a
result, the OCC may, if it determines that foreign governmental
restrictions or taxes would prevent the orderly settlement of foreign
currency option exercises, or would result in undue burdens on the OCC or
its clearing member, impose special procedures on exercise and settlement,
such as technical changes in the mechanics of delivery of currency, the
fixing of dollar settlement prices or prohibitions on exercise.
As in the case of forward contracts, certain options on foreign currencies
are traded over-the-counter and involve liquidity and credit risks which
may not be present in the case of exchange-traded currency options. A
Portfolio's ability to terminate over-the-counter options will be more
limited than with exchange-traded options. It is also possible that broker-
dealers participating in over-the-counter options transactions will not
fulfill their obligations. Until such time as the staff of the SEC changes
its position, each Portfolio will treat purchased over-the-counter options
and assets used to cover written over-the-counter options as illiquid
securities. With respect to options written with primary dealers in U.S.
government securities pursuant to an agreement requiring a closing purchase
transaction at a formula price, the amount of illiquid securities may be
calculated with reference to the repurchase formula.
In addition, futures contracts, options on futures contracts, forward
contracts and options on foreign currencies may be traded on foreign
exchanges. Such transactions are subject to the risk of governmental
actions affecting trading in or the prices of foreign currencies or
securities. The value of such positions also could be adversely affected
by: (i) other complex foreign political and economic factors; (ii) lesser
availability than in the United States of data on which to make trading
decisions; (iii) delays in the Portfolio's ability to act upon economic
events occurring in foreign markets during nonbusiness hours in the United
States; (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States; and
(v) lesser trading volume.
OPTIONS ON SECURITIES. The Portfolio may write (sell) covered call and put
options to a limited extent on its portfolio securities ("covered options")
in an attempt to increase income. However, the Portfolio may forgo the
benefits of appreciation on securities sold or may pay more than the market
price on securities acquired pursuant to call and put options written by
the Portfolio.
When the Portfolio writes a covered call option, it gives the purchaser of
the option the right to buy the underlying security at the price specified
in the option (the "exercise price") by exercising the option at any time
during the option period. If the option expires unexercised, the Portfolio
will realize income in an amount equal to the premium received for writing
the option. If the option is exercised, a decision over which the Portfolio
has no control, the Portfolio must sell the underlying security to the
option holder at the exercise price. By writing a covered call option, the
Portfolio forgoes, in exchange for the premium less the commission ("net
premium"), the opportunity to profit during the option period from an
increase in the market value of the underlying security above the exercise
price.
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 specified exercise price at any time during the option period. If the
option expires unexercised, the Portfolio will realize income in the amount
of the premium received for writing the option. If the put option is
exercised, a decision over which the Portfolio has no control, the
Portfolio must purchase the underlying security from the option holder at
the exercise price. By writing a covered put option, the Portfolio, in
exchange for the net premium received, accepts the risk of a decline in the
market value of the underlying security below the exercise price. The
Portfolio will only write put options involving securities for which a
determination is made at the time the option is written that the Portfolio
wishes to acquire the securities at the exercise price.
The Portfolio may terminate its obligation as the writer of a call or put
option by purchasing an option with the same exercise price and expiration
date as the option previously written. This transaction is called a
"closing purchase transaction." 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 by the Portfolio is included in the liability section of the
Portfolio's Statement of Assets and Liabilities as a deferred credit. The
amount of the deferred credit will be subsequently marked to market to
reflect the current market value of the option written. The current market
value of a traded option is the last sale price or, in the absence of a
sale, the mean between the closing bid and asked price. If an option
expires on its stipulated expiration date or if the Portfolio enters into a
closing purchase transaction, the Portfolio will realize a gain (or loss if
the cost of a closing purchase transaction exceeds the premium received
when the option was sold), and the deferred credit related to such option
will be eliminated. If a call option is exercised, the Portfolio will
realize a gain or loss from the sale of the underlying security and the
proceeds of the sale will be increased by the premium originally received.
The writing of covered call options may be deemed to involve the pledge of
the securities against which the option is being written. Securities
against which call options are written will be segregated on the books of
the custodian for the Portfolio.
The Portfolio may purchase call and put options on any securities in which
it may invest. The Portfolio would normally purchase a call option in
anticipation of an increase in the market value of such securities. The
purchase of a call option would entitle the Portfolio, in exchange for the
premium paid, to purchase a security at a specified price during the option
period. The Portfolio would ordinarily have a gain if the value of the
securities increased above the exercise price sufficiently to cover the
premium and would have a loss if the value of the securities remained at or
below the exercise price during the option period.
The Portfolio would normally purchase put options in anticipation of a
decline in the market value of securities in its portfolio ("protective
puts") or securities of the type in which it is permitted to invest. The
purchase of a put option would entitle the Portfolio, in exchange for the
premium paid, to sell a security, which may or may not be held in the
Portfolio's portfolio securities, 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 portfolio
securities. Put options also may be purchased by the Portfolio for the
purpose of affirmatively benefiting from a decline in the price of
securities which the Portfolio does not own. The Portfolio would ordinarily
recognize a gain if the value of the securities decreased below the
exercise price sufficiently to cover the premium and would recognize a loss
if the value of the securities remained at or above the exercise price.
Gains and losses on the purchase of protective put options would tend to be
offset by countervailing changes in the value of underlying portfolio
securities.
The Portfolio has adopted certain other nonfundamental policies concerning
option transactions which are discussed below. The Portfolio's activities
in options may also be restricted by the requirements of the Internal
Revenue Code of 1986, as amended (the "Code"), for qualification as a
regulated investment company.
The hours of trading for options on securities may not conform to the hours
during which the underlying securities are traded. To the extent that the
option markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying
securities markets that cannot be reflected in the option markets. It is
impossible to predict the volume of trading that may exist in such options,
and there can be no assurance that viable exchange markets will develop or
continue.
The Portfolio may engage in over-the-counter options transactions with
broker-dealers who make markets in these options. At present, approximately
ten broker-dealers, including several of the largest primary dealers in
U.S. government securities, make these markets. The ability to terminate
over-the-counter option positions is more limited than with exchange-traded
option positions because the predominant market is the issuing broker
rather than an exchange, and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. To
reduce this risk, the Portfolio will purchase such options only from
broker-dealers who are primary government securities dealers recognized by
the Federal Reserve Bank of New York and who agree to (and are expected to
be capable of) entering into closing transactions, although there can be no
guarantee that any such option will be liquidated at a favorable price
prior to expiration. The Adviser will monitor the creditworthiness of
dealers with whom the Portfolio enters into such options transactions under
the general supervision of the Portfolio's Trustees.
