1940 Act File No. 811-06703
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 5 ............................... X
UTILITY PORTFOLIO
(Exact Name of Registrant as Specified in Charter)
Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779
(Address of Principal Executive Offices)
(412) 288-1900
(Registrant's Telephone Number)
Jay S. Neuman, Esq. Copies to: Burton M. Leibert, Esq.
Federated Investors Tower Willkie Farr & Gallagher
Pittsburgh, Pennsylvania 15222-3779 One Citicorp Center
(Name and Address of Agent for Service) 153 East 53rd Street
New York, New York 10022
Explanatory Note
This Amendment to the Registrant's Registration Statement on Form N-1A
(the `Registration Statement'') has been filed by the Registrant pursuant
to Section 8(b) of the Investment Company Act of 1940. However, beneficial
interests in the Registrant are not being registered under the Securities
Act of 1933 (the "1933 Act"), because such interests will be issued solely
in private placement transactions that do not involve any "public offering"
within the meaning of Section 4(2) of the 1933 Act. Investments in the
Registrant may only be made by investment companies, insurance company
separate accounts, common or commingled trust funds or similar
organizations or entities that are "accredited investors" within the
meaning of Regulation D under the 1933 Act. The Registration Statement does
not constitute an offer to sell, or the solicitation of an offer to buy,
any beneficial interests in the Registrant.
UTILITY PORTFOLIO
PART A
Responses to Items 1 through 3 and 5A have been omitted pursuant to
paragraph 4 of Instruction F of the General Instructions to Form N-1A.
ITEM 4. GENERAL DESCRIPTION OF REGISTRANT.
Utility Portfolio (the "Portfolio") is a no-load, diversified, open-end
management investment company which was organized as a trust under the laws
of the State of New York on December 11, 1991. Beneficial interests in the
Portfolio are issued solely in private placement transactions that do not
involve any "public offering" within the meaning of Section 4(2) of the
Securities Act of 1933, as amended (the "1933 Act"). Investments in the
Portfolio may only be made by investment companies, insurance company
separate accounts, common or commingled trust funds or similar
organizations or entities that are "accredited investors" within the
meaning of Regulation D under the 1933 Act. This Registration Statement
does not constitute an offer to sell, or the solicitation of an offer to
buy, any "security" within the meaning of the 1933 Act.
The investment objective of the Portfolio is to seek a high level of
current income derived primarily from equity securities of public utility
companies. The Portfolio also seeks growth of income and capital
appreciation, but only when consistent with its primary investment
objective.
Additional information about the investment policies of the Portfolio
appears in Part B. There can be no assurance that the investment objective
of the Portfolio will be achieved.
Under normal conditions at least 65% of the Portfolio's assets will be
invested in the equity securities of public utility companies. As used
herein, "equity securities" includes common stock, preferred stock, trust
or limited partnership interests, warrants and rights, and securities
convertible into common or preferred stock. Public utility companies
include companies that provide electricity, natural gas, or water and other
sanitary services to the public, and telephone or telegraph companies and
other companies providing public communications services. Bankers Trust
Company ("Bankers Trust"), as the Portfolio's investment adviser (the
"Adviser"), emphasizes quality in selecting investments for the Portfolio
and looks for well-established utility companies with proven dividend
records and sound financial structures. The Portfolio may invest up to 15%
of its assets in securities of foreign issuers. For additional information
on foreign investment and related hedging techniques, see "Risk Factors,"
`Additional Information'' and Part B.
EQUITY INVESTMENTS. The Portfolio invests primarily in common and preferred
stock and other securities with equity characteristics, such as trust or
limited partnership interests, rights and warrants. These investments may
or may not pay dividends and may or may not carry voting rights. The
Portfolio may also invest in convertible securities when, due to market
conditions, it is more advantageous to obtain a position in an attractive
company by purchase of its convertible securities than by purchase of its
common stock. The convertible securities in which the Portfolio invests may
include any debt securities or preferred stock which may be converted into
common stock or which carries the right to purchase common stock.
Convertible securities entitle the holder to exchange the securities for a
specified number of shares of common stock, usually of the same company, at
specified prices within a certain period of time and to receive interest or
dividends until the holder elects to exercise the conversion privilege.
Since the Portfolio invests in both common stock and convertible
securities, the risks of the general equity markets may be tempered to a
degree by the Portfolio's investments in convertible securities which are
often not as volatile as equity securities.
SHORT-TERM INSTRUMENTS. The Portfolio intends to stay invested in the
securities described above to the extent practical in light of its
objective and long-term investment perspective. However, the Portfolio's
assets may be invested in short-term instruments with remaining maturities
of 397 days or less to meet anticipated redemptions and expenses or for
day-to-day operating purposes and when, in Bankers Trust's opinion, it is
advisable to adopt a temporary defensive position because of unusual and
adverse conditions affecting the equity markets. In addition, when the
Portfolio experiences large cash inflows through the sale of securities and
desirable equity securities that are consistent with the Portfolio's
investment objective are unavailable in sufficient quantities or at
attractive prices, the Portfolio may hold short-term investments for a
limited time pending availability of such equity securities. Short-term
instruments consist of foreign and domestic: (i) short-term obligations of
sovereign governments, their agencies, instrumentalities, authorities or
political subdivisions; (ii) other short-term debt securities rated Aa or
higher by Moody's Investors Service, Inc. ("Moody's") or AA or higher by
Standard & Poor's Ratings Group("S&P") or, if unrated, of comparable
quality in the opinion of Bankers Trust; (iii) commercial paper; (iv) bank
obligations, including negotiable certificates of deposit, time deposits
and bankers' acceptances; and (v) repurchase agreements. At the time the
Portfolio invests in commercial paper, bank obligations or repurchase
agreements, the issuer or the issuer's parent must have outstanding debt
rated Aa or higher by Moody's or AA or higher by S&P or outstanding
commercial paper or bank obligations rated Prime-1 by Moody's or A-1 by
S&P; or, if no such ratings are available, the instrument must be of
comparable quality in the opinion of Bankers Trust. These instruments may
be denominated in U.S. dollars or in foreign currencies and will have been
determined to be of high quality by a nationally recognized rating service,
or if unrated, by Bankers Trust.
ADDITIONAL INVESTMENT TECHNIQUES. The Portfolio may also utilize the
following investments and investment techniques and practices: foreign
investments, options on stocks, options on stock indices, futures contracts
on stock indices, options on futures contracts, foreign currency exchange
transactions, options on foreign currencies, Rule 144A securities, when-
issued and delayed delivery securities, securities lending and repurchase
agreements. See "Additional Information" for further information.
ADDITIONAL INVESTMENT LIMITATIONS. As a diversified fund, no more than
5% of the assets of the Portfolio may be invested in the securities of one
issuer (other than U.S. government securities), except that up to 25% of
the Portfolio's assets may be invested without regard to this limitation.
Other than public utility companies, the Portfolio will not invest more
than 25% of its assets in the securities of issuers in any one industry.
These are fundamental investment policies of the Portfolio which may not be
changed without investor approval. No more than 15% of the Portfolio's net
assets may be invested in illiquid or not readily marketable securities
(including repurchase agreements and time deposits with remaining
maturities of more than seven calendar days). Additional investment
policies of the Portfolio are contained in Part B. The investment
objectives of the Portfolio are also not fundamental policies.
RISK FACTORS. The Portfolio seeks a high level of current income, with
growth of income and capital appreciation as a secondary objective. The
Portfolio invests primarily in common stock, preferred stock and securities
convertible into common or preferred stock. Changes in interest rates may
also affect the value of the Portfolio's investments, and rising interest
rates can be expected to reduce the Portfolio's net asset value
(`NAV'').
Because the Portfolio concentrates its investments in public utility
companies, its performance will depend in large part on conditions in the
public utility industries. Utility stocks have traditionally been popular
among more conservative stock market investors because they have generally
paid above average dividends. However, utility stocks can still be affected
by the risks of the stock market, as well as factors specific to public
utility companies. Governmental regulation of public utility companies can
limit their ability to expand their business or to pass cost increases on
to customers. Companies providing power or energy-related services may also
be affected by fuel shortages or cost increases, environmental protection
or energy conservation regulations, the special risks of constructing and
operating nuclear power facilities, as well as fluctuating demand for their
services. Some public utility companies are facing increased competition,
which may reduce their profits. All of these factors are subject to rapid
change, which may affect utility companies independently from the stock
market as a whole.
In seeking its investment objectives, the Portfolio may invest in
securities of foreign issuers. Foreign securities may involve a higher
degree of risk and may be less liquid or more volatile than domestic
instruments. Foreign securities usually are denominated in foreign
currencies, which means their value will be affected by changes in the
strength of foreign currencies relative to the U.S. dollar as well as the
other factors that affect security prices. Foreign companies may not be
subject to accounting standards or governmental supervision comparable to
U.S. companies, and there often is less publicly available information
about their operations. Generally, there is less governmental regulation of
foreign securities markets, and security trading practices abroad may offer
less protection to investors such as the Portfolio. The value of such
investments may be adversely affected by changes in political or social
conditions, diplomatic relations, confiscatory taxation, expropriation,
nationalization, limitation on the removal of funds or assets, or
imposition of (or change in) exchange control or tax regulations in those
foreign countries. Additional risks of foreign securities include
settlement delays and costs, difficulties in obtaining and enforcing
judgments, and taxation of dividends at the source of payment. The
Portfolio will not invest more than 5% of the value of its total assets in
the securities of issuers based in developing countries, including Eastern
Europe.
PORTFOLIO TURNOVER. Bankers Trust intends to manage the Portfolio
actively in pursuit of its investment objective. The Portfolio does not
expect to trade in securities for short-term profits but, when
circumstances warrant, securities may be sold without regard to the length
of time held. The Portfolio's portfolio turnover rates for the fiscal years
ended December 31, 1996 and 1995 were 24.90% and 53.71%, respectively.
DERIVATIVES. The Portfolio may invest in various instruments that are
commonly known as derivatives. Generally, a derivative is a financial
arrangement, the value of which is based on, or `derived'' from, a
traditional security, asset or market index. Some `derivatives'' such as
mortgage-related and other asset-backed securities are in many respects
like any other investment, although they may be more volatile or less
liquid than more traditional debt securities. There are, in fact, many
different types of derivatives and many different ways to use them. There
are a range of risks associated with those uses. Futures and options are
commonly used for traditional hedging purposes to attempt to protect a fund
from exposure to changing interest rates, securities prices or currency
exchange rates and for cash management purposes as a low cost method of
gaining exposure to a particular securities market without investing
directly in those securities. However, some derivatives are used for
leverage, which tends to magnify the effects of an instrument's price
changes as market conditions change. Leverage involves the use of a small
amount of money to control a large amount of financial assets and can, in
some circumstances, lead to significant losses. The Adviser will use
derivatives only in circumstances where the Adviser believes they offer the
most economic means of improving the risk/reward profile of the Portfolio.
Derivatives will not be used to increase portfolio risk above the level
that could be achieved using only traditional investment securities or to
acquire exposure to changes in the value of assets or indices that by
themselves would not be purchased for the Portfolio. The use of derivatives
for non-hedging purposes may be considered speculative. A description of
the derivatives that the Portfolio may use and some of their associated
risks is found under `Additional Information'' herein.
ITEM 5. MANAGEMENT OF THE TRUST.
The Board of Trustees provides broad supervision over the affairs of the
Portfolio. Bankers Trust is the Portfolio's Adviser. A majority of the
Portfolio's Trustees are not affiliated with the Adviser. Bankers Trust,
the Portfolio's administrator, supervises the overall administration of the
Portfolio. The Portfolio's fund accountant, transfer agent, custodian and
dividend paying agent is also Bankers Trust.
Bankers Trust, a New York banking corporation with principal offices at
280 Park Avenue, New York, New York 10017, is a wholly owned subsidiary of
Bankers Trust New York Corporation. Bankers Trust conducts a variety of
general banking and trust activities and is a major wholesale supplier of
financial services to the international and domestic institutional market.
As of December 31, 1996, Bankers Trust New York Corporation was the seventh
largest bank holding company in the United States with total assets of
approximately $120 billion. Bankers Trust is a worldwide merchant bank
dedicated to servicing the needs of corporations, governments, financial
institutions and private clients through a global network of over 120
offices in more than 40 countries. Investment management is a core business
of Bankers Trust, built on a tradition of excellence from its roots as a
trust bank founded in 1930. The scope of Bankers Trust's investment
management capability is unique due to its leadership positions in both
active and passive quantitative management and its presence in major equity
and fixed income markets around the world. As of December 31, 1996, Bankers
Trust had assets under management globally of approximately $227
billion.
Bankers Trust has more than 50 years of experience managing retirement
assets for the nation's largest corporations and institutions. In the past,
these clients have been serviced through separate account and commingled
fund structures. Now, the BT Family of Funds brings Bankers Trust's
extensive investment management expertise, once available to only the
largest institutions in the U.S., to individual investors. Bankers Trust's
officers have had extensive experience in managing investment portfolios
having objectives similar to those of the Portfolio.
Bankers Trust, subject to the supervision and direction of the Board of
Trustees, manages the Portfolio in accordance with the Portfolio's
investment objective and stated investment policies, makes investment
decisions for the Portfolio, places orders to purchase and sell securities
and other financial instruments on behalf of the Portfolio and employs
professional investment managers and securities analysts who provide
research services to the Portfolio. All orders for investment transactions
on behalf of the Portfolio are placed by Bankers Trust with broker-dealers
and other financial intermediaries that it selects, including those
affiliated with Bankers Trust. A Bankers Trust affiliate will be used in
connection with a purchase or sale of an investment for the Portfolio only
if Bankers Trust believes that the affiliate's charge for the transaction
does not exceed usual and customary levels. The Portfolio will not invest
in obligations for which Bankers Trust or any of its affiliates is the
ultimate obligor or accepting bank. The Portfolio may, however, invest in
the obligations of correspondents and customers of Bankers Trust. As
compensation for its investment advisory services, the Portfolio will pay
Bankers Trust a fee computed daily and paid monthly at the annual rate of
0.65% of the average daily net assets of the Portfolio pursuant to an
investment advisory agreement.
Bankers Trust has been advised by its counsel that, in counsel's
opinion, Bankers Trust currently may perform the services for the Portfolio
described in this Registration Statement without violation of the Glass-
Steagall Act or other applicable banking laws or regulations.
Under an administration and services agreement with the Portfolio (the
"Administration and Services Agreement"), Bankers Trust calculates the
value of the assets of the Portfolio and generally assists the Board of
Trustees in all aspects of the administration and operation of the
Portfolio. The Administration and Services Agreement provides for the
Portfolio to pay Bankers Trust a fee computed daily and paid monthly at the
rate of 0.10% of the average daily net assets of the Portfolio. Under the
Administration and Services Agreement, Bankers Trust may delegate one or
more of its responsibilities to others at Bankers Trust's expense.
The Portfolio bears its own expenses. Operating expenses for the
Portfolio generally consist of all costs not specifically borne by Bankers
Trust or Edgewood Services, Inc. ("Edgewood") including investment advisory
and administration and service fees, fees for necessary professional
services, amortization of organizational expenses, the costs associated
with regulatory compliance and maintaining legal existence and investor
relations.
ITEM 6. CAPITAL STOCK AND OTHER SECURITIES.
The Portfolio is organized as a trust under the laws of the State of New
York. Under the Declaration of Trust, the Trustees are authorized to issue
beneficial interests in the Portfolio. Each investor is entitled to a vote
in proportion to the amount of its investment in the Portfolio. Investments
in the Portfolio may not be transferred, but an investor may withdraw all
or any portion of its investment at any time at NAV. Investors in the
Portfolio (e.g., investment companies, insurance company separate accounts
and common and commingled trust funds) will each be liable for all
obligations of the Portfolio. However, the risk of an investor in the
Portfolio incurring financial loss on account of such liability is limited
to circumstances in which both inadequate insurance existed and the
Portfolio itself was unable to meet its obligations.
Investments in the Portfolio have no preemptive or conversion rights and
are fully paid and nonassessable, except as set forth below. The Portfolio
is not required and has no current intention to hold annual meetings of
investors, but the Portfolio will hold special meetings of investors when
in the judgment of the Trustees it is necessary or desirable to submit
matters for an investor vote. Changes in fundamental policies will be
submitted to investors for approval. Investors have under certain
circumstances (e.g., upon application and submission of certain specified
documents to the Trustees by a specified number of investors) the right to
communicate with other investors in connection with requesting a meeting of
investors for the purpose of removing one or more Trustees. Investors also
have the right to remove one or more Trustees without a meeting by a
declaration in writing by a specified number of investors. Upon liquidation
of the Portfolio, investors would be entitled to share pro rata in the net
assets of the Portfolio available for distribution to investors.
The NAV of the Portfolio is determined each day on which the New York
Stock Exchange, Inc. ("NYSE") is open ("Portfolio Business Day") (and on
such other days as are deemed necessary in order to comply with Rule 22c-1
under the Investment Company Act of 1940, as amended (the "1940 Act")).
This determination is made each Portfolio Business Day as of the close of
regular trading on the NYSE (currently 4:00 p.m., Eastern time or in the
event that the NYSE closes early, at the time of such early closing) (the
"Valuation Time").
Each investor in the Portfolio may add to or reduce its investment in the
Portfolio on each Portfolio Business Day. At the Valuation Time, on each
such business day, the value of each investor's beneficial interest in the
Portfolio will be determined by multiplying the NAV of the Portfolio by the
percentage, effective for that day, that represents that investor's share
of the aggregate beneficial interests in the Portfolio. Any additions or
withdrawals, 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 re-computed 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 Valuation Time, on such day plus or minus, as the
case may be, the amount of any additions to or withdrawals from the
investor's investment in the Portfolio effected on such day, and (ii) the
denominator of which is the aggregate NAV of the Portfolio as of the
Valuation Time on such day plus or minus, as the case may be, the amount of
the net additions to or withdrawals from the aggregate investments in the
Portfolio by all investors in the Portfolio. The percentage so determined
will then be applied to determine the value of the investor's interest in
the Portfolio as of the Valuation Time, on the following business day of
the Portfolio.
The "net income" of the Portfolio shall consist of (i) all income accrued,
less the amortization of any premium, on the assets of the Portfolio, less
(ii) all actual and accrued expenses of the Portfolio determined in
accordance with generally accepted accounting principles. Interest income
includes discount earned (including both original issue and market
discount) on discount paper accrued ratably to the date of maturity and any
net realized gains or losses on the assets of the Portfolio. All the net
income of the Portfolio is allocated pro rata among the investors in the
Portfolio. The net income is accrued daily and distributed monthly to the
investors in the Portfolio.
Under the anticipated method of operation of the Portfolio, the Portfolio
will not be subject to any income tax. However, each investor in the
Portfolio will be taxable on its share (as determined in accordance with
the governing instruments of the Portfolio) of the Portfolio's ordinary
income and capital gain in determining its income tax liability. The
determination of such share will be made in accordance with the Internal
Revenue Code of 1986, as amended (the "Code"), and regulations promulgated
thereunder.
It is intended that the Portfolio's assets, income and distributions will
be managed in such a way that an investor in the Portfolio will be able to
satisfy the requirements of Subchapter M of the Code, assuming that the
investor invested all of its assets in the Portfolio.
ITEM 7. PURCHASE OF SECURITIES BEING OFFERED.
Beneficial interests in the Portfolio are issued solely in private
placement transactions that do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act. See "General Description of the
Registrant" above.
An investment in the Portfolio may be made without a sales load. All
investments are made at NAV next determined if an order is received by the
Portfolio by the designated cutoff time for each accredited investor. The
NAV of the Portfolio is determined on each Portfolio Business Day. The
Portfolio's portfolio securities are valued primarily on the basis of
market quotations or, if quotations are not readily available, by a method
which the Board of Trustees believes accurately reflects fair value.
There is no minimum initial or subsequent investment in the Portfolio.
However, because the Portfolio intends to be as fully invested at all times
as is reasonably practicable in order to enhance the yield on its assets,
investments must be made in Federal funds (i.e., monies credited to the
account of the Portfolio's custodian bank by a Federal Reserve Bank).
The Portfolio and Edgewood reserve the right to cease accepting
investments at any time or to reject any investment order.
The placement agent for the Portfolio is Edgewood. The principal business
address of Edgewood and its affiliates is Clearing Operations, P.O. Box
897, Pittsburgh, Pennsylvania 15230-0897. Edgewood receives no additional
compensation for serving as the placement agent for the Portfolio.
ITEM 8. REDEMPTION OR REPURCHASE.
An investor in the Portfolio may withdraw all or any portion of its
investment at the NAV next determined if a withdrawal request in proper
form is furnished by the investor to the Portfolio by the designated cutoff
time for each accredited investor. The proceeds of a withdrawal will be
paid by the Portfolio in Federal funds normally on the Portfolio Business
Day the withdrawal is effected, but in any event within seven days. The
Portfolio reserves the right to pay redemptions in kind. Unless requested
by an investor, the Portfolio will not make a redemption in kind to the
investor, except in situations where that investor may make redemptions in
kind. Investments in the Portfolio may not be transferred.
The right of any investor to receive payment with respect to any withdrawal
may be suspended or the payment of the withdrawal proceeds postponed during
any period in which the NYSE is closed (other than weekends or holidays) or
trading on the NYSE is restricted or, to the extent otherwise permitted by
the 1940 Act, if an emergency exists.
ITEM 9. PENDING LEGAL PROCEEDINGS.
Not applicable.
ADDITIONAL INFORMATION
Rule 144A Securities. The Portfolio may purchase securities in the
United States that are not registered for sale under Federal securities
laws but which can be resold to institutions under SEC's Rule 144A.
Provided that a dealer or institutional trading market in such securities
exists, these restricted securities are treated as exempt from the
Portfolio's 15% limit on illiquid securities. Under the supervision of the
Board of Trustees, Bankers Trust determines the liquidity of restricted
securities and, through reports from Bankers Trust, the Board will monitor
trading activity in restricted securities. Because Rule 144A is relatively
new, it is not possible to predict how these markets will develop. If
institutional trading in restricted securities were to decline, the
liquidity of the Portfolio could be adversely affected.
When-Issued and Delayed Delivery Securities. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. Delivery of and
payment for these securities may take place as long as a month or more
after the date of the purchase commitment. The value of these securities is
subject to market fluctuation during this period and no income accrues to
the Portfolio until settlement takes place. When entering into a when-
issued or delayed delivery transaction, the Portfolio will rely on the
other party to consummate the transaction; if the other party fails to do
so, the Portfolio may be disadvantaged.
Securities Lending. The Portfolio is permitted to lend up to 30% of the
total value of its securities. These loans must be secured continuously by
cash or equivalent collateral or by a letter of credit at least equal to
the market value of the securities loaned plus accrued income. By lending
its securities, the Portfolio can increase its income by continuing to
receive income on the loaned securities as well as by the opportunity to
receive interest on the collateral. During the term of the loan, the
Portfolio continues to bear the risk of fluctuations in the price of the
loaned securities. In lending securities to brokers, dealers and other
organizations, the Portfolio is subject to risk which, like those
associated with other extensions of credit, include delays in recovery and
possible loss of rights in the securities lent should the borrower fail
financially.
Foreign Investments. The Portfolio may invest in securities of foreign
issuers directly or in the form of American Depositary Receipts ("ADRs"),
Global Depositary Receipts ("GDRs"), European Depositary Receipts ("EDRs")
or other similar securities representing securities of foreign issuers.
These securities may not necessarily be denominated in the same currency as
the securities they represent. Designed for use in U.S. and European
securities markets, respectively, ADRs, GDRs and EDRs are alternatives to
the purchase of the underlying securities in their national markets and
currencies. ADRs, GDRs and EDRs are subject to the same risks as the
foreign securities to which they relate.
With respect to certain countries in which capital markets are either less
developed or not easily accessed, investments by the Portfolio may be made
through investment in other investment companies that in turn are
authorized to invest in the securities of such countries. Investment in
other investment companies is limited in amount by the 1940 Act, will
involve the indirect payment of a portion of the expenses, including
advisory fees, of such other investment companies and may result in a
duplication of fees and expenses.
Options on Stocks. The Portfolio may write and purchase put and call
options on stocks. A call option gives the purchaser of the option the
right to buy, and obligates the writer to sell, the underlying stock at the
exercise price at any time during the option period. Similarly, a put
option gives the purchaser of the option the right to sell, and obligates
the writer to buy, the underlying stock at the exercise price at any time
during the option period. A covered call option, which is a call option
with respect to which the Portfolio owns the underlying stock, sold by the
Portfolio exposes the Portfolio during the term of the option to possible
loss of opportunity to realize appreciation in the market price of the
underlying stock or to possible continued holding of a stock which might
otherwise have been sold to protect against depreciation in the market
price of the stock. A covered put option sold by the Portfolio exposes the
Portfolio during the term of the option to a decline in price of the
underlying stock. A put option sold by the Portfolio is covered when, among
other things, cash or liquid securities are placed in a segregated account
to fulfill the obligations undertaken.
To close out a position when writing covered options, the Portfolio may
make a "closing purchase transaction," which involves purchasing an option
on the same stock with the same exercise price and expiration date as the
option which it has previously written on the stock. The Portfolio will
realize a profit or loss for a closing purchase transaction if the amount
paid to purchase an option is less or more, as the case may be, than the
amount received from the sale thereof. To close out a position as a
purchaser of an option, the Portfolio may make a "closing sale
transaction," which involves liquidating the Portfolio's position by
selling the option previously purchased.
The Portfolio intends to treat over-the-counter options ("OTC Options")
purchased and the assets used to "cover" OTC Options written as not readily
marketable and therefore subject to the limitations described in
"Investment Restrictions" in Part B.