OPTIONS ON SECURITIES INDICES. The Portfolio may also purchase and write
(sell) call and put options on securities indices. Such options give the
holder the right to receive a cash settlement during the term of the option
based upon the difference between the exercise price and the value of the
index. Such options will be used for the purposes described above under
"Options on Securities."
Options on securities indices entail risks in addition to the risks of
options on securities. The absence of a liquid secondary market to close
out options positions on securities indices is more likely to occur,
although the Portfolio generally will only purchase or write such an option
if the Adviser believes the option can be closed out.
Use of options on securities indices also entails the risk that trading in
such options may be interrupted if trading in certain securities included
in the index is interrupted. The Portfolio will not purchase such options
unless the Adviser believes the market is sufficiently developed such that
the risk of trading in such options is no greater than the risk of trading
in options on securities.
Price movements in the Portfolio's portfolio securities may not correlate
precisely with movements in the level of an index and, therefore, the use
of options on indices cannot serve as a complete hedge. Because options on
securities indices require settlement in cash, the Adviser may be forced to
liquidate portfolio securities to meet settlement obligations.
RATING SERVICES
The ratings of rating services represent their opinions as to the quality
of the securities that they undertake to rate. It should be emphasized,
however, that ratings are relative and subjective and are not absolute
standards of quality. Although these ratings are an initial criterion for
selection of portfolio investments, Bankers Trust also makes its own
evaluation of these securities, subject to review by the Board of Trustees.
After purchase by the 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 used herein and in the
Funds' Prospectus is set forth in the Appendix to this Statement of
Additional Information.
INVESTMENT RESTRICTIONS
The following investment restrictions are "fundamental policies" of the
Fund and the Portfolio and may not be changed with respect to the Fund or
the Portfolio without the approval of a "majority of the outstanding voting
securities" of the Fund or the Portfolio, as the case may be. "Majority of
the outstanding voting securities" under the Investment Company Act of
1940, as amended (the "1940 Act"), and as used in this Statement of
Additional Information and the Prospectus, means, with respect to the Fund
(or the Portfolio), the lesser of (i) 67% or more of the outstanding voting
securities of the Fund (or of the total beneficial interests of the
Portfolio) present at a meeting, if the holders of more than 50% of the
outstanding voting securities of the Fund (or of the total beneficial
interests of the Portfolio) are present or represented by proxy or (ii)
more than 50% of the outstanding voting securities of the Fund (or of the
total beneficial interests of the Portfolio). Whenever the Trust is
requested to vote on a fundamental policy of a Portfolio, the Trust will
hold a meeting of the corresponding Fund's shareholders and will cast its
vote as instructed by that Fund's shareholders. Fund shareholders who do
not vote will not affect the Trust's votes at the Portfolio meeting. The
percentage of the Trust's votes representing Fund shareholders not voting
will be voted by the Trustees of the Trust in the same proportion as the
Fund shareholders who do, in fact, vote.
As a matter of fundamental policy, the Portfolio (or Fund) may not (except
that no investment restriction of a Fund shall prevent a Fund from
investing all of its Assets in an open-end investment company with
substantially the same investment objective):
(1) borrow money or mortgage or hypothecate assets of the Portfolio
(Fund), except that in an amount not to exceed 1/3 of the current
value of the Portfolio's (Fund's) assets, it may borrow money as a
temporary measure for extraordinary or emergency purposes and enter
into reverse repurchase agreements or dollar roll transactions, and
except that it may pledge, mortgage or hypothecate not more than 1/3
of such assets to secure such borrowings (it is intended that money
would be borrowed only from banks and only either to accommodate
requests for the withdrawal of beneficial interests (redemption of
shares) while effecting an orderly liquidation of portfolio securities
or to maintain liquidity in the event of an unanticipated failure to
complete a portfolio security transaction or other similar situations)
or reverse repurchase agreements, provided that collateral
arrangements with respect to options and futures, including deposits
of initial deposit and variation margin, are not considered a pledge
of assets for purposes of this restriction and except that assets may
be pledged to secure letters of credit solely for the purpose of
participating in a captive insurance company sponsored by the
Investment Company Institute; for additional related restrictions, see
clause (i) under the caption "Additional Restrictions" below. (As an
operating policy, the Portfolios may not engage in dollar roll
transactions);
(2) underwrite securities issued by other persons except insofar as
the Portfolio (Trust or the Fund) may technically be deemed an
underwriter under the 1933 Act in selling a portfolio security;
(3) make loans to other persons except: (a) through the lending of
the Portfolio's (Fund's) portfolio securities and provided that any
such loans not exceed 30% of the Portfolio's (Fund's) net assets
(taken at market value); (b) through the use of repurchase agreements
or the purchase of short-term obligations; or (c) by purchasing a
portion of an issue of debt securities of types distributed publicly
or privately;
(4) purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or interests
therein), interests in oil, gas or mineral leases, commodities or
commodity contracts (except futures and option contracts) in the
ordinary course of business (except that the Portfolio (Trust) may
hold and sell, for the Portfolio's (Fund's) portfolio, real estate
acquired as a result of the Portfolio's (Fund's) ownership of
securities);
(5) concentrate its investments in any particular industry (excluding
U.S. government securities), but if it is deemed appropriate for the
achievement of a Portfolio's (Fund's) investment objective, up to 25%
of its total assets may be invested in any one industry; and
(6) issue any senior security (as that term is defined in the
1940 Act) if such issuance is specifically prohibited by the 1940 Act
or the rules and regulations promulgated thereunder, provided that
collateral arrangements with respect to options and futures, including
deposits of initial deposit and variation margin, are not considered
to be the issuance of a senior security for purposes of this
restriction.
ADDITIONAL RESTRICTIONS. In order to comply with certain statutes and
policies the Portfolio (or the Trust, on behalf of the Fund) will not as
a matter of operating policy (except that no operating policy shall prevent
the Fund from investing all of its Assets in an open-end investment
company with substantially the same investment objective):
(i) borrow money (including through dollar roll transactions) for any
purpose in excess of 10% of the Portfolio's (Fund's) total assets
(taken at cost), except that the Portfolio (Fund) may borrow for
temporary or emergency purposes up to 1/3 of its total assets;
(ii) pledge, mortgage or hypothecate for any purpose in excess of 10% of
the Portfolio's (Fund's) total assets (taken at market value),
provided that collateral arrangements with respect to options and
futures, including deposits of initial deposit and variation margin,
and reverse repurchase agreements are not considered a pledge of
assets for purposes of this restriction;
(iii) purchase any security or evidence of interest therein on margin,
except that such short-term credit as may be necessary for the
clearance of purchases and sales of securities may be obtained and
except that deposits of initial deposit and variation margin may be
made in connection with the purchase, ownership, holding or sale of
futures;
(iv) sell any security which it does not own unless by virtue of its
ownership of other securities it has at the time of sale a right to
obtain securities, without payment of further consideration,
equivalent in kind and amount to the securities sold and provided that
if such right is conditional the sale is made upon the same
conditions;
(v) invest for the purpose of exercising control or management;
(vi) purchase securities issued by any investment company except by
purchase in the open market where no commission or profit to a sponsor
or dealer results from such purchase other than the customary broker's
commission, or except when such purchase, though not made in the open
market, is part of a plan of merger or consolidation; provided,
however, that securities of any investment company will not be
purchased for the Portfolio (Fund) if such purchase at the time
thereof would cause (a) more than 10% of the Portfolio's (Fund's)
total assets (taken at the greater of cost or market value) to be
invested in the securities of such issuers; (b) more than 5% of the
Portfolio's (Fund's) total assets (taken at the greater of cost or
market value) to be invested in any one investment company; or (c)
more than 3% of the outstanding voting securities of any such issuer
to be held for the Portfolio (Fund); provided further that, except in
the case of merger or consolidation, the Portfolio (Fund) shall not
purchase any securities of any open-end investment company unless the
Portfolio (Fund) (1) waives the investment advisory fee with respect
to assets invested in other open-end investment companies and (2)
incurs no sales charge in connection with the investment (as an
operating policy each Portfolio will not invest in another open-end
registered investment company);
(vii) invest more than 15% of the Portfolio's (Fund's) net assets
(taken at the greater of cost or market value) in securities that are
illiquid or not readily marketable not including (a) Rule 144A
securities that have been determined to be liquid by the Board of
Trustees; and (b) commercial paper that is sold under section 4(2) of
the 1933 Act which: (i) is not traded flat or in default as to
interest or principal; and (ii) is rated in one of the two highest
categories by at least two nationally recognized statistical rating
organizations and the Portfolio's (Fund's) Board of Trustees have
determined the commercial paper to be liquid; or (iii) is rated in one
of the two highest categories by one nationally recognized statistical
rating agency and the Portfolio's (Fund's) Board of Trustees have
determined that the commercial paper is equivalent quality and is
liquid;
(viii) invest more than 10% of the Portfolio's (Fund's) total assets
(taken at the greater of cost or market value) in securities that
are restricted as to resale under the 1933 Act (other than Rule 144A
securities deemed liquid by the Portfolio's (Fund's) Board of
Trustees)
(ix) no more than 5% of the Portfolio's (Fund's) total assets are invested
in securities issued by issuers which (including predecessors) have
been in operation less than three years;
(x) with respect to 75% of the Portfolio's (Fund's) total assets, purchase
securities of any issuer if such purchase at the time thereof would
cause the Portfolio (Fund) 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 futures or option
contracts shall not be subject to this restriction;
(xi) if the Portfolio (Fund) is a "diversified" fund with respect to 75% of
its assets, invest more than 5% of its total assets in the securities
(excluding U.S. government securities) of any one issuer;
(xii) purchase or retain in the Portfolio's (Fund's) portfolio
securities any securities issued by an issuer any of whose officers,
directors, trustees or security holders is an officer or Trustee of
the Portfolio (Trust), or is an officer or partner of the Adviser, if
after the purchase of the securities of such issuer for the Portfolio
(Fund) one or more of such persons owns beneficially more than 1/2 of
1% of the shares or securities, or both, all taken at market value, of
such issuer, and such persons owning more than 1/2 of 1% of such
shares or securities together own beneficially more than 5% of such
shares or securities, or both, all taken at market value;
(xiii) invest more than 5% of the Portfolio's (Fund's) net assets in
warrants (valued at the lower of cost or market) (other than warrants
acquired by the Portfolio (Fund) as part of a unit or attached to
securities at the time of purchase), but not more than 2% of the
Portfolio's (Fund's) net assets may be invested in warrants not listed
on the New York Stock Exchange, Inc. (the `NYSE'') or the American
Stock Exchange;
(xiv) make short sales of securities or maintain a short position,
unless at all times when a short position is open it owns an equal
amount of such securities or securities convertible into or
exchangeable, without payment of any further consideration, for
securities of the same issue and equal in amount to, the securities
sold short, and unless not more than 10% of the Portfolio's (Fund's)
net assets (taken at market value) is represented by such securities,
or securities convertible into or exchangeable for such securities, at
any one time (the Portfolios (Funds) have no current intention to
engage in short selling);
(xv) write puts and calls on securities unless each of the following
conditions are met: (a) the security underlying the put or call is
within the investment policies of the Portfolio (Fund) and the option
is issued by the Options Clearing Corporation, except for put and call
options issued by non-U.S. entities or listed on non-U.S. securities
or commodities exchanges; (b) the aggregate value of the obligations
underlying the puts determined as of the date the options are sold
shall not exceed 50% of the Portfolio's (Fund's) net assets; (c) the
securities subject to the exercise of the call written by the
Portfolio (Fund) must be owned by the Portfolio (Fund) at the time the
call is sold and must continue to be owned by the Portfolio (Fund)
until the call has been exercised, has lapsed, or the Portfolio (Fund)
has purchased a closing call, and such purchase has been confirmed,
thereby extinguishing the Portfolio's (Fund's) obligation to deliver
securities pursuant to the call it has sold; and (d) at the time a put
is written, the Portfolio (Fund) establishes a segregated account with
its custodian consisting of cash or short-term U.S. government
securities equal in value to the amount the Fund will be obligated to
pay upon exercise of the put (this account must be maintained until
the put is exercised, has expired, or the Portfolio (Fund) has
purchased a closing put, which is a put of the same series as the one
previously written); and
(xvi) buy and sell puts and calls on securities, stock index futures or
options on stock index futures, or financial futures or options on
financial futures unless such options are written by other persons
and: (a) the options or futures are offered through the facilities of
a national securities association or are listed on a national
securities or commodities exchange, except for put and call options
issued by non-U.S. entities or listed on non-U.S. securities or
commodities exchanges; (b) the aggregate premiums paid on all such
options which are held at any time do not exceed 20% of the
Portfolio's (Fund's) total net assets; and (c) the aggregate margin
deposits required on all such futures or options thereon held at any
time do not exceed 5% of the Portfolio's (Fund's) total assets.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
The Adviser is responsible for decisions to buy and sell securities,
futures contracts and options on such securities and futures for the
Portfolio, the selection of brokers, dealers and futures commission
merchants to effect transactions and the negotiation of brokerage
commissions, if any. Broker-dealers may receive brokerage commissions on
portfolio transactions, including options, futures and options on futures
transactions and the purchase and sale of underlying securities upon the
exercise of options. Orders may be directed to any broker-dealer or futures
commission merchant, including to the extent and in the manner permitted by
applicable law, Bankers Trust or its subsidiaries or affiliates. Purchases
and sales of certain portfolio securities on behalf of the Portfolio are
frequently placed by the Adviser with the issuer or a primary or secondary
market-maker for these securities on a net basis, without any brokerage
commission being paid by the Portfolio. Trading does, however, involve
transaction costs. Transactions with dealers serving as market-makers
reflect the spread between the bid and asked prices. Transaction costs may
also include fees paid to third parties for information as to potential
purchasers or sellers of securities. Purchases of underwritten issues may
be made which will include an underwriting fee paid to the underwriter.