Options on Stock Indices. The Portfolio may purchase and write put and call
options on stock indices listed on stock exchanges. A stock index
fluctuates with changes in the market values of the stocks included in the
index.
Options on stock indices are generally similar to options on stock except
that the delivery requirements are different. Instead of giving the right
to take or make delivery of stock at a specified price, an option on a
stock index gives the holder the right to receive a cash "exercise
settlement amount" equal to (a) the amount, if any, by which the fixed
exercise price of the option exceeds (in the case of a put) or is less than
(in the case of a call) the closing value of the underlying index on the
date of exercise, multiplied by (b) a fixed "index multiplier." Receipt of
this cash amount will depend upon the closing level of the stock index upon
which the option is based being greater than, in the case of a call, or
less than, in the case of a put, the exercise price of the option. The
amount of cash received will be equal to such difference between the
closing price of the index and the exercise price of the option expressed
in dollars times a specified multiple. The writer of the option is
obligated, in return for the premium received, to make delivery of this
amount. The writer may offset its position in stock index options prior to
expiration by entering into a closing transaction on an exchange or the
option may expire unexercised.
Because the value of an index option depends upon movements in the level of
the index rather than the price of a particular stock, whether the
Portfolio will realize a gain or loss from the purchase or writing of
options on an index depends upon movements in the level of stock prices in
the stock market generally or, in the case of certain indices, in an
industry or market segment, rather than movements in the price of a
particular stock. Accordingly, successful use by the Portfolio of options
on stock indices will be subject to Bankers Trust's ability to predict
correctly movements in the direction of the stock market generally or of a
particular industry. This requires different skills and techniques than
predicting changes in the price of individual stocks.
Futures Contracts on Stock Indices. The Portfolio may enter into contracts
providing for the making and acceptance of a cash settlement based upon
changes in the value of an index of securities ("Futures Contracts"). This
investment technique is designed only to hedge against anticipated future
change in general market prices which otherwise might either adversely
affect the value of securities held by the Portfolio or adversely affect
the prices of securities which are intended to be purchased at a later date
for the Portfolio. A Futures Contract may also be entered into to close out
or offset an existing futures position.
In general, each transaction in Futures Contracts involves the
establishment of a position which will move in a direction opposite to that
of the investment being hedged. If these hedging transactions are
successful, the futures positions taken for the Portfolio will rise in
value by an amount which approximately offsets the decline in value of the
portion of the Portfolio's investments that are being hedged. Should
general market prices move in an unexpected manner, the full anticipated
benefits of Futures Contracts may not be achieved or a loss may be
realized.
Although Futures Contracts would be entered into for hedging purposes only,
such transactions do involve certain risks. These risks could include a
lack of correlation between the Futures Contract and the equity market
being hedged, a potential lack of liquidity in the secondary market and
incorrect assessments of market trends which may result in poorer overall
performance than if a Futures Contract had not been entered into.
Brokerage costs will be incurred and "margin" will be required to be posted
and maintained as a good-faith deposit against performance of obligations
under Futures Contracts written for the Portfolio. The Portfolio may not
purchase or sell a Futures Contract if immediately thereafter its margin
deposits on its outstanding Futures Contracts would exceed 5% of the market
value of the Portfolio's total assets.
Options on Futures Contracts. The Portfolio may invest in options on such
Futures Contracts for similar purposes.
Foreign Currency Exchange Transactions. Because the Portfolio may buy and
sell securities denominated in currencies other than the U.S. dollar and
receives interest, dividends and sale proceeds in currencies other than the
U.S. dollar, 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 Portfolio either enters into these transactions on a spot (I.E., cash)
basis at the spot rate prevailing in the foreign currency exchange market
or uses forward contracts to purchase or sell foreign currencies.
A forward foreign currency exchange contract is an obligation by the
Portfolio to purchase or sell a specific currency at a future date, which
may be any fixed number of days from the date of the contract. Forward
foreign currency exchange contracts establish an exchange rate at a future
date. These contracts are transferable in the interbank market conducted
directly between currency traders (usually large commercial banks) and
their customers. A forward foreign currency exchange contract generally has
no deposit requirement and is traded at a net price without commission.
Neither spot transactions nor forward foreign currency exchange contracts
eliminate fluctuations in the prices of the Portfolio's securities or in
foreign exchange rates, or prevent loss if the prices of these securities
should decline.
The Portfolio may enter into foreign currency hedging transactions in an
attempt to protect against changes in foreign currency exchange rates
between the trade and settlement dates of specific securities transactions
or changes in foreign currency exchange rates that would adversely affect a
portfolio position or an anticipated investment position. Since
consideration of the prospect for currency parities will be incorporated
into Bankers Trust's long-term investment decisions, the Portfolio will not
routinely enter into foreign currency hedging transactions with respect to
security transactions; however, Bankers Trust believes that it is important
to have the flexibility to enter into foreign currency hedging transactions
when it determines that the transactions would be in the Portfolio's best
interest. Although these transactions tend to minimize the risk of loss due
to a decline in the value of the hedged currency, at the same time they
tend to limit any potential gain that might be realized should the value of
the hedged currency increase. The precise matching of the forward contract
amounts and the value of the securities involved will not generally be
possible because the future value of such securities in foreign currencies
will change as a consequence of market movements in the value of such
securities between the date the forward contract is entered into and the
date it matures. The projection of currency market movements is extremely
difficult, and the successful execution of a hedging strategy is highly
uncertain.
Options on Foreign Currencies. The Portfolio may write covered put and call
options and purchase put and call options on foreign currencies for the
purpose of protecting against declines in the dollar value of portfolio
securities and against increases in the dollar cost of securities to be
acquired. The Portfolio may use options on currency to cross-hedge, which
involves writing or purchasing options on one currency to hedge against
changes in exchange rates for a different, but related currency. As with
other types of options, however, the writing of an option on foreign
currency will constitute only a partial hedge up to the amount of the
premium received, and the Portfolio could be required to purchase or sell
foreign currencies at disadvantageous exchange rates, thereby incurring
losses. The purchase of an option on foreign currency may be used to hedge
against fluctuations in exchange rates although, in the event of exchange
rate movements adverse to the Portfolio's position, it may forfeit the
entire amount of the premium plus related transaction costs. In addition,
the Portfolio may purchase call options on currency when the Adviser
anticipates that the currency will appreciate in value.
There is no assurance that a liquid secondary market on an options exchange
will exist for any particular option, or at any particular time. If the
Portfolio is unable to effect a closing purchase transaction with respect
to covered options it has written, the Portfolio will not be able to sell
the underlying currency or dispose of assets held in a segregated account
until the options expire or are exercised. Similarly, if the Portfolio is
unable to effect a closing sale transaction with respect to options it has
purchased, it would have to exercise the options in order to realize any
profit and will incur transaction costs upon the purchase or sale of
underlying currency. The Portfolio pays brokerage commissions or spreads in
connection with its options transactions.
As in the case of forward contracts, certain options on foreign
currencies are traded over-the-counter and involve liquidity and credit
risks which may not be present in the case of exchange-traded currency
options.
The Portfolio's ability to terminate over-the-counter options ("OTC
Options") will be more limited than with exchange-traded options. It is
also possible that broker-dealers participating in OTC Options transactions
will not fulfill their obligations. Until such time as the staff of the
Securities and Exchange Commission (the "SEC") changes its position, the
Portfolio will treat purchased OTC Options and assets used to cover written
OTC Options as illiquid securities. With respect to options written with
primary dealers in U.S. Government Securities pursuant to an agreement
requiring a closing purchase transaction at a formula price, the amount of
illiquid securities may be calculated with reference to the repurchase
formula.
All options that the Portfolio writes will be covered under applicable
requirements of the SEC. The Portfolio will write and purchase options only
to the extent permitted by the policies of state securities authorities in
states where shares of investors in the Portfolio are qualified for offer
and sale.
There can be no assurance that the use of these portfolio strategies will
be successful.
Repurchase Agreements. In a repurchase agreement the Portfolio buys a
security and simultaneously agrees to sell it back at a higher price at a
future date. In the event of the bankruptcy of the other party to a
repurchase agreement, the Portfolio could experience delays in recovering
either its cash or selling the securities subject to the repurchase
agreement. To the extent that, in the meantime, the value of the securities
repurchased had decreased or the value of the securities had increased, the
Portfolio could experience a loss. In all cases, Bankers Trust must find
the creditworthiness of the other party to the transaction satisfactory.
Asset Coverage. To assure that the Portfolios use of futures and related
options, as well as when-issued and delayed delivery securities and foreign
currency exchange transactions, are not used to achieve investment
leverage, the Portfolios will cover such transactions, as required under
the applicable interpretations of the SEC, either by owning the underlying
securities or by segregating with the Portfolio's custodian liquid
securities in an amount at all times equal to or exceeding the Portfolio's
commitment with respect to these instruments or contracts.
UTILITY PORTFOLIO
PART B
ITEM 10. COVER PAGE.
Not applicable.
ITEM 11. TABLE OF CONTENTS.
General Information and History....................1
Investment Objectives and Policies....................1
Management of the Fund...............................11
Control Persons and Principal Holders of Securities..13
Investment Advisory and Other Services...............13
Brokerage Allocation and Other Practices.............14
Capital Stock and Other Securities...................15
Purchase, Redemption and Pricing of Securities.......16
Tax Status...........................................16
Underwriters.........................................17
Calculation of Performance Data......................17
Financial Statements.................................17
Appendix: Bond and Commercial Paper Ratings.....18
ITEM 12. GENERAL INFORMATION AND HISTORY.
Not applicable.
ITEM 13. INVESTMENT OBJECTIVES AND POLICIES.
Part A contains additional information about the investment objective and
policies of Utility Portfolio (the "Portfolio"). This Part B should only be
read in conjunction with Part A.
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.
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 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 recently 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. Bankers Trust Company ("Bankers Trust"), as the
Portfolio's investment adviser (the "Adviser"), anticipates that the market
for certain restricted securities such as institutional commercial paper
will expand further as a result of this new regulation and the development
of automated systems for the trading, clearance and settlement of
unregistered securities of domestic and foreign issuers, such as the PORTAL
System sponsored by the National Association of Securities Dealers, Inc.
(the "NASD").
The Adviser will monitor the liquidity of Rule 144A securities in the
Portfolio's portfolio securities 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).
FOREIGN SECURITIES: EASTERN EUROPE. Investments in companies domiciled in
Eastern European countries may be subject to potentially greater risks than
those of other foreign issuers. These risks include: (i) potentially less
social, political and economic stability; (ii) the small current size of
the markets for such securities and the low volume of trading, which result
in less liquidity and in greater price volatility; (iii) certain national
policies which may restrict the Portfolio's investment opportunities,
including restrictions on investment in issuers or industries deemed
sensitive to national interests; (iv) foreign taxation; (v) the absence of
developed legal structures governing private or foreign investment or
allowing for judicial redress for injury to private property; (vi) the
absence, until recently in certain Eastern European countries, of a capital
market structure or market-oriented economy; and (vii) the possibility that
recent favorable economic developments in Eastern Europe may be slowed or
reversed by unanticipated political or social events in such countries, or
in the Commonwealth of Independent States (formerly the Soviet Union).
So long as the Communist Party continues to exercise a significant or, in
some countries, dominant role in Eastern European countries, investments in
such countries will involve risks of nationalization, expropriation and
confiscatory taxation. The Communist governments of a number of East
European countries expropriated large amounts of private property in the
past, in many cases without adequate compensation, and there may be no
assurance that such expropriation will not occur in the future. In the
event of such expropriation, the Portfolio could lose a substantial portion
of any investments it has made in the affected countries. Further, no
accounting standards exist in East European countries. Finally, even though
certain East European currencies may be convertible into United States
dollars, the conversion rates may be artificial to the actual market values
and may be adverse to investors.
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 Services,
Inc. ("Edgewood") or their affiliates. By lending its securities, the
Portfolio can increase its income by continuing to receive interest on the
loaned securities as well as by either investing the cash collateral in
short-term securities or obtaining yield in the form of interest paid by
the borrower when U.S. government obligations are used as collateral. There
may be risks of delay in receiving additional collateral or risks of delay
in recovery of the securities or even loss of rights in the collateral
should the borrower of the securities fail financially. The Portfolio will
adhere to the following conditions whenever its securities are loaned: (i)
the Portfolio must receive at least 100% cash collateral or equivalent
securities from the borrower; (ii) the borrower must increase this
collateral whenever the market value of the securities including accrued
interest rises above the level of the collateral; (iii) the Portfolio must
be able to terminate the loan at any time; (iv) the Portfolio must receive
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, foreign
currencies, or contracts based on financial indices including any index of
U.S. government securities, foreign government securities or corporate debt
securities. U.S. futures contracts have been designed by exchanges which
have been designated "contracts markets" by the Commodity Futures Trading
Commission ("CFTC"), and must be executed through a futures commission
merchant, or brokerage firm, which is a member of the relevant contract
market. Futures contracts trade on a number of exchange markets, and,
through their clearing corporations, the exchanges guarantee performance of
the contracts as between the clearing members of the exchange. The
Portfolio may enter into futures contracts which are based on debt
securities that are backed by the full faith and credit of the U.S.
government, such as long-term U.S. Treasury bonds, Treasury notes,
Government National Mortgage Association modified pass-through mortgage-
backed securities and three-month U.S. Treasury bills. 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 purpose of the acquisition or sale of a futures contract, in cases
where the Portfolio holds or intends to acquire fixed-income securities, is
to attempt to protect the Portfolio from fluctuations in interest or
foreign exchange rates without actually buying or selling fixed-income
securities or foreign currencies. For example, if interest rates were
expected to increase, the Portfolio might enter into futures contracts for
the sale of debt securities. Such a sale would have much the same effect as
selling an equivalent value of the debt securities owned by the Portfolio.