The Adviser seeks to evaluate the overall reasonableness of the brokerage
commissions paid (to the extent applicable) in placing orders for the
purchase and sale of securities for the Portfolio taking into account such
factors as price, commission (negotiable in the case of national securities
exchange transactions), if any, size of order, difficulty of execution and
skill required of the executing broker-dealer through familiarity with
commissions charged on comparable transactions, as well as by comparing
commissions paid by the Portfolio to reported commissions paid by others.
The Adviser reviews on a routine basis commission rates, execution and
settlement services performed, making internal and external comparisons.
The Adviser is authorized, consistent with Section 28(e) of the Securities
Exchange Act of 1934, as amended, when placing portfolio transactions for
the Portfolio with a broker to pay a brokerage commission (to the extent
applicable) in excess of that which another broker might have charged for
effecting the same transaction on account of the receipt of research,
market or statistical information. The term "research, market or
statistical information" includes advice as to the value of securities; the
advisability of investing in, purchasing or selling securities; the
availability of securities or purchasers or sellers of securities; and
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and the performance of
accounts.
Consistent with the policy stated above, the Rules of Fair Practice of the
NASD and such other policies as the Trustees of the Portfolio may
determine, the Adviser may consider sales of shares of the Fund as a factor
in the selection of broker-dealers to execute portfolio transactions.
Bankers Trust will make such allocations if commissions are comparable to
those charged by nonaffiliated, qualified broker-dealers for similar
services.
Higher commissions may be paid to firms that provide research services to
the extent permitted by law. Bankers Trust may use this research
information in managing the Portfolio's assets, as well as the assets of
other clients.
Except for implementing the policies stated above, there is no intention to
place portfolio transactions with particular brokers or dealers or groups
thereof. In effecting transactions in over-the-counter securities, orders
are placed with the principal market-makers for the security being traded
unless, after exercising care, it appears that more favorable results are
available otherwise.
Although certain research, market and statistical information from brokers
and dealers can be useful to the Portfolio and to the Adviser, it is the
opinion of the management of the Portfolio that such information is only
supplementary to the Adviser's own research effort, since the information
must still be analyzed, weighed and reviewed by the Adviser's staff. Such
information may be useful to the Adviser in providing services to clients
other than the Portfolios, and not all such information is used by the
Adviser in connection with the Portfolio. Conversely, such information
provided to the Adviser by brokers and dealers through whom other clients
of the Adviser effect securities transactions may be useful to the Adviser
in providing services to the Portfolio.
In certain instances there may be securities which are suitable for a
Portfolio as well as for one or more of the Adviser's other clients.
Investment decisions for the Portfolio and for the Adviser's other clients
are made with a view to achieving their respective investment objectives.
It may develop that a particular security is bought or sold for only one
client even though it might be held by, or bought or sold for, other
clients. Likewise, a particular security may be bought for one or more
clients when one or more clients are selling that same security. Some
simultaneous transactions are inevitable when several clients receive
investment advice from the same investment adviser, particularly when the
same security is suitable for the investment objectives of more than one
client. When two or more clients are simultaneously engaged in the purchase
or sale of the same security, the securities are allocated among clients in
a manner believed to be equitable to each. It is recognized that in some
cases this system could have a detrimental effect on the price or volume of
the security as far as the Portfolio in concerned. However, it is believed
that the ability of the Portfolio to participate in volume transactions
will produce better executions for the Portfolio.
For the period from January 1, 1996 through September 30, 1996, and for the
fiscal years ended December 31, 1995, and 1994, the Portfolio did not
incur brokerage commissions.
{PRIVATE }PERFORMANCE INFORMATION{TC "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 for the Fund used in advertising are computed by dividing the
Fund's interest and dividend income for a given 30-day or one-month period,
net of expenses, by the average number of shares entitled to receive
distributions during the period, dividing this figure by the Fund's net
asset value per share at the end of the period, and annualizing the result
(assuming compounding of income) in order to arrive at an annual percentage
rate. Income is calculated for purpose of yield quotations in accordance
with standardized methods applicable to all stock and bond mutual funds.
Dividends from equity investments are treated as if they were accrued on a
daily basis, solely for the purpose of yield calculations. In general,
interest income is reduced with respect to bonds trading at a premium over
their par value by subtracting a portion of the premium from income on a
daily basis, and is increased with respect to bonds trading at a discount
by adding a portion of the discount to daily income. Capital gains and
losses generally are excluded from the calculation.
Income calculated for the purposes of calculating the Fund's yield differs
from income as determined for other accounting purposes. Because of the
different accounting methods used, and because of the compounding assumed
in yield calculations, the yield quoted for the Fund may differ from the
rate of distributions of the Fund paid over the same period or the rate of
income reported in the Fund's financial statements.
The Fund's yield for the 30-day period ended September 30, 1996, was 5.45%.
TOTAL RETURN: A Fund's average annual total return will be 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 which represent aggregate performance
over a period or year-by-year performance.
The Fund's average annual total returns for the one-year period ended
September 30, 1996, and for the period from August 24, 1992 (commencement
of operations) to September 30, 1996, were 4.86%, and 4.61%, respectively.
PERFORMANCE RESULTS: Any total return quotation provided for the Fund
should not be considered as representative of the performance of the Fund
in the future since the net asset value and public offering price of shares
of the Fund will vary based not only on the type, quality and maturities of
the securities held in 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. These factors and possible differences in the methods used to
calculate total return should be considered when comparing the total return
of the Fund to total returns published for other investment companies or
other investment vehicles. Total return reflects the performance of both
principal and income.
COMPARISON OF FUND PERFORMANCE
Comparison of the quoted nonstandardized performance of various investments
is valid only if performance is calculated in the same manner. Since there
are different methods of calculating performance, investors should consider
the effect of the methods used to calculate performance when comparing
performance of the Fund with performance quoted with respect to other
investment companies or types of investments.
In connection with communicating its performance to current or prospective
shareholders, the Fund also may compare these figures to the performance
of other mutual funds tracked by mutual fund rating services or to
unmanaged indices which may assume reinvestment of dividends but generally
do not reflect deductions for administrative and management costs.
Evaluations of the Fund's performance made by independent sources may also
be used in advertisements concerning the Fund. Sources for the Fund's
performance information could include the following:
Asian Wall Street Journal, a weekly Asian newspaper that often reviews U.S.
mutual funds investing internationally.
Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds investing
abroad.
Changing Times, The Kiplinger Magazine, a monthly investment advisory
publication that periodically features the performance of a variety of
securities.
Consumer Digest, a monthly business/financial magazine that includes a
"Money Watch" section featuring financial news.
Financial Times, Europe's business newspaper, which features from time to
time articles on international or country-specific funds.
Financial World, a general business/financial magazine that includes a
"Market Watch" department reporting on activities in the mutual fund
industry.
Forbes, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the
performance of a variety of mutual funds.
Global Investor, a European publication that periodically reviews the
performance of U.S. mutual funds investing internationally.
Investor's Daily, a daily newspaper that features financial, economic and
business news.
Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a
weekly publication of industry-wide mutual fund averages by type of fund.
Money, a monthly magazine that from time to time features both specific
funds and the mutual fund industry as a whole.
Morningstar Inc., a publisher of financial information and mutual fund
research.
New York Times, a nationally distributed newspaper which regularly covers
financial news.
Personal Investing News, a monthly news publication that often reports on
investment opportunities and market conditions.
Personal Investor, a monthly investment advisory publication that includes
a "Mutual Funds Outlook" section reporting on mutual fund performance
measures, yields, indices and portfolio holdings.
Success, a monthly magazine targeted to the world of entrepreneurs and
growing business, often featuring mutual fund performance data.
U.S. News and World Report, a national business weekly that periodically
reports mutual fund performance data.
Value Line, a biweekly publication that reports on the largest 15,000
mutual funds.
Wall Street Journal, a Dow Jones and Company, Inc. newspaper which
regularly covers financial news.
Weisenberger Investment Companies Services, an annual compendium of
information about mutual funds and other investment companies, including
comparative data on funds' backgrounds, management policies, salient
features, management results, income and dividend records, and price
ranges.
Working Women, a monthly publication that features a "Financial Workshop"
section reporting on the mutual fund/financial industry.
VALUATION OF SECURITIES; REDEMPTIONS AND PURCHASES IN KIND
Equity and debt securities (other than short-term debt obligations maturing
in 60 days or less), including listed securities and securities for which
price quotations are available, will normally be valued on the basis of
market valuations furnished by a pricing service. Short-term debt
obligations and money market securities maturing in 60 days or less are
valued at amortized cost, which approximates market. Other assets are
valued at fair value using methods determined in good faith by the
Portfolio's Board of Trustees.
The Trust, on behalf of the Fund, and the Portfolio reserves the right,
if conditions exist which make cash payments undesirable, to honor any
request for redemption or repurchase order by making payment in whole or in
part in readily marketable securities chosen by the Trust, or the
Portfolio, as the case may be, and valued as they are for purposes of
computing the Fund's or the Portfolio's net asset value, as the case may be
(a redemption in kind). If payment is made to a Fund shareholder in
securities, an investor, including the Fund, the shareholder may incur
transaction expenses in converting these securities into cash. The Trust,
on behalf of the Fund, and the Portfolio has elected, however, to be
governed by Rule 18f-1 under the 1940 Act as a result of which the Fund
and the Portfolio are obligated to redeem shares of beneficial interests,
as the case may be, with respect to any one investor during any 90-day
period, solely in cash up to the lesser of $250,000 or 1% of the net asset
value of the Fund or the Portfolio, as the case may be, at the beginning of
the period.
The Portfolio has agreed to make a redemption in kind to the Fund whenever
the Fund wishes to make a redemption in kind and therefore shareholders of
the Fund that receive redemptions in kind will receive portfolio securities
of the Portfolio and in no case will they receive a security issued by the
Portfolio. The Portfolio has advised the Trust that the Portfolio will not
redeem in kind except in circumstances in which the Fund is permitted to
redeem in kind or unless requested by the Fund.
Each investor in the Portfolio, including the Fund, may add to or reduce
its investment in the Portfolio on each day that the NYSE is open for
business and New York charter banks are not closed owing to customary or
local holidays. As of the close of the NYSE, currently 4:00 p.m. Eastern
time (or such earlier time as the NYSE closes) on each such day, the value
of each investor's interest in the Portfolio will be determined by
multiplying the net asset value of the Portfolio by the percentage
representing that investor's share of the aggregate beneficial interests in
the Portfolio. Any additions or reductions which are to be effected on that
day will then be effected. The investor's percentage of the aggregate
beneficial interests in the Portfolio will then be recomputed as the
percentage equal to the fraction (i) the numerator of which is the value of
such investor's investment in the Portfolio as of the close of the NYSE on
such day plus or minus, as the case may be, the amount of net additions to
or reductions in the investor's investment in the Portfolio effected on
such day and (ii) the denominator of which is the aggregate net asset value
of the Portfolio as of 4:00 p.m. Eastern time or the close of the NYSE on
such day plus or minus, as the case may be, the amount of net additions to
or reductions in the aggregate investments in the Portfolio by all
investors in the Portfolio. The percentage so determined will then be
applied to determine the value of the investor's interest in the Portfolio
as of 4:00 p.m. Eastern time or the close of the NYSE on the following day
the NYSE is open for trading.
The Fund may, at its own option, accept securities in payment for shares.