If interest rates did increase, the value of the debt security in the
Portfolio would decline, but the value of the futures contracts to the
Portfolio would increase at approximately the same rate, thereby keeping
the net asset value of the Portfolio from declining as much as it otherwise
would have. The Portfolio could accomplish similar results by selling debt
securities and investing in bonds with short maturities when interest rates
are expected to increase. However, since the futures market is more liquid
than the cash market, the use of futures contracts as an investment
technique allows the Portfolio to maintain a defensive position without
having to sell its portfolio securities.
Similarly, when it is expected that interest rates may decline, futures
contracts may be purchased to attempt to hedge against anticipated
purchases of debt securities at higher prices. Since the fluctuations in
the value of futures contracts should be similar to those of debt
securities, the Portfolio could take advantage of the anticipated rise in
the value of debt securities without actually buying them until the market
had stabilized. At that time, the futures contracts could be liquidated and
the Portfolio could then buy debt securities on the cash market. To the
extent the Portfolio enters into futures contracts for this purpose, the
assets in the segregated asset account maintained to cover the Portfolio's
obligations with respect to such futures contracts will consist of cash,
cash equivalents or high quality liquid debt securities from its portfolio
in an amount equal to the difference between the fluctuating market value
of such futures contracts and the aggregate value of the initial and
variation margin payments made by the Portfolio with respect to such
futures contracts.
The ordinary spreads between prices in the cash and futures market, due to
differences in the nature of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial
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 intends to 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 has adopted the requirement that futures contracts
and options on futures contracts be used only as a hedge and not for
speculation. In addition to this requirement, the Board of Trustees has
also adopted two percentage restrictions on the use of futures contracts.
The first restriction is that the Portfolio will not enter into any futures
contracts or options on futures contracts if immediately thereafter the
amount of margin deposits on all the futures contracts of the Portfolio and
premiums paid on outstanding options on futures contracts owned by the
Portfolio would exceed 5% of the market value of the total assets of the
Portfolio.
OPTIONS ON FOREIGN CURRENCIES. The Portfolio may purchase and write options
on foreign currencies for hedging purposes in a manner similar to that in
which futures contracts on foreign currencies, or forward contracts, will
be utilized. For example, a decline in the dollar value of a foreign
currency in which portfolio securities are denominated will reduce the
dollar value of such securities, even if their value in the foreign
currency remains constant. In order to protect against such diminutions in
the value of portfolio securities, the Portfolio may purchase put options
on the foreign currency. If the value of the currency does decline, the
Portfolio will have the right to sell such currency for a fixed amount in
dollars and will thereby offset, in whole or in part, the adverse effect on
its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing
the cost of such securities, the Portfolio may purchase call options
thereon. The purchase of such options could offset, at least partially, the
effects of the adverse movements in exchange rates. As in the case of other
types of options, however, the benefit to the Portfolio deriving from
purchases of foreign currency options will be reduced by the amount of the
premium and related transaction costs. In addition, where currency exchange
rates do not move in the direction or to the extent anticipated, the
Portfolio could sustain losses on transactions in foreign currency options
which would require it to forego a portion or all of the benefits of
advantageous changes in such rates.
The Portfolio may write options on foreign currencies for the same types of
hedging purposes. For example, where the Portfolio anticipates a decline in
the dollar value of foreign currency denominated securities due to adverse
fluctuations in exchange rates it could, instead of purchasing a put
option, write a call option on the relevant currency. If the expected
decline occurs, the options will most likely not be exercised, and the
diminution in value of portfolio securities will be offset by the amount of
the premium received.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, the
Portfolio could write a put option on the relevant currency which, if rates
move in the manner projected, will expire unexercised and allow the
Portfolio to hedge such increased cost up to the amount of the premium. As
in the case of other types of options, however, the writing of a foreign
currency option will constitute only a partial hedge up to the amount of
the premium, and only if rates move in the expected direction. If this does
not occur, the option may be exercised and the Portfolio would be required
to purchase or sell the underlying currency at a loss which may not be
offset by the amount of the premium. Through the writing of options on
foreign currencies, the Portfolio also may be required to forego all or a
portion of the benefits which might otherwise have been obtained from
favorable movements in exchange rates.
The Portfolio intends to write covered call options on foreign
currencies. A call option written on a foreign currency by the Portfolio is
"covered" if the Portfolio owns the underlying foreign currency covered by
the call or has an absolute and immediate right to acquire that foreign
currency without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon
conversion or exchange of other foreign currency held in its portfolio. A
call option is also covered if the Portfolio has a call on the same foreign
currency and in the same principal amount as the call written where the
exercise price of the call held (a) is equal to or less than the exercise
price of the call written or (b) is greater than the exercise price of the
call written if the difference is maintained by the Portfolio in cash, U.S.
government securities and other high quality liquid debt securities in a
segregated account with its custodian.
The Portfolio also intends to write call options on foreign currencies that
are not covered for cross-hedging purposes. A call option on a foreign
currency is for cross-hedging purposes if it is not covered, but is
designed to provide a hedge against a decline in the U.S. dollar value of a
security which the Portfolio owns or has the right to acquire and which is
denominated in the currency underlying the option due to an adverse change
in the exchange rate. In such circumstances, the Portfolio collateralizes
the option by maintaining in a segregated account with its custodian, cash
or U.S. government securities or other high quality liquid debt securities
in an amount not less than the value of the underlying foreign currency in
U.S. dollars marked to market daily.
ADDITIONAL RISKS OF OPTIONS ON FUTURES CONTRACTS, FORWARD CONTRACTS AND
OPTIONS ON FOREIGN CURRENCIES. Unlike transactions entered into by 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 the 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. The
Portfolio's ability to terminate over-the-counter options will be more
limited than with exchange-traded options. It is also possible that broker-
dealers participating in over-the-counter options transactions will not
fulfill their obligations. Until such time as the staff of the SEC changes
its position, the Portfolio will treat purchased over-the-counter options
and assets used to cover written over-the-counter options as illiquid
securities. With respect to options written with primary dealers in U.S.
Government Securities pursuant to an agreement requiring a closing purchase
transaction at a formula price, the amount of illiquid securities may be
calculated with reference to the repurchase formula.
In addition, futures contracts, options on futures contracts, forward
contracts and options on foreign currencies may be traded on foreign
exchanges. Such transactions are subject to the risk of governmental
actions affecting trading in or the prices of foreign currencies or
securities. The value of such positions also could be adversely affected
by: (i) other complex foreign political and economic factors; (ii) lesser
availability than in the United States of data on which to make trading
decisions; (iii) delays in the Portfolio's ability to act upon economic
events occurring in foreign markets during nonbusiness hours in the United
States; (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States; and (v)
lesser trading volume.
OPTIONS ON SECURITIES. The Portfolio may write (sell) covered call and put
options to a limited extent on its portfolio securities ("covered options")
in an attempt to increase income. However, the Portfolio may forgo the
benefits of appreciation on securities sold or may pay more than the market
price on securities acquired pursuant to call and put options written by
the Portfolio.
When 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, 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 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. In addition to options on securities, the
Portfolio may also purchase and write (sell) call and put options on
securities indices. Such options give the holder the right to receive a
cash settlement during the term of the option based upon the difference
between the exercise price and the value of the index. Such options will be
used for the purposes described above under "Options on Securities."
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.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Because the Portfolio buys and
sells securities denominated in currencies other than the U.S. dollar and
receives interest, dividends and sale proceeds in currencies other than the
U.S. dollar, the Portfolio from time to time may enter into foreign
currency exchange transactions to convert to and from different foreign
currencies and to convert foreign currencies to and from the U.S. dollar.
The Portfolio either enters into these transactions on a spot (i.e., cash)
basis at the spot rate prevailing in the foreign currency exchange market
or uses forward contracts to purchase or sell foreign currencies.
A forward foreign currency exchange contract is an obligation by the
Portfolio to purchase or sell a specific currency at a future date, which
may be any fixed number of days from the date of the contract. Forward
foreign currency exchange contracts establish an exchange rate at a future
date. These contracts are transferable in the interbank market conducted
directly between currency traders (usually large commercial banks) and
their customers. A forward foreign currency exchange contract generally has
no deposit requirement and is traded at a net price without commission. The
Portfolio maintains with its custodian a segregated account of high grade
liquid assets in an amount at least equal to its obligations under each
forward foreign currency exchange contract. Neither spot transactions nor
forward foreign currency exchange contracts eliminate fluctuations in the
prices of the Portfolio's securities or in foreign exchange rates, or
prevent loss if the prices of these securities should decline.
The Portfolio may enter into foreign currency hedging transactions in an
attempt to protect against changes in foreign currency exchange rates
between the trade and settlement dates of specific securities transactions
or changes in foreign currency exchange rates that would adversely affect a
portfolio position or an anticipated investment position. Since
consideration of the prospect for currency parities will be incorporated
into Bankers Trust's long-term investment decisions, the Portfolio will not
routinely enter into foreign currency hedging transactions with respect to
security transactions; however, Bankers Trust believes that it is important
to have the flexibility to enter into foreign currency hedging transactions
when it determines that the transactions would be in the Portfolio's best
interest. Although these transactions tend to minimize the risk of loss due
to a decline in the value of the hedged currency, at the same time they
tend to limit any potential gain that might be realized should the value of
the hedged currency increase. The precise matching of the forward contract
amounts and the value of the securities involved will not generally be
possible because the future value of such securities in foreign currencies
will change as a consequence of market movements in the value of such
securities between the date the forward contract is entered into and the
date it matures. The projection of currency market movements is extremely
difficult, and the successful execution of a hedging strategy is highly
uncertain.
While these contracts are not presently regulated by the CFTC, the CFTC may
in the future assert authority to regulate forward contracts. In such event
the Portfolio's ability to utilize forward contracts in the manner set
forth in Part A to this Registration Statement may be restricted. Forward
contracts may reduce the potential gain from a positive change in the
relationship between the U.S. dollar and foreign currencies. Unanticipated
changes in currency prices may result in poorer overall performance for the
Portfolio than if it had not entered into such contracts. The use of
foreign currency forward contracts may not eliminate fluctuations in the
underlying U.S. dollar equivalent value of the prices of or rates of return
on the Portfolio's foreign currency denominated portfolio securities and
the use of such techniques will subject the Portfolio to certain risks.
The matching of the increase in value of a forward contract and the decline
in the U.S. dollar equivalent value of the foreign currency denominated
asset that is the subject of the hedge generally will not be precise. In
addition, the Portfolio may not always be able to enter into foreign
currency forward contracts at attractive prices and this will limit the
Portfolio's ability to use such contract to hedge or cross-hedge its
assets. Also, with regard to the Portfolio's use of cross-hedges, there can
be no assurance that historical correlations between the movement of
certain foreign currencies relative to the U.S. dollar will continue. Thus,
at any time poor correlation may exist between movements in the exchange
rates of the foreign currencies underlying the Portfolio's cross-hedges and
the movements in the exchange rates of the foreign currencies in which the
Portfolio's assets that are the subject of such cross-hedges are
denominated.
RATING SERVICES
The ratings of rating services represent their opinions as to the quality
of the securities that they undertake to rate. It should be emphasized,
however, that ratings are relative and subjective and are not absolute
standards of quality. Although these ratings are an initial criterion for
selection of portfolio investments, Bankers Trust also makes its own
evaluation of these securities, subject to review by the Board of Trustees.
After purchase by 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 Part A is
set forth in the Appendix.
INVESTMENT RESTRICTIONS
The Portfolio has adopted its investment objective and the following
investment restrictions as "fundamental policies," which may not be changed
without approval by holders of a "majority of the outstanding shares" of
the Portfolio, which as used in this Registration Statement means the vote
of the lesser of (i) 67% or more of the outstanding "voting securities" of
the Portfolio present at a meeting, if the holders of more than 50% of the
outstanding "voting securities" of the Portfolio are present or represented
by proxy, or (ii) more than 50% of the outstanding "voting securities" of
the Portfolio. The term "voting securities" as used in this paragraph has
the same meaning as in the Investment Company Act of 1940, as amended, (the
"1940 Act").