The securities delivered in payment for shares are valued by the method
described under "Net Asset Value" as of the day the Fund receives the
securities. This is a taxable transaction to the shareholder. Securities
may be accepted in payment for shares only if they are, in the judgment of
Bankers Trust, appropriate investments for the Fund's Portfolio. In
addition, securities accepted in payment for shares must: (i) meet the
investment objective and policies of the acquiring Fund's Portfolio;
(ii) be acquired by the applicable Fund for investment and not for resale
(other than for resale to the Fund's Portfolio); (iii) be liquid securities
which are not restricted as to transfer either by law or liquidity of
market; and (iv) if stock, have a value which is readily ascertainable as
evidenced by a listing on a stock exchange, over-the-counter market or by
readily available market quotations from a dealer in such securities. When
securities are used as payment for shares or as a redemption in kind from
the Fund, the transaction fee will not be assessed. However, the
shareholder will be charged the costs associated with receiving or
delivering the securities. These costs include security movement costs and
taxes and registration costs. The Fund reserves the right to accept or
reject at its own option any and all securities offered in payment for its
shares.
MANAGEMENT OF THE TRUST AND PORTFOLIO
The Board of Trustees is composed of persons experienced in financial
matters who meet throughout the year to oversee the activities of the Fund
or Portfolio they represent. In addition, the Trustees review contractual
arrangements with companies that provide services to the Fund and/or
Portfolio and review the Fund's performance.
The Trustees and officers of the Trust and Portfolios, their birthdates,
and their principal occupations during the past five years are set forth
below. Their titles may have varied during that period. Unless otherwise
indicated, the address of each officer is Clearing Operations, P.O. Box 897
Pittsburgh, Pennsylvania 15230-0897.
TRUSTEES OF THE TRUST
PHILIP W. COOLIDGE* (birthdate: September 2, 1951) Trustee; Chairman, Chief
Executive Officer and President, Signature Financial Group, Inc. ("SFG")
(since December, 1988) and Signature (since April, 1989). His address is 6
St. James Avenue, Boston, Massachusetts 02116.
MARTIN J. GRUBER (birthdate: July 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: December 10, 1924) Trustee; Professor,
Department of Economics, Columbia University. His address is 35 Claremont
Avenue, New York, New York 10027.
HARRY VAN BENSCHOTEN (birthdate: February 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, FL 33963.
* Indicates an `interested person'' (as defined by the 1940 Act) of the
Trust.
TRUSTEES OF THE PORTFOLIO
CHARLES P. BIGGAR (birthdate: October 13, 1930) Trustee; Retired; Director
of Chase/NBW Bank Advisory Board; Director, Batemen, Eichler, Hill Richards
Inc.; formerly Vice President of International Business Machines and
President of the National Services and the Field Engineering Divisions of
IBM. His address is 12 Hitching Post Lane, Chappaqua, New York 10514.
PHILIP W. COOLIDGE* (birthdate: September 2, 1951) Trustee; Chairman, Chief
Executive Officer and President, SFG (since December, 1988) and Signature
(since April, 1989).
S. LELAND DILL (birthdate: March 28, 1930) Trustee: Retired; Director,
Coutts Group; Coutts (U.S.A.) International; Coutts Trust Holdings Ltd.;
Director, Zweig Series Trust; formerly, Partner of KPMG Peat Marwick,
Mitchell & Co.; Director, Vintners International Company, Inc.; General
Partner of Pemco (an investment company registered under the 1940 Act). His
address is 5070 North Ocean Drive, Singer Island, Florida 33404.
PHILIP SAUNDERS, JR. (birthdate: October 11, 1935) Trustee; Principal,
Philip Saunders Associates (Consulting); former Director of Financial
Industry Consulting, Wolf & Company; President, John Hancock Home Mortgage
Corporation; and Senior Vice President of Treasury and Financial Services,
John Hancock Mutual Life Insurance Company, Inc. His address is 445 Glen
Road, Weston, Massachusetts 02193.
* Indicates an `interested person'' (as defined by the 1940 Act) of the
Trust.
OFFICERS OF THE TRUST AND PORTFOLIO
Unless otherwise specified, each officer listed below holds the same
position with the Trust and the Portfolio.
RONALD M. PETNUCH-- (birthdate: February 27, 1960)-- President and
Treasurer; Senior Vice President; Federated Services Company (`FSC'');
formerly, Director of Proprietary Client Services, Federated Administrative
Services (`FAS''), and Associate Corporate Counsel, Federated Investors
(`FI'').
CHARLES L. DAVIS, JR.-- (birthdate: March 23, 1960)-- Vice President and
Assistant Treasurer; Vice President, FAS.
JAY S. NEUMAN-- (birthdate: April 22, 1950)-- Secretary; Corporate Counsel,
FI.
Messrs. Coolidge, Petnuch, Davis and Neuman also hold similar positions
for other investment companies for which Signature or Edgewood,
respectively an affiliate serves as the principal underwriter.
For the period from January 1, 1996, through September 30, 1996, the Fund
incurred Trustees fees equal to $5,162.
The following table reflects fees paid to the Trustees of the Trust and
Portfolio for the year ended September 30, 1996.
TRUSTEE COMPENSATION TABLE
Name, Aggregate Total
Position With Compensation Compensation From
Trust/Portfolio From Trust Fund Complex*
Harry Van Benschoten $13,000 $23,000
Trustee of Trust
Philip W. Coolidge none none
Trustee of Trust
and Portfolio
Martin J. Gruber $13,000 $23,000
Trustee of Trust
Kelvin J. Lancaster $10,000 $23,000
Trustee of Trust
Charles P. Biggar none none
Trustee of Portfolio
S. Leland Dill none none
Trustee of Portfolio
Philip Saunders, Jr. none none
Trustee of the Portfolio
* Aggregated information is furnished for the BT Family of Funds which
consists of the following: BT Investment Funds, BT Institutional
Funds, BT Pyramid Funds, BT Advisor Funds, BT Investment Portfolios,
Cash Management Portfolio, Treasury Money Portfolio, Tax Free Money
Portfolio, NY Tax Free Money Portfolio, International Equity
Portfolio, Utility Portfolio, Short Intermediate US Government
Securities Portfolio, Intermediate Tax Free Portfolio, Asset
Management Portfolio, Equity 500 Index Portfolio, and Capital
Appreciation Portfolio.
Bankers Trust reimbursed the Funds and Portfolios for a portion of their
Trustees fees for the period above. See "Investment Adviser" and
"Administrator" below.
As of December 31, 1996, the Trustees and officers of the Trust and the
Portfolio owned in the aggregate less than 1% of the shares of the Fund or
the Trust (all series taken together).
As of December 31, 1996, the following shareholders of record owned 5% or
more of the outstanding Shares of the Fund: Bankers Trust Company, Trustee
for Mapco, Inc. Profit Sharing and Savings Program 401(k), Nashville,
Tennessee, owned approximately 1,004,888 shares (20.60%); Bankers Trust
Company, Trustee for Alliance Coal Corp. Profit Sharing and Savings Plan
401(k) owned approximately 961,519 shares (19.71%); Batrus & Co., New York,
New York, owned approximately 342,666 shares (7.03%); and BCBS Association
VEBA, Chicago, Illinois, owned approximately 253,807 shares (5.20%).
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 objective,
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 each Portfolio bears
certain other expenses incurred in their operation, including: taxes,
interest, brokerage fees and commissions, if any; fees of Trustees of the
Trust or the Portfolio who are not officers, directors or employees of
Bankers Trust, Edgewood or any of their affiliates; SEC fees and state
Blue Sky qualification fees; charges 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 and meetings of shareholders, officers and Trustees
of the Trust or the Portfolio; and any extraordinary expenses.
For the period from January 1, 1996 through September 30, 1996, and, the
fiscal years ended December 31, 1995, and 1994, Bankers Trust earned
$100,786, $130,819, and $90,050, respectively, as compensation for
investment advisory services provided to the Portfolio. During the same
periods, Bankers Trust reimbursed $20,932, $25,406, and $31,730,
respectively, to the Portfolio to cover expenses.
The Fund's prospectus contains disclosure as to the amount of Bankers
Trust's investment advisory and administration and services fees, including
waivers thereof. Bankers Trust may not recoup any of its waived investment
advisory or administration and services fees. Such waivers by Bankers Trust
shall stay in effect for at least 12 months.
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 recordkeeping
services (including without limitation the maintenance of such books and
records as are required under the 1940 Act and the rules thereunder, except
as maintained by other agents), internal auditing, custodial and trasfer
agency services, executive and administrative services, and stationery and
office supplies; prepare reports to shareholders or investors; supply
financial information and supporting data for reports to and filings with
the SEC and various state Blue Sky authorities; supply supporting
documentation for meetings of the Board of Trustees; provide monitoring
reports and assistance regarding compliance with Declarations of Trust,
by-laws, investment objectives and policies and with Federal and state
securities laws; arrange for appropriate insurance coverage; calculate net
asset values, net income and realized capital gains or losses; and
negotiate arrangements with, and supervise and coordinate the activities
of, agents and others to supply services.
Pursuant to a sub-administration agreement, (the "Sub-Administration
Agreement") FSC performs such sub-administration duties for the Trust and
the Portfolio as from time to time may be agreed upon by Bankers Trust and
FSC. The Sub-Administration Agreement provides that FSC will receive such
compensation as from time to time may be agreed upon by FSC and Bankers
Trust. All such compensation will be paid by Bankers Trust.
For the period from January 1, 1996, through September 30, 1996, and the
fiscal years ended December 31, 1995, and 1994, Bankers Trust earned
$87,048, $91,142, and $60,306, respectively, as compensation for
administrative and other services provided to the Fund. During the same
periods, Bankers Trust reimbursed $100,231 , $58,676, and $49,475,
respectively, to the Fund to cover expenses.
For the period from January 1, 1996, through September 30, 1996 and for
the fiscal years ended December 31, 1995, and 1994, Bankers Trust earned
$20,157, $26,164, and $18,010, respectively, as compensation for
administrative and other services provided to the Portfolio.
Bankers Trust has agreed that if in any year the aggregate expenses of the
Fund and its Portfolio (including fees pursuant to the investment advisory
agreement, but excluding interest, taxes, brokerage and, if permitted by
the relevant state securities commissions, extraordinary expenses) exceed
the expense limitation of any state having jurisdiction over the Fund,
Bankers Trust will reimburse the Fund for the excess expense to the extent
required by state law. As of the date of this Statement of Additional
Information, the most restrictive annual expense limitation applicable to
any Fund is 2.5% of the Fund's first $30 million of average annual net
assets, 2.0% of the next $70 million of average annual net assets and 1.5%
of the remaining average annual net assets.
CUSTODIAN AND TRANSFER AGENT
Bankers Trust, 280 Park Avenue, New York, New York 10017, serves as
Custodian for the Trust and for the Portfolio pursuant to the
administration and services agreements. As Custodian, it holds the Fund's
and the Portfolio's assets. Bankers Trust also serves as transfer agent of
the Trust and of the Portfolio pursuant to the respective administration
and services agreement. Under its transfer agency agreement with the Trust,
Bankers Trust maintains the shareholder account records for the Fund,
handles certain communications between shareholders and the Trust and
causes to be distributed any dividends and distributions payable by the
Trust. Bankers Trust may be reimbursed by the Fund or the Portfolio for its
out-of-pocket expenses. Bankers Trust will comply with the self-custodian
provisions of Rule 17f-2 under the 1940 Act.
USE OF NAME
The Trust and Bankers Trust have agreed that the Trust may use "BT" as
part of its name for so long as Bankers Trust serves as investment adviser
to the Portfolio. The Trust has acknowledged that the term "BT" is used by
and is a property right of certain subsidiaries of Bankers Trust and that
those subsidiaries and/or Bankers Trust may at any time permit others to
use that term. The Trust may be required, on 60 days' notice from Bankers
Trust at any time, to abandon use of the acronym "BT" as part of its name.
If this were to occur, the Trustees would select an appropriate new name
for the Trust, but there would be no other material effect on the Trust,
its shareholders or activities.
BANKING REGULATORY MATTERS
Bankers Trust has been advised by its counsel that, in counsel's opinion,
Bankers Trust currently may perform the services for the Trust and the
Portfolio contemplated by the investment 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 Trust and the
Portfolio. Coopers & Lybrand L.L.P., 1100 Main Street, Suite 900, Kansas
City, Missouri 64105 has been selected as Independent Accountants for the
Trust and the Portfolio.
ORGANIZATION OF THE TRUST
Shares of the Trust do not have cumulative voting rights, which means that
holders of more than 50% of the shares voting for the election of Trustees
can elect all Trustees. Shares are transferable but have no preemptive,
conversion or subscription rights. Shareholders generally vote by Fund,
except with respect to the election of Trustees and the ratification of the
selection of independent accountants.