As a matter of fundamental policy, the Portfolio may not:
(1) borrow money or mortgage or hypothecate assets of the Portfolio,
except that in an amount not to exceed 1/3 of the current value of the
Portfolio'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 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 "State and Federal
Restrictions" below. (As an operating policy, the Portfolio may not
engage in dollar roll transactions);
(2) underwrite securities issued by other persons except insofar as
the Portfolio 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 portfolio securities and provided that any such loans
not exceed 30% of the Portfolio's total assets (taken at market
value); (b) through the use of repurchase agreements or the purchase
of short-term obligations; or (c) by purchasing a portion of an issue
of debt securities of types distributed publicly or privately;
(4) purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or interests
therein), interests in oil, gas or mineral leases, commodities or
commodity contracts (except futures and option contracts) in the
ordinary course of business (except that the Portfolio may hold and
sell, for the Portfolio's portfolio, real estate acquired as a result
of the Portfolio's ownership of securities);
(5) except that the Portfolio will concentrate its investments in
the utility industry, concentrate its investments in any particular
industry (excluding U.S. government securities), but if it is deemed
appropriate for the achievement of the Portfolio's investment
objective, up to 25% of its total assets may be invested in any one
industry;
(6) issue any senior security (as that term is defined in the 1940
Act) if such issuance is specifically prohibited by the 1940 Act or
the rules and regulations promulgated thereunder, provided that
collateral arrangements with respect to options and futures, 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 will not as a matter of operating policy:
(i) borrow money (including through dollar roll transactions) for any
purpose in excess of 10% of the Portfolio's total assets (taken at
cost), except that the Portfolio may borrow for temporary or emergency
purposes up to 1/3 of its assets;
(ii) pledge, mortgage or hypothecate for any purpose in excess of 10%
of the Portfolio'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 if such purchase at the time thereof would
cause (a) more than 10% of the Portfolio'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 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; provided
further that, except in the case of a merger or consolidation, the
Portfolio shall not purchase any securities of any open-end investment
company unless the Portfolio (1) waives the investment advisory fee
with respect to assets invested in other open-ended companies and (2)
incurs no sales charge in connection with the investment (as an
operating policy the Portfolio will not invest in another open-end
registered investment company);
(vii) invest more than 15% of the Portfolio's net assets (taken at
the greater of cost or market value) in securities that are illiquid
or not readily marketable 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 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 Board of Trustees);
(ix) no more than 5% of the Portfolio'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 total assets, purchase
securities of any issuer if such purchase at the time thereof would
cause the Portfolio to hold more than 10% of any class of securities
of such issuer, for which purposes all indebtedness of an issuer shall
be deemed a single class and all preferred stock of an issuer shall be
deemed a single class, except that futures or option contracts shall
not be subject to this restriction;
(xi) if the Portfolio 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 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, or is an officer or partner of the Adviser, if after the
purchase of the securities of such issuer for the Portfolio 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 net assets in
warrants (valued at the lower of cost or market) (other than warrants
acquired by the Portfolio as part of a unit or attached to securities
at the time of purchase) but not more than 2% of the Portfolio's net
assets may be invested in warrants not listed on the New York Stock
Exchange, Inc. ("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 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 Portfolio has 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 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
50% of the Portfolio's net assets; (c) the securities subject to the
exercise of the call written by the Portfolio must be owned by the
Portfolio at the time the call is sold and must continue to be owned
by the Portfolio until the call has been exercised, has lapsed, or the
Portfolio has purchased a closing call, and such purchase has been
confirmed, thereby extinguishing the Portfolio's obligation to deliver
securities pursuant to the call it has sold; and (d) at the time a put
is written, the Portfolio establishes a segregated account with its
custodian consisting of cash or short-term U.S. government securities
equal in value to the amount the Portfolio 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 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 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 total assets.
The Portfolio will comply with the securities laws and regulations of all
states in which any investor in the Portfolio is registered. The Portfolio
will comply with the permitted investments and investment limitations in
the securities laws and regulations of all states in which any registered
investment company investing in the Portfolio is registered.
ITEM 14. MANAGEMENT OF THE FUND.
The Board of Trustees is composed of persons experienced in financial
matters who meet throughout the year to oversee the activities of the
Portfolio. In addition, the Trustees review contractual arrangements with
companies that provide services to the Portfolio.
The Trustees and officers of the Portfolio, 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
below, the address of each Trustee and officer is Clearing Operations, P.O.
Box 897, Pittsburgh, Pennsylvania 15230-0897.
TRUSTEES
PHILIP W. COOLIDGE* (birthdate: September 2, 1951) -- Trustee; Chairman,
Chief Executive Officer and President, Signature Financial Group, Inc.
("SFG") (since December, 1988) and Signature Broker-Dealer Services, Inc.
(`Signature'') (since April, 1989). His address is 6 St. James Avenue,
Boston, Massachusetts 02116.
CHARLES P. BIGGAR (birthdate: October 13, 1930) -- Trustee; Retired;
Director of Chase/NBW Bank Advisory Board; Director Batemen, Eichler, Hill
Richards Inc.; Formerly Vice President of International Business Machines
and President of the National Services and the Field Engineering Divisions
of IBM. His address is 12 Hitching Post Lane, Chappaqua, New York 10514.
S. LELAND DILL (birthdate: March 28, 1930) -- Trustee; Retired; Director,
Coutts Group and Coutts. (U.S.A.) International; Coutts Trust Holdings Ltd;
Director, Zweig Series Trust; formerly Partner of KPMG Peat Marwick;
Director, Vinters International Company Inc.; General Partner of Pemco (an
investment company registered under the 1940 Act). His address is 5070
North Ocean Drive, Singer Island, Florida 33404.
PHILIP 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
Portfolio.
OFFICERS
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, Edgewood or an
affiliate serves as the principal underwriter.
No person who is an officer or director of Bankers Trust is an officer or
Trustee of the Portfolio. No director, officer or employee of Edgewood or
any of its affiliates will receive any compensation from the Trust or any
Portfolio for serving as an officer or Trustee of the Portfolio.
The Trustees of the Portfolio received the following remuneration from the
Portfolio for the fiscal year ended December 31, 1996:
TRUSTEE COMPENSATION TABLE
Name, Aggregate Total
Position With Compensation Compensation From
Trust/Portfolio From Portfolio Fund Complex*
Philip W. Coolidge $23 $1,250
Trustee of Trust
and Portfolio
Charles P. Biggar $765 $28,750
Trustee of Portfolio
S. Leland Dill $705 $28,750
Trustee of Portfolio
Philip Saunders, Jr. $705 $28,750
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.
The Portfolio's Declaration of Trust provides that it will indemnify its
Trustees and officers against liabilities and expenses incurred in
connection with litigation in which they may be involved because of their
offices with the Portfolio, unless, as to liability to the Portfolio or its
investors, it is finally adjudicated that they engaged in willful
misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in their offices, or unless with respect to any other
matter it is finally adjudicated that they did not act in good faith in the
reasonable belief that their actions were in the best interests of the
Portfolio. In the case of settlement, such indemnification will not be
provided unless it has been determined by a court or other body approving
the settlement or other disposition, or by a reasonable determination,
based upon a review of readily available facts, by vote of a majority of
disinterested Trustees or in a written opinion of independent counsel, that
such officers or Trustees have not engaged in willful misfeasance, bad
faith, gross negligence or reckless disregard of their duties.
ITEM 15. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.
As of March 1, 1997, Utility Fund (the "Fund") (a series of shares of BT
Investment Funds) owned approximately 100% of the value of the outstanding
interests in the Portfolio. Because the Fund controls the Portfolio, it may
take actions without the approval of any other investor in the
Portfolio.
The Fund has informed the Portfolio that whenever it is requested to vote
on matters pertaining to the fundamental policies of the Portfolio, the
Fund will hold a meeting of shareholders and will cast its votes as
instructed by the Fund's shareholders. It is anticipated that other
registered investment companies investing in the Portfolio will follow the
same or a similar practice.
ITEM 16. INVESTMENT ADVISORY AND OTHER SERVICES.
Bankers Trust manages the assets of the Portfolio pursuant to an investment
advisory agreement (the "Advisory Agreement"). Subject to such policies as
the Board of Trustees may determine, the Adviser makes investment decisions
for the Portfolio. Bankers Trust will: (i) act in strict conformity with
the Portfolio's Declaration of Trust, the 1940 Act and the Investment
Advisers Act of 1940, as the same may from time to time be amended; (ii)
manage the Portfolio in accordance with the Portfolio's investment
objectives, restrictions and policies; (iii) make investment decisions for
the Portfolio; and (iv) place purchase and sale orders for securities and
other financial instruments on behalf of the Portfolio.
The Adviser furnishes at its own expense all services, facilities and
personnel necessary in connection with managing the Portfolio's investments
and effecting securities transactions for the Portfolio. The Advisory
Agreement will continue in effect if such continuance is specifically
approved at least annually by the Board of Trustees or by a majority vote
of the investors in the Portfolio (with the vote of each being in
proportion to the amount of its investment) and, in either case, by a
majority of the Portfolio's Trustees who are not parties to the Advisory
Agreement or interested persons of any such party, at a meeting called for
the purpose of voting on the Advisory Agreement.
The Advisory Agreement is terminable without penalty on 60 days' written
notice by the Portfolio when authorized either by majority vote of the
investors in the Portfolio (with the vote of each being in proportion to
the amount of its investment) or by a vote of a majority of its Board of
Trustees, or by the Adviser, and will automatically terminate in the event
of its assignment. The Advisory Agreement provides that neither the Adviser
nor its personnel shall be liable for any error of judgment or mistake of
law or for any loss arising out of any investment or for any act or
omission in the execution of security transactions for the Portfolio,
except for willful misfeasance, bad faith or gross negligence or of
reckless disregard of its or their obligations and duties under the
Advisory Agreement.
For the fiscal years ended December 31, 1996, 1995, and 1994, Bankers Trust
earned $54,954, $95,386, and $198,040, respectively, in compensation for
investment advisory services provided to the Portfolio. During the same
periods, Bankers Trust reimbursed $37,865, $45,535, and $82,273,
respectively, to the Portfolio to cover expenses.
Pursuant to an administration and services agreement (the "Administration
Agreement"), Bankers Trust provides administration services to the
Portfolio. Under the Administration Agreement, Bankers Trust is obligated
on a continuous basis to provide such administrative services as the Board
of Trustees reasonably deems necessary for the proper administration of the
Portfolio. Bankers Trust will generally assist in all aspects of the
Portfolio's operations; supply and maintain the Portfolio with office
facilities, 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 of the Portfolio), internal auditing, executive and
administrative services, and stationery and office supplies; prepare
reports to investors; prepare and file tax returns; supply financial
information and supporting data for reports to and filings with the SEC;
supply supporting documentation for meetings of the Board of Trustees;
provide monitoring reports and assistance regarding compliance with the
Portfolio's Declaration of Trust, By-Laws, investment objective and
policies and with Federal and state securities laws; arrange for
appropriate insurance coverage; calculate the net asset value, net income
and realized capital gains or losses of the Portfolio; and negotiate
arrangements with, and supervise and coordinate the activities of, agents
and others retained by the Portfolio to supply services to the Portfolio
and/or its investors.
Pursuant to a sub-administration agreement (the "Sub-Administration
Agreement"), FSC performs such sub-administration duties for 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.
Bankers Trust also provides fund accounting, transfer agency and custodian
services to the Portfolio pursuant to the Administration Agreement.
For the fiscal years ended December 31, 1996, 1995, and 1994, Bankers
Trust earned $8,454, $14,675, and $30,468, respectively, in compensation
for administrative and other services provided to the Portfolio. Bankers
Trust reimbursed the Portfolio for a portion of its administrative and
services fees for the period above. See "Investment Advisory and Other
Services" above.
Coopers & Lybrand L.L.P. are the Independent Accountants for the Portfolio,
providing audit services, tax return preparation, and assistance and
consultation with respect to the preparation of filings with the SEC. The
principal business address of Coopers & Lybrand L.L.P. is 1301 Avenue of
the Americas, New York, New York 10019.
ITEM 17. BROKERAGE ALLOCATION AND OTHER PRACTICES.
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 Portfolio's Trustees may determine, the
Adviser may consider sales of shares of the Portfolio's investors 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 Portfolio, and not all such information is used by the
Adviser in connection with the Portfolio. Conversely, such information
provided to the Adviser by brokers and dealers through whom other clients
of the Adviser effect securities transactions may be useful to the Adviser
in providing services to the Portfolio.
In certain instances there may be securities which are suitable for the
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 fiscal years ended December 31, 1996, 1995, and 1994, the
Portfolio incurred brokerage commissions in the amounts of $8,142, $57,505,
and $49,959, respectively.
ITEM 18. CAPITAL STOCK AND OTHER SECURITIES.