Massachusetts law provides that shareholders could under certain
circumstances be held personally liable for the obligations of the Trust.
However, the Trust's Declaration of Trust disclaims shareholder liability
for acts or obligations of the Trust and requires that notice of this
disclaimer be given in each agreement, obligation or instrument entered
into or executed by the Trust or a Trustee. The Declaration of Trust
provides for indemnification from the Trust's property for all losses and
expenses of any shareholder held personally liable for the obligations of
the Trust. Thus, the risk of a shareholder's incurring financial loss on
account of shareholder liability is limited to circumstances in which the
Trust itself would be unable to meet its obligations, a possibility that
the Trust believes is remote. Upon payment of any liability incurred by the
Trust, the shareholder paying the liability will be entitled to
reimbursement from the general assets of the Trust. The Trustees intend to
conduct the operations of the Trust in a manner so as to avoid, as far as
possible, ultimate liability of the shareholders for liabilities of the
Trust.
The Trust was organized on February 28, 1992.
TAXATION
TAXATION OF THE FUND
The Fund intends to qualify annually and to elect the Fund to be treated
as a regulated investment company under the Internal Revenue Code of 1986,
as amended (the `Code'').
As a regulated investment company, the Fund will not be subject to U.S.
Federal income tax on its investment company taxable income and net capital
gains (the excess of net long-term capital gains over net short-term
capital losses), if any, that it distributes to shareholders. The Fund
intends to distribute to its shareholders, at least annually, substantially
all of its investment company taxable income and net capital gains, and
therefore does not anticipate incurring a Federal income tax liability.
TAXATION OF THE PORTFOLIO
The Portfolio is not subject to the Federal income taxation. Instead, the
Fund and other investors investing in the Portfolio must take into
account, in computing their Federal income tax liability, their share of
the Portfolio's income, gains, losses, deductions, credits and tax
preference items, without regard to whether they have received any cash
distributions from the Portfolio.
OTHER TAXATION
The Trust is organized as a Massachusetts business trust and, under current
law, neither the Trust nor the Fund is liable for any income or franchise
tax in the Commonwealth of Massachusetts, provided that the Fund continues
to qualify as a regulated investment company under Subchapter M of the
Code. The Portfolio is organized as a New York trust. The Portfolio is
not subject to any income or franchise tax in the State of New York or the
Commonwealth of Massachusetts.
FINANCIAL STATEMENTS
The financial statements for the Fund for the period ended September 30,
1996, are incorporated herein by reference to the Fund's Annual Report
dated September 30, 1996 (File Nos. 33-45973 and 811-06576). A copy of the
Annual Report may be obtained without change by contacting the Fund.
APPENDIX
BOND AND COMMERCIAL PAPER RATINGS
Set forth below are descriptions of the ratings of Moody's and S&P, which
represent their opinions as to the quality of the securities which they
undertake to rate. It should be emphasized, however, that ratings are
relative and subjective and are not absolute standards of quality.
S&P BOND RATINGS
An S&P corporate debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. Debt
rated "AAA" has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong. Debt rated "AA" has a
very strong capacity to pay interest and to repay principal and differs
from the highest rated issues only in small degree.
The rating "AA" may be modified by the addition of a plus or minus sign to
show relative standing within such category.
MOODY'S BOND RATINGS
Excerpts from Moody's description of its corporate bond ratings: Aaa judged
to be the best quality, carry the smallest degree of investment risk; Aa
judged to be of high quality by all standards.
FITCH INVESTORS SERVICE BOND RATINGS
AAA. Securities of this rating are regarded as strictly high-grade, broadly
marketable, suitable for investment by trustees and fiduciary institutions,
and liable to but slight market fluctuation other than through changes in
the money rate. The factor last named is of importance varying with the
length of maturity. Such securities are mainly senior issues of strong
companies, and are most numerous in the railway and public utility fields,
though some industrial obligations have this rating. The prime feature of
an AAA rating is showing of earnings several times or many times interest
requirements with such stability of applicable earnings that safety is
beyond reasonable question whatever changes occur in conditions. Other
features may enter in, such as a wide margin of protection through
collateral security or direct lien on specific property as in the case of
high class equipment certificates or bonds that are first mortgages on
valuable real estate. Sinking funds or voluntary reduction of the debt by
call or purchase are often factors, while guarantee or assumption by
parties other than the original debtor may also influence the rating.
AA. Securities in this group are of safety virtually beyond question, and
as a class are readily salable while many are highly active. Their merits
are not greatly unlike those of the AAA class, but a security so rated may
be of junior though strong lien in many cases directly following an AAA
security or the margin of safety is less strikingly broad. The issue may be
the obligation of a small company, strongly secured but influenced as to
ratings by the lesser financial power of the enterprise and more local type
of market.
A-2
FITCH INVESTORS SERVICE AND DUFF & PHELPS COMMERCIAL PAPER RATINGS
Commercial paper rated "Fitch-1" is considered to be the highest grade
paper and is regarded as having the strongest degree of assurance for
timely payment. "Fitch-2" is considered very good grade paper and reflects
an assurance of timely payment only slightly less in degree than the
strangest issue.
Commercial paper issues rated "Duff 1" by Duff & Phelps, Inc. have the
following characteristics: very high certainty of timely payment, excellent
liquidity factors supported by strong fundamental protection factors, and
risk factors which are very small. Issues rated "Duff 2" have a good
certainty of timely payment, sound liquidity factors and company
fundamentals, small risk factors, and good access to capital markets.
A-3
INVESTMENT ADVISER OF THE PORTFOLIO AND ADMINISTRATOR
BANKERS TRUST COMPANY
DISTRIBUTOR
EDGEWOOD SERVICES, INC.
CUSTODIAN AND TRANSFER AGENT
BANKERS TRUST COMPANY
INDEPENDENT ACCOUNTANTS
COOPERS & LYBRAND L.L.P.
COUNSEL
WILLKIE FARR & GALLAGHER
No person has been authorized to give any information or to make any
representations other than those contained in the Trust's Prospectuses, its
Statements of Additional Information or the Trust's official sales
literature in connection with the offering of the Trust's shares and, if
given or made, such other information or representations must not be relied
on as having been authorized by the Trust. Neither the Prospectuses nor
this Statement of Additional Information constitutes an offer in any state
in which, or to any person to whom, such offer may not lawfully be made.
CUSIP: 055847305
STA519400 (7/97)