Under the Declaration of Trust, the Trustees are authorized to issue
beneficial interests in the Portfolio. Investors are entitled to
participate pro rata in distributions of taxable income, loss, gain and
credit of the Portfolio. Upon liquidation or dissolution of the Portfolio,
investors are entitled to share pro rata in the Portfolio's net assets
available for distribution to its investors. Investments in the Portfolio
have no preference, preemptive, conversion or similar rights and are fully
paid and nonassessable, except as set forth below. Investments in the
Portfolio may not be transferred. Certificates representing an investor's
beneficial interest in the Portfolio are issued only upon the written
request of an investor.
Each investor is entitled to a vote in proportion to the amount of its
investment in the Portfolio. Investors in the Portfolio do not have
cumulative voting rights, and investors holding more than 50% of the
aggregate beneficial interest in the Portfolio may elect all of the
Trustees if they choose to do so and in such event the other investors in
the Portfolio would not be able to elect any Trustee. The Portfolio is not
required and has no current intention to hold annual meetings of investors
but the Portfolio will hold special meetings of investors when in the
judgment of the Portfolio's Trustees it is necessary or desirable to submit
matters for an investor vote. No material amendment may be made to the
Portfolio's Declaration of Trust without the affirmative majority vote of
investors (with the vote of each being in proportion to the amount of its
investment).
The Portfolio may enter into a merger or consolidation, or sell all or
substantially all of its assets, if approved by the vote of two thirds of
its investors (with the vote of each being in proportion to its percentage
of the beneficial interests in the Portfolio), except that if the Trustees
recommend such sale of assets, the approval by vote of a majority of the
investors (with the vote of each being in proportion to its percentage of
the beneficial interests of the Portfolio) will be sufficient. The
Portfolio may also be terminated (i) upon liquidation and distribution of
its assets if approved by the vote of two thirds of its investors (with the
vote of each being in proportion to the amount of its investment) or (ii)
by the Trustees by written notice to its investors.
The Portfolio is organized as a trust under the laws of the State of New
York. Investors in the Portfolio will be held personally liable for its
obligations and liabilities, subject, however, to indemnification by the
Portfolio in the event that there is imposed upon an investor a greater
portion of the liabilities and obligations of the Portfolio than its
proportionate beneficial interest in the Portfolio. The Declaration of
Trust also provides that the Portfolio shall maintain appropriate insurance
(for example, fidelity bonding and errors and omissions insurance) for the
protection of the Portfolio, its investors, Trustees, officers, employees
and agents covering possible tort and other liabilities. Thus, the risk of
an investor incurring financial loss on account of investor liability is
limited to circumstances in which both inadequate insurance existed and the
Portfolio itself was unable to meet its obligations.
The Declaration of Trust further provides that obligations of the
Portfolio are not binding upon the Trustees individually but only upon the
property of the Portfolio and that the Trustees will not be liable for any
action or failure to act, but nothing in the Declaration of Trust protects
a Trustee against any liability to which he would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office.
ITEM 19. PURCHASE, REDEMPTION AND PRICING OF SECURITIES.
Beneficial interests in the Portfolio are issued solely in private
placement transactions that do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act. See "Purchase of Securities Being
Offered" and "Redemption or Repurchase" in Part A.
The Portfolio determines its net asset value on each day on which the
NYSE is open ("Portfolio Business Day"). This determination is made each
Portfolio Business Day as of the close of regular trading on the NYSE
(currently 4:00 p.m., Eastern time) (the "Valuation Time") by dividing the
value of the Portfolio's net assets (i.e., the value of its securities and
other assets less its liabilities, including expenses payable or accrued)
by the value of the investment of the investors in the Portfolio at the
time the determination is made. (As of the date of this Registration
Statement, the NYSE and New York chartered banks are both open for trading
every weekday except: (a) the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas; and (b) the preceding Friday of the
subsequent Monday when one of the calendar-determined holidays falls on a
Saturday or Sunday, respectively. Purchases and withdrawals will be
effected at the time of determination of net asset value next following the
receipt of any purchase or withdrawal order.
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.
ITEM 20. TAX STATUS.
The Portfolio is organized as a trust under New York law. Under the
anticipated method of operation of the Portfolio, the Portfolio will not be
subject to any income tax. However each investor in the Portfolio will be
taxable on its share (as determined in accordance with the governing
instruments of the Portfolio) of the Portfolio's ordinary income and
capital gain in determining its income tax liability. The determination of
such share will be made in accordance with the Internal Revenue Code of
1986, as amended (the "Code"), and regulations promulgated thereunder.
The Portfolio's taxable year-end is December 31. Although, as described
above, the Portfolio will not be subject to Federal income tax, it will
file appropriate income tax returns.
It is intended that the Portfolio's assets, income and distributions will
be managed in such a way that an investor in the Portfolio will be able to
satisfy the requirements of Subchapter M of the Code, assuming that the
investor invested all of its assets in the Portfolio.
There are certain tax issues that will be relevant to only certain of the
investors, specifically investors that are segregated asset accounts and
investors who contribute assets rather than cash to the Portfolio. It is
intended that such segregated asset accounts will be able to satisfy
diversification requirements applicable to them and that such contributions
of assets will not be taxable provided certain requirements are met. Such
investors are advised to consult their own tax advisors as to the tax
consequences of an investment in the Portfolio.
FOREIGN SECURITIES. Tax conventions between certain countries and the
United States may reduce or eliminate such taxes. It is impossible to
determine the effective rate of foreign tax in advance since the amount of
the Portfolio's assets to be invested in various countries will vary.
If the Portfolio is liable for foreign taxes, and if more than 50% of the
value of the Portfolio's total assets at the close of its taxable year
consists of stocks or securities of foreign corporations, it may make an
election pursuant to which certain foreign taxes paid by it would be
treated as having been paid directly by its investors. Pursuant to such
election, the amount of foreign taxes paid will be included in the income
of the Portfolio's investors, and such investors (except tax-exempt
investors) may, subject to certain limitations, claim either a credit or
deduction for the taxes. Each such investor will be notified after the
close of the Portfolio's taxable year whether the foreign taxes paid will
"pass through" for that year and, if so, such notification will designate
(a) the investor's portion of the foreign taxes paid to each such country
and (b) the portion which represents income derived from sources within
each such country.
The amount of foreign taxes for which an investor may claim a credit in any
year will generally be subject to a separate limitation for "passive
income," which includes, among other items of income, dividends, interest
and certain foreign currency gains. Because capital gains realized by the
Portfolio on the sale of foreign securities will be treated as U.S.-source
income, the available credit of foreign taxes paid with respect to such
gains may be restricted by this limitation.
ITEM 21. UNDERWRITERS.
The placement agent for the Portfolio is Edgewood, which receives no
additional compensation for serving in this capacity. Investment companies,
insurance company separate accounts, common and commingled trust funds and
similar organizations and entities may continuously invest in the
Portfolio.
ITEM 22. CALCULATION OF PERFORMANCE DATA.
Not applicable.
ITEM 23. FINANCIAL STATEMENTS.
The following financial statements, contained in the Annual Report of BT
Investment Funds dated December 31, 1996, (File No. 811-04760) for the
fiscal year ended December 31, 1996, are incorporated by reference into
this Part B:
Statement of Assets and Liabilities, December 31, 1996
Statement of Operations for the fiscal year ended December 31, 1996
Statement of Changes in Net Assets for the fiscal years ended December 31,
1996 and 1995
Financial Highlights: Selected ratios and supplemental data for the
periods indicated
Schedule of Portfolio Investments, December 31, 1996
Notes to Financial Statements
Report of Independent Accountants
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'S 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.
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.
PART C. OTHER INFORMATION.
Item 24. Financial Statements and Exhibits:
(a)Financial Statements:
Incorporated by reference to the Annual Report of BT
Investment Funds dated December 31, 1996, pursuant to Rule
411 under the Securities Act of 1933. (File Nos. 33-07404
and 811-04760)
(b)Exhibits:
(1) Conformed copy of Declaration of Trust of the
Registrant; (2)
(2) Copy of By-Laws of the Registrant; (2)
(3) Not applicable;
(4) Not applicable;
(5) Conformed copy of Investment Advisory Agreement between
the Registrant and Bankers Trust Company (``Bankers
Trust''); (2)
(6) Not applicable;
(7) Not applicable;
(8) Not applicable;
(9) (i) Conformed copy of Administration and Services
Agreement between the Registrant and Bankers Trust;
(2)
(ii) Conformed copy of Exclusive Placement Agent
Agreement and Amended Exhibit thereto; +
(10) Not applicable;
(11) Not applicable;
(12) Not applicable;
(13) Investment representation letters of initial investors;
(1)
(14) Not applicable;
(15) Not applicable;
(16) Not applicable;
(17) Copy of Financial Data Schedule; +
(18) Not applicable;
(19) Conformed copy of Power of Attorney. +
+ All exhibits been filed electronically.
1.Previously filed on June 15, 1992.
2.Response is incorporated by reference to Registrant's Amendment No. 4 on
Form N-1A filed April 24, 1996.
Item 25. Persons Controlled by or under Common Control with Registrant:
None
Item 26. Number of Holders of Securities:
Number of Record Holders
Title of Class as of December 31, 1996
Beneficial Interests 1
Item 27. Indemnification: (3)
Item 28. Business and Other Connections of Investment Adviser:
Bankers Trust serves as investment adviser to the Portfolio. Bankers Trust,
a New York banking corporation, is a wholly owned subsidiary of Bankers
Trust New York Corporation. Bankers Trust conducts a variety of commercial
banking and trust activities and is a major wholesale supplier of financial
services to the international institutional market.
To the knowledge of the Trust, none of the directors or officers of Bankers
Trust, except those set forth below, is engaged in any other business,
profession, vocation or employment of a substantial nature, except that
certain directors and officers also hold various positions with and engage
in business for Bankers Trust New York Corporation. Set forth below are the
names and principal businesses of the directors and officers of Bankers
Trust who are engaged in any other business, profession, vocation or
employment of a substantial nature.
George B. Beitzel, International Business Machines Corporation, Old Orchard
Road, Armonk, NY 10504. Retired Senior Vice President and Director,
Member of Advisory Board of International Business Machines Corporation.
Director of Bankers Trust and Bankers Trust New York Corporation. Director
of FlightSafety International, Inc. Director of Phillips Petroleum
Company. Director of Roadway Services, Inc. Director of Rohm and Haas
Company.
William R. Howell, J.C. Penney Company, Inc., P.O. Box 10001, Plano, TX
75301-0001. Chairman of the Board and Chief Executive Officer, J.C. Penney
Company, Inc. Director of Bankers Trust and Bankers Trust New York
Corporation. Also a Director of Exxon Corporation, Halliburton Company and
Warner-Lambert Corporation.
Jon M. Huntsman, Huntsman Chemical Corporation, 2000 Eagle Gate Tower, Salt
Lake City, UT 84111. Chairman and Chief Executive Officer, Huntsman
Chemical Corporation, Director of Bankers Trust and Bankers Trust New York
Corporation. Chairman of Constar Corporation, Huntsman Corporation,
Huntsman Holdings Corporation and Petrostar Corporation. President of
Autostar Corporation, Huntsman Polypropylene Corporation and Restar
Corporation. Director of Razzleberry Foods Corporation and Thiokol
Corporation. General Partner of Huntsman Group Ltd., McLeod Creek
Partnership and Trustar Ltd.
3.Response is incorporated by reference to Registrant's Amendment No. 4 on
Form N-1A filed April 24, 1996.
Vernon E. Jordan, Jr., Akin, Gump, Strauss, Hauer & Feld, LLP, 1333 New
Hampshire Ave., N.W., Washington, DC 20036. Partner, Akin, Gump, Strauss,
Hauer & Feld, LLP. Director of Bankers Trust and Bankers Trust New York
Corporation. Also a Director of American Express Company, Corning
Incorporated, Dow Jones, Inc., J.C. Penney Company, Inc., RJR Nabisco Inc.,
Revlon Group Incorporated, Ryder System, Inc., Sara Lee Corporation, Union
Carbide Corporation and Xerox Corporation.
Hamish Maxwell, Philip Morris Companies Inc., 120 Park Avenue, New York, NY
10017. Chairman of the Executive Committee, Philip Morris Companies Inc.
Director of Bankers Trust and Bankers Trust New York Corporation. Director
of The News Corporation Limited.
Donald F. McCullough, Collins & Aikman Corporation, 210 Madison Avenue, New
York, NY 10016. Chairman Emeritus, Collins & Aikman Corporation.
Director of Bankers Trust and Bankers Trust New York Corporation. Director
of Massachusetts Mutual Life Insurance Co. and Melville Corporation.
N.J. Nicholas Jr., 745 Fifth Avenue, New York, NY 10020. Former
President, Co-Chief Executive Officer and Director of Time Warner Inc.
Director of Bankers Trust and Bankers Trust New York Corporation. Also a
Director of Xerox Corporation.
Russell E. Palmer, The Palmer Group, 3600 Market Street, Suite 530,
Philadelphia, PA 19104. Chairman and Chief Executive Officer of The Palmer
Group. Director of Bankers Trust and Bankers Trust New York Corporation.
Also Director of Allied-Signal Inc., Contel Cellular, Inc., Federal Home
Loan Mortgage Corporation, GTE Corporation, Goodyear Tire & Rubber Company,
Imasco Limited, May Department Stores Company and Safeguard Scientifics,
Inc. Member, Radnor Venture Partners Advisory Board.
Didier Pineau-Valencienne, Schneider S.A., 4 Rue de Longchamp, 75116 Paris,
France. Chairman and Chief Executive Officer, Schneider S.A. Director and
member of the European Advisory Board of Bankers Trust and Director of
Bankers Trust New York Corporation. Director of AXA (France) and Equitable
Life Assurance Society of America, Arbed (Luxembourg), Banque Paribas
(France), Ciments Francais (France), Cofibel (Belgique), Compagnie
Industrielle de Paris (France), SIAPAP, Schneider USA, Sema Group PLC
(Great Britain), Spie- Batignolles, Tractebel (Belgique) and Whirlpool.
Chairman and Chief Executive Officer of Societe Parisienne d'Entreprises et
de Participations.
Charles S. Sanford, Jr., Bankers Trust Company, 280 Park Avenue, New York,
NY 10017. Chairman of the Board of Bankers Trust and Bankers Trust New
York Corporation. Also a Director of Mobil Corporation and J.C. Penney
Company, Inc.
Eugene B. Shanks, Jr., Bankers Trust Company, 280 Park Avenue, New York, NY
10017. President of Bankers Trust and Bankers Trust New York Corporation.
Patricia Carry Stewart, c/o Office of the Secretary, 280 Park Avenue, New
York, NY 10017. Former Vice President, The Edna McConnell Clark
Foundation. Director of Bankers Trust and Bankers Trust New York
Corporation. Director, Borden Inc., Continental Corp. and Melville
Corporation.
George J. Vojta, Bankers Trust Company, 280 Park Avenue, New York, NY
10017. Vice Chairman of the Board of Bankers Trust and Bankers Trust New
York Corporation. Director of Northwest Airlines and Private Export
Funding Corp.
Item 29. Principal Underwriters:
Not applicable.
ITEM 30. Location of Accounts and Records:
All accounts and records required to be maintained by Section
31(a) of the Investment Company Act of 1940 and Rules 31a-1
through 31a-3 promulgated thereunder are maintained at one of the
following locations:
Registrant: Federated Investor Tower, Pittsburgh, PA
15222-3779.
Bankers Trust Company: 280 Park Avenue, New York, NY
10017.
Investors Fiduciary Trust Company: 127 West 10th Street, Kansas City, MO
64105.
Edgewood Services, Inc.: Clearing Operations, P.O. Box 897,
Pittsburgh, PA 15230-0897.
Item 31. Management Services:
Not applicable.
Item 32. Undertakings:
Not applicable.
SIGNATURES
Pursuant to the requirements of the Investment Company Act of 1940, the
Registrant, UTILITY PORTFOLIO, has duly caused this Amendment to its
Registration Statement on Form N-1A to be signed on its behalf by the
undersigned, thereto duly authorized, in the City of Pittsburgh and
Commonwealth of Pennsylvania on the 19th day of March, 1997.
UTILITY PORTFOLIO
By: /s/ Jay S. Neuman
Jay S. Neuman, Secretary
March 19, 1997
September 30, 1996
Edgewood Services, Inc.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Ladies and Gentlemen:
Re: EXCLUSIVE PLACEMENT AGENT AGREEMENT
This is to confirm that, in consideration of the agreements
hereinafter contained, the undersigned open-end management investment
companies (collectively, the `Trusts'') registered under the Investment
Company Act of 1940, as amended (the `1940 Act''), each organized as a
business trust under the laws of the State of New York, has agreed that
Edgewood Services, Inc., a New York corporation (`ESI''), shall be the
exclusive placement agent (the `Exclusive Placement Agent'') of beneficial
interests (`Trust Interests'') of each series of the Trusts.
1. Services as Exclusive Placement Agent.
1.1 ESI will act as Exclusive Placement Agent of the Trust
Interests. In acting as Exclusive Placement Agent under this Exclusive
Placement Agent Agreement, neither ESI nor its employees or any agents
thereof shall make any offer or sale of Trust Interests in a manner which
would require the Trust Interests to be registered under the Securities Act
of 1933, as amended (the `1933 Act'').
1.2 All activities by ESI and its agents and employees as
Exclusive Placement Agent of Trust Interests shall comply with all
applicable laws, rules and regulations, including, without limitation, all
rules and regulations adopted pursuant to the 1940 Act by the Securities
and Exchange Commission (the `Commission'').
1.3 Nothing herein shall be construed to require a Trust to
accept any offer to purchase any Trust Interests, all of which shall be
subject to approval by the Trust's Board of Trustees.
1.4 The Trusts shall furnish from time to time for use in
connection with the sale of Trust Interests such information with respect
to the Trust and Trust Interests as ESI may reasonably request. The Trusts
shall also furnish ESI upon request with: (a) unaudited semiannual
statements of the Trust's books and accounts prepared by the Trust, and (b)
from time to time such additional information regarding the Trust's
financial or regulatory condition as ESI may reasonably request.
1.5 Each Trust represents to ESI that all registration
statements filed by the Trust with the Commission under the 1940 Act with
respect to Trust Interests have been prepared in conformity with the
requirements of such statute and the rules and regulations of the
Commission thereunder. As used in this Agreement the term `registration
statement''shall mean any registration statement filed with the
Commission, as modified by any amendments thereto that at any time shall
have been filed with the Commission by or on behalf of a Trust. Each Trust
represents and warrants to ESI that any registration statement will contain
all statements required to be stated therein in conformity with both such
statute and the rules and regulations of the Commission; that all
2
statements of fact contained in any registration statement will be true and
correct in all material respects at the time of filing of such registration
statement or amendment thereto; and that no registration statement will
include an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading to a purchaser of Trust Interests. The Trusts may
but shall not be obligated to propose from time to time such amendment to
any registration statement as in the light of future developments may, in
the opinion of the Trust's counsel, be necessary or advisable. If a Trust
shall not propose such amendment and/or supplement within fifteen days
after receipt by the Trust of a written request from ESI to do so, ESI may,
at its option, terminate this Agreement. The Trusts shall not file any
amendment to any registration statement without giving ESI reasonable
notice thereof in advance; provided, however, that nothing contained in
this Agreement shall in any way limit a Trust's right to file at any time
such amendment to any registration statement as the Trust may deem
advisable, such right being in all respects absolute and unconditional.
1.6 Each Trust severally agrees to indemnify, defend and hold ESI,
its several officers and directors, and any person who controls ESI within
the meaning of Section 15 of the 1933 Act or Section 20 of the Securities
Exchange Act of 1934 (the ``934 Act'') (for purposes of this paragraph
1.6, collectively, the `Covered Persons'') free and harmless from and
against any and all claims, demands, liabilities and expenses (including
the cost of investigating or defending such claims, demands or liabilities
and any counsel fees incurred in connection therewith) which any Covered
Person may incur under the 1933 Act, the 1934 Act, common law, or
otherwise, but only to the extent that such liability or expense incurred
by a Covered Person resulting from such claims or demands shall arise out
3
of or be based on (i) any untrue statement of a material fact contained in
any registration statement, private placement memorandum or other offering
material (``ffering Material'') or (ii) any omission to state a material
fact required to be stated in any Offering Material or necessary to make
the statements in any Offering Material not misleading; provided, however,
that each Trust's agreement to indemnify Covered Persons shall not be
deemed to cover any claims, demands, liabilities or expenses arising out of
any financial and other statements as are furnished in writing to the Trust
by ESI in its capacity as Exclusive Placement Agent for use in the answers
to any items of any registration statement or in any statements made in any
Offering Material, or arising out of or based on any omission or alleged
omission to state a material fact in connection with the giving of such
information required to be stated in such answers or necessary to make the
answers not misleading; and further provided that each Trust's agreement to
indemnify ESI and each Trust's representation and warranties hereinbefore
set forth in paragraph 1.5 shall not be deemed to cover any liability to
the Trust or its investors to which a Covered Person would otherwise be
subject by reason of willful misfeasance, bad faith or gross negligence in
the performance of its duties, or by reason of a Covered Person's reckless
disregard of its obligations and duties under this Agreement. A Trust
shall be notified of any action brought against a Covered Person, such
notification to be given by letter or by telegram addressed to the Trust,
Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA 15222-3779,
Attention: Secretary, with a copy to Burton M. Leibert, Esq., Willkie Farr
& Gallagher, One Citicorp Center, 153 East 53rd Street, New York, NY 10022,
promptly after the summons or other first legal process shall have been
duly and completely served upon such Covered Person. The failure to so
notify a Trust of any such action shall not relieve the Trust (i) from any
liability except to the extent the Trust shall have been prejudiced by such
4
failure, or (ii) from any liability that the Trust may have to the Covered
Person against whom such action is brought by reason of any such untrue or
alleged untrue statement, or omission or alleged omission, otherwise than
on account of the Trust's indemnity agreement contained in this paragraph.
Each Trust will be entitled to assume the defense of any suit brought to
enforce any such claim, demand or liability, but in such case such defense
shall be conducted by counsel of good standing chosen by the Trust and
approved by ESI, which approval shall not be unreasonably withheld. In the
event a Trust elects to assume the defense in any such suit and retain
counsel of good standing approved by ESI, the defendant or defendants in
such suit shall bear the fees and expenses of any additional counsel
retained by any of them; but in case a Trust does not elect to assume the
defense of any such suit, or in case ESI reasonably does not approve of
counsel chosen by the Trust, the Trust will reimburse the Covered Person
named as defendant in such suit, for the fees and expenses of any counsel
retained by ESI or the Covered Persons. Each Trust's indemnification
agreement contained in this paragraph and each Trust's representations and
warranties in this Agreement shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of Covered
Persons, and shall survive the delivery of any Trust Interests. This
agreement of indemnity will inure exclusively to Covered Persons and their
successors. Each Trust agrees to notify ESI promptly of the commencement
of any litigation or proceedings against the Trust or any of its officers
or Trustees in connection with the issue and sale of any Trust Interests.
1.7 ESI agrees to indemnify, defend and hold each Trust, its
several officers and trustees, and any person who controls a Trust within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act
(for purposes of this paragraph 1.7, collectively, the `Covered Persons'')
5
free and harmless from and against any and all claims, demands, liabilities
and expenses (including the costs of investigating or defending such
claims, demands, liabilities and any counsel fees incurred in connection
therewith) that Covered Persons may incur under the 1933 Act, the 1934 Act,
common law, or otherwise, but only to the extent that such liability or
expense incurred by a Covered Person resulting from such claims or demands
shall arise out of or be based on (i) any untrue statement of a material
fact contained in information furnished in writing by ESI in its capacity
as Exclusive Placement Agent to the Trusts for use in the answers to any of
the items of any registration statement or in any statements in any other
Offering Material, or (ii) any omission to state a material fact in
connection with such information furnished in writing by ESI to a Trust
required to be stated in such answers or necessary to make such information
not misleading. ESI shall be notified of any action brought against a
Covered Person, such notification to be given by letter or telegram
addressed to ESI at Federated Investors Tower, 1001 Liberty Avenue,
Pittsburgh, PA 15222-3779, Attention: Secretary, promptly after the
summons or other first legal process shall have been duly and completely
served upon such Covered Person. The failure to so notify ESI of any such
action shall not relieve ESI (i) from any liability except to the extent a
Trust shall have been prejudiced by such failure, or (ii) from any
liability that ESI may have to the Covered Person against whom such action
is brought by reason of any such untrue or alleged untrue statement, or
omission or alleged omission, otherwise than on account of ESI's indemnity
agreement contained in this paragraph. ESI will be entitled to assume the
defense of any suit brought to enforce any such claim, demand or liability,
but in such case such defense shall be conducted by counsel of good
standing chosen by ESI and approved by the Trust, which approval shall not
be unreasonably withheld. In the event that ESI elects to assume the
6
defense in any such suit and retain counsel of good standing approved by a
Trust, the defendant or defendants in such suit shall bear the fees and
expenses of any additional counsel retained by any of them; but in case ESI
does not elect to assume the defense of any such suit, or in case a Trust
reasonably does not approve of counsel chosen by ESI, ESI will reimburse
the Covered Person named as defendant in such suit, for the fees and
expenses of any counsel retained by the Trust or the Covered Persons.
ESI's indemnification agreement contained in this paragraph and ESI's
representations and warranties in this Agreement shall remain operative and
in full force and effect regardless of any investigation made by or on
behalf of Covered Persons, and shall survive the delivery of any Trust
Interests. This agreement of indemnity will inure exclusively to Covered
Persons and their successors. ESI agrees to notify each Trust promptly of
the commencement of any litigation or proceedings against ESI or any of its
officers or directors in connection with the issue and sale of any Trust
Interests.
1.8 No Trust Interests shall be offered by either ESI or the
Trusts under any of the provisions of this Agreement and no orders for the
purchase or sale of Trust Interests hereunder shall be accepted by the
Trusts if and so long as the effectiveness of the registration statement or
any necessary amendments thereto shall be suspended under any of the
provisions of the 1940 Act; provided, however, that nothing contained in
this paragraph shall in any way restrict or have an application to or
bearing on a Trust's obligation to redeem Trust Interests from any investor
in accordance with the provisions of the Trust's registration statement or
Declaration of Trust, as amended from time to time. Each Trust shall
notify ESI promptly of the suspension of its registration statement or any
7
necessary amendments thereto, such notification to be given by letter or
telegram addressed to ESI at Federated Investors Tower, 1001 Liberty
Avenue, Pittsburgh, PA 15222-3779, Attention: Secretary.
1.9 Each Trust agree to advise ESI as soon as reasonably
practical by a notice in writing delivered to ESI or its counsel:
(a) of any request by the Commission for amendments to the
registration statement then in effect or for additional information;
(b) in the event of the issuance by the Commission of any stop
order suspending the effectiveness of the registration statement then in
effect or the initiation by service of process on a Trust of any proceeding
for that purpose;
(c) of the happening of any event that makes untrue any
statements of a material fact made in the registration statement then in
effect or that requires the making of a change in such registration
statement in order to make the statements therein not misleading; and
(d) of all action of the Commission with respect to any
amendment to any registration statement that may from time to time be filed
with the Commission.
For purposes of this paragraph 1.9, informal requests by or acts
of the Staff of the Commission shall not be deemed actions of or requests
by the Commission.
8
1.10 ESI agrees on behalf of itself and its employees to treat
confidentially and as proprietary information of the Trusts all records and
other information not otherwise publicly available relative to the Trusts
and their respective prior, present or potential investors and not to use
such records and information for any purpose other than performance of its
responsibilities and duties hereunder, except after prior notification to
and approval in writing by a Trust, which approval shall not be
unreasonably withheld and may not be withheld where ESI may be exposed to
civil or criminal contempt proceedings for failure to comply, when
requested to divulge such information by duly constituted authorities, or
when so requested by a Trust.
1.11 In addition to ESI's duties as Exclusive Placement Agent,
the Trusts understand that ESI may, in its discretion, perform additional
functions in connection with transactions in Trust Interests.
The processing of Trust Interest transactions may include, but is
not limited to, compilation of all transactions from ESI's various offices;
creation of a transaction tape and timely delivery of it to the Trusts'
transfer agent for processing; reconciliation of all transactions delivered
to the Trusts' transfer agent; and the recording and reporting of these
transactions executed by the Trusts' transfer agent in customer statements;
rendering of periodic customer statements; and the reporting of IRS Form
1099 information at year end if required.
ESI may also provide other investor services, such as
communicating with Trust investors and other functions in administering
customer accounts for Trust investors.
9
ESI understands that these services may result in cost savings to
the Trusts or to the Trusts' investment manager and neither the Trusts nor
the Trusts' investment manager will compensate ESI for all or a portion of
the costs incurred in performing functions in connection with transactions
in Trust Interests. Nothing herein is intended, nor shall be construed, as
requiring ESI to perform any of the foregoing functions.
1.12 Except as set forth in paragraph 1.6 of this Agreement, the
Trusts shall not be liable to ESI or any Covered Persons as defined in
paragraph 1.6 for any error of judgment or mistake of law or for any loss
suffered by ESI in connection with the matters to which this Agreement
relates, except a loss resulting from the willful misfeasance, bad faith or
gross negligence on the part of a Trust in the performance of its duties or
from reckless disregard by a Trust of its obligations and duties under this
Agreement.
1.13 Except as set forth in paragraph 1.7 of this Agreement, ESI
shall not be liable to any Trust or any Covered Persons as defined in
paragraph 1.7 for any error of judgment or mistake of law or for any loss
suffered by a Trust in connection with the matters to which this Agreement
relates, except a loss resulting from the willful misfeasance, bad faith or
gross negligence on the part of ESI in the performance of its duties or
from reckless disregard by ESI of its obligations and duties under this
Agreement.
2. Term.
This Agreement shall become effective on the date first written
above and, unless sooner terminated as provided herein, shall continue
10
until one year from the date first written above, and thereafter shall
continue automatically for successive annual periods, provided such
continuance is specifically approved at least annually with respect to each
Trust by (i) each Trust's Board of Trustees or (ii) by a vote of a majority
(as defined in the 1940 Act) of each Trust's outstanding voting securities,
provided that in either event the continuance is also approved by the
majority of the Trust's Trustees who are not interested persons (as defined
in the 1940 Act) of the Trust and who have no direct or indirect financial
interest in this Agreement, by vote cast in person at a meeting called for
the purpose of voting on such approval. This Agreement is terminable
without penalty, on not less than 60 days' notice, by a Board, by a vote of
a majority (as defined in the 1940 Act) of a Trust's outstanding voting
securities, or by ESI. This Agreement will also terminate automatically in
the event of its assignment (as defined in the 1940 Act and the rules
thereunder).
3. Representations and Warranties.
ESI and each Trust each hereby represents and warrants to the
other that it has all requisite authority to enter into, execute, deliver
and perform its obligations under this Agreement and that, with respect to
it, this Agreement is legal, valid and binding, and enforceable in
accordance with its terms.
4. Concerning Applicable Provisions of Law, etc.
This Agreement shall be subject to all applicable provisions of
law, including the applicable provisions of the 1940 Act and to the extent
11
that any provisions herein contained conflict with any such applicable
provisions of law, the latter shall control.
The laws of the State of New York shall, except to the extent
that any applicable provisions of Federal law shall be controlling, govern
the construction, validity and effect of this Agreement, without reference
to principles of conflicts of law.
The undersigned officer of each Trust has executed this Agreement
not individually, but as President under each Trust's Declaration of Trust,
as amended. Pursuant to the Declaration of Trust, the obligations of this
Agreement are not binding upon any of the Trustees or investors of the
Trust individually, but bind only the trust estate.
If the contract set forth herein is acceptable to you, please so
indicate by executing the enclosed copy of this Agreement and returning the
same to the undersigned, whereupon this Agreement shall constitute a
binding contract between the parties hereto effective at the closing of
business on the date hereof.
Very truly yours,
Charles L. Davis, Jr.
By:/s/ Charles L. Davis, Jr.
12
Vice President, on behalf of the Trusts listed
on Exhibit A, attached hereto:
Accepted:
EDGEWOOD SERVICES, INC..
By:/s/ R. Jeffrey Niss
EXHIBIT A
TO
EXCLUSIVE PLACEMENT AGENT AGREEMENT
Pursuant to the Exclusive Placement Agreement, ESI shall be Exclusive
Placement Agent with respect to the following Trusts, effective as of the
date indicated below:
Name of Trust Date
BT Investment Portfolios:
Liquid Assets Portfolio September 30, 1996
Asset Management Portfolio II September 30, 1996
Asset Management Portfolio III September 30, 1996
Global High Yield Securities PortfolioSeptember 30, 1996
Latin American Equity Portfolio September 30, 1996
Small Cap Portfolio September 30, 1996
13
Pacific Basin Equity Portfolio September 30, 1996
European Equity Portfolio September 30, 1996
International Bond Portfolio September 30, 1996
100% Treasury Portfolio September 30, 1996
Growth and Income Portfolio September 30, 1996
U.S. Bond Index Portfolio September 30, 1996
Equity 500 Equal Weighted Index Portfolio September 30, 1996
Small Cap Index Portfolio September 30, 1996
EAFE Equity Index Portfolio September 30, 1996
Cash Management Portfolio September 30, 1996
Treasury Money Portfolio September 30, 1996
Tax Free Money Portfolio September 30, 1996
International Equity Portfolio September 30, 1996
Utility Portfolio September 30, 1996
Equity 500 Index Portfolio September 30, 1996
Short/Intermediate U.S. Government Securities PortfolioSeptember 30, 1996
Asset Management Portfolio September 30, 1996
Capital Appreciation Portfolio September 30, 1996
Intermediate Tax Free Portfolio September 30, 1996
093096
093096
14
EXHIBIT A
TO
EXCLUSIVE PLACEMENT AGENT AGREEMENT
AS LAST AMENDED: DECEMBER 11, 1996
Pursuant to the Exclusive Placement Agreement, ESI shall be Exclusive
Placement Agent with respect to the following Trusts, effective as of the
date indicated below:
Name of Trust Date
BT Investment Portfolios:
Liquid Assets Portfolio September 30, 1996
Asset Management Portfolio II September 30, 1996
Asset Management Portfolio III September 30, 1996
Global High Yield Securities PortfolioSeptember 30, 1996
Latin American Equity Portfolio September 30, 1996
Small Cap Portfolio September 30, 1996
Pacific Basin Equity Portfolio September 30, 1996
European Equity Portfolio September 30, 1996
International Bond Portfolio September 30, 1996
100% Treasury Portfolio September 30, 1996
Growth and Income Portfolio September 30, 1996
U.S. Bond Index Portfolio September 30, 1996
Equity 500 Equal Weighted Index Portfolio September 30, 1996
Small Cap Index Portfolio September 30, 1996
EAFE Equity Index Portfolio September 30, 1996
BT RetirementPlus Portfolio December 11, 1996
Cash Management Portfolio September 30, 1996
Treasury Money Portfolio September 30, 1996
Tax Free Money Portfolio September 30, 1996
International Equity Portfolio September 30, 1996
Utility Portfolio September 30, 1996
Equity 500 Index Portfolio September 30, 1996
Short/Intermediate U.S. Government Securities PortfolioSeptember 30, 1996
Asset Management Portfolio September 30, 1996
Capital Appreciation Portfolio September 30, 1996
Intermediate Tax Free Portfolio September 30, 1996
121196
POWER OF ATTORNEY
The undersigned Trustees and officers, as indicated respectively
below, of BT Investment Funds, BT Institutional Funds, BT Pyramid Mutual
Funds, The Leadership Trust, and BT Advisor Funds (each, a `Trust'') and,
Cash Management Portfolio, Treasury Money Portfolio, Tax Free Money
Portfolio, NY Tax Free Money Portfolio, International Equity Portfolio,
Utility Portfolio, Short/Intermediate U.S. Government Securities Portfolio,
Equity 500 Index Portfolio, Asset Management Portfolio, Capital
Appreciation Portfolio, Intermediate Tax Free Portfolio, and BT Investment
Portfolios (each, a `Portfolio Trust'') each hereby constitutes and
appoints the Secretary and each Assistant Secretary of each Trust and each
Portfolio Trust and the Deputy General Counsel of Federated Investors, each
of them with full powers of substitution, as his true and lawful attorney-
in-fact and agent to execute in his name and on his behalf in any and all
capacities the Registration Statements on Form N-1A, and any and all
amendments thereto, and all other documents, filed by a Trust or a
Portfolio Trust with the Securities and Exchange Commission (the `SEC'')
under the Investment Company Act of 1940, as amended, and (as applicable)
the Securities Act of 1933, as amended, and any and all instruments which
such attorneys and agents, or any of them, deem necessary or advisable to
enable the Trust or Portfolio Trust to comply with such Acts, the rules,
regulations and requirements of the SEC, and the securities or Blue Sky
laws of any state or other jurisdiction, and to file the same, with all
exhibits thereto and other documents in connection therewith, with the SEC
and such other jurisdictions, and the undersigned each hereby ratifies and
confirms as his own act and deed any and all acts that such attorneys and
agents, or any of them, shall do or cause to be done by virtue hereof. Any
one of such attorneys and agents has, and may exercise, all of the powers
hereby conferred. The undersigned each hereby revokes any Powers of
Attorney previously granted with respect to any Trust or Portfolio Trust
concerning the filings and actions described herein.
IN WITNESS WHEREOF, each of the undersigned has hereunto set his hand
as of the 30th day of September, 1996.
SIGNATURES TITLE
/s/ Ronald M. Petnuch President and Treasurer (Chief Executive
Officer,
Ronald M. Petnuch Principal Financial and Accounting Officer)
of each Trust and Portfolio Trust
/s/ Philip W. Coolidge Trustee of each Trust and
Philip W. Coolidge Portfolio Trust
/s/ Charles P. Biggar Trustee of each Portfolio Trust
Charles P. Biggar and BT Institutional Funds
SIGNATURES TITLE
/s/ S. Leland Dill Trustee of each Portfolio Trust
S. Leland Dill and BT Investment Funds
2
/s/ Philip Saunders, Jr. Trustee of each Portfolio Trust
Philip Saunders, Jr. and BT Investment Funds
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains Summary Financial Information extracted from the BT
Utility Portfolio Annual Report dated December 31, 1996, and is qualified
in its entirety by reference to such Annual Report.
</LEGEND>
<CIK> 0081106703
<NAME> UTILITY PORTFOLIO
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 6021226
<INVESTMENTS-AT-VALUE> 7751218
<RECEIVABLES> 24002
<ASSETS-OTHER> 8719
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 7783939
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 17284
<TOTAL-LIABILITIES> 17284
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 6036663
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</TABLE>
