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. 6 ............................... 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
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.
INVESTMENT COMPANY SECURITIES. Securities of other investment companies may
be acquired by the Portfolio to the extent permitted under the 1940 Act,
that is, the Portfolio may invest a maximum of up to 10% of its total
assets in securities of other investment companies so long as not more than
3% of the total outstanding voting stock of any one investment company is
held by the Portfolio. In addition, not more than 5% of the Portfolio's
total assets may be invested in the securities of any one investment
company. The Portfolio may be permitted to exceed these limitations by an
exemptive order of the SEC. It should be noted that investment companies
incur certain expenses such as management, custodian, and transfer agency
fees, and, therefore, any investment by the Portfolio in shares of other
investment companies would be subject to such duplicate expenses.
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, unless
permitted to do so by an exemptive order of the SEC; 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;
(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.
Responses to Items 24(b)(6), 24(b)(10), 24(b)(11), and 24(b)(12) have been
omitted pursuant to paragraph 4 of Instruction F of the General
Instructions to Form N-1A.
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) Conformed copy of Custodian Agreement between Registrant
and Bankers Trust; +
(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; 3
(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; 3
(18) Not applicable;
(19) Conformed copy of Power of Attorney; 3
+ 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.
3.Response is incorporated by reference to Registrant's Amendment No. 5 on
Form N-1A filed March 19, 1997.
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 May 1, 1997
Beneficial Interests 1
Item 27. Indemnification: (2)
Item 28. Business and Other Connections of Investment Adviser:
Bankers Trust serves as investment adviser to each 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 or has been at
anytime during the past two fiscal years 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 or during the past two fiscal years have been engaged in any
other business, profession, vocation or employment of a substantial nature.
These persons may be contacted c/o Bankers Trust Company, 130 Liberty
Street, New York, New York 10006.
George B. Beitzel, International Business Machines Corporation, Old Orchard
Road, Armonk, NY 10504. Director, Bankers Trust Company; Retired senior
vice president and Director, International Business machines Corporation;
Director, Computer Task Group; Director, Phillips Petroleum Company;
Director, Caliber Systems, Inc. (formerly, Roadway Services Inc.);
Director, Rohm and Haas Company; Director, TIG Holdings; Chairman emeritus
of Amherst College; and Chairman of the Colonial Willimsburg Foundation.
Richard H. Daniel, Bankers Trust Company, 130 Liberty Street, New York, New
York 10006. Vice chairman and chief financial officer, Bankers Trust
Company and Bankers Trust New York Corporation; Beneficial owner, general
partner, Daniel Brothers, Daniel Lingo & Assoc., Daniel Pelt & Assoc.;
Beneficial owner, Rhea C. Daniel Trust.
2.Response is incorporated by reference to Registrant's Amendment No. 4 on
Form N-1A filed April 24, 1996.
Philip A. Griffiths, Bankers Trust Company, 130 Liberty Street, New York,
New York 10006. Director, Institute for Advanced Study; Director, Bankers
Trust Company; Chairman, Committee on Science, Engineering and Public
Policy of the National Academies of Sciences and Engineering & the
Institute of Medicine; and Chairman and member, Nominations Committee and
Committee on Science and Engineering Indicators, National Science Board;
Trustee, North Carolina School of Science and Mathematics and the Woodward
Academy.
William R. Howell, J.C. Penney Company, Inc., P.O. Box 10001, Plano, TX
75301-0001. Chairman Emeritus, J.C. Penney Company, Inc.; Director, Bankers
Trust Company; Director, Exxon Corporation; Director, Halliburton Company;
Director, Warner-Lambert Corporation; Director, The Williams Companies,
Inc.; and Director, National Retail Federation.
Vernon E. Jordan, Jr., Akin, Gump, Strauss, Hauer & Feld, LLP, 1333 New
Hampshire Ave., N.W., Washington, DC 20036. Senior Partner, Akin, Gump,
Strauss, Hauer & Feld, LLP; Director, Bankers Trust Company; Director,
American Express Company; Director, Dow-Jones, Inc.; Director, J.C. Penney
Company, Inc.; Director, Revlon Group Incorporated; Director, Ryder System,
Inc.; Director, Sara Lee Corporation; Director, Union Carbide Corporation;
Director, Xerox Corporation; Trustee, Brookings Institution; Trustee, The
Ford Foundation; and Trustee, Howard University.
David Marshall, 130 Liberty Street, New York, New York 10006. Chief
Information Officer and Executive Vice President, Bankers Trust New York
Corporation; Senior Managing Director, Bankers Trust Company.
Hamish Maxwell, Philip Morris Companies Inc., 120 Park Avenue, New York, NY
10006. Retired Chairman and Chief Executive Officer, Philip Morris
Companies Inc.; Director, Bankers Trust Company; Director, The News
Corporation Limited; Director, Sola International Inc.; and Chairman, WWP
Group pic.
Frank N. Newman, Bankers Trust Company, 130 Liberty Street, New York, New
York 10006. Chairman of the Board, Chief Executive Officer and President,
Bankers Trust New York Corporation and Bankers Trust Company; Director,
Bankers Trust Company; Director, Dow-Jones, Inc.; and Director, Carnegie
Hall.
N.J. Nicholas Jr., 745 Fifth Avenue, New York, NY 10020. Director, Bankers
Trust Company; Director, Boston Scientific Corporation; and Director, 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, Bankers Trust Company; Director, Allied-Signal Inc.;
Director, Federal Home Loan Mortgage Corporation; Director, GTE
Corporation; Director, The May Department Stores Company; Director,
Safeguard Scientifics, Inc.; and Trustee, University of Pennsylvania.
Donald L. Staheli, Bankers Trust Company, 130 Liberty Street, New York, New
York 10006. Chairman of the Board and Chief Executive Officer, Continental
Grain Company; Director, Bankers Trust Company; Director, ContiFinancial
Corporation; Director, Prudential Life Insurance Company of America;
Director, Fresenius Medical Care, A.g.; Director, America-China Society;
Director, National Committee on United States-China Relations; Director,
New York City Partnership; Chairman, U.S.-China Business Council; Chairman,
Council on Foreign Relations; Chairman, National Advisor Council of Brigham
Young University's Marriott School of Management; Vice Chairman, The Points
of Light Foundation; and Trustee, American Graduate School of International
Management.
Patricia Carry Stewart, c/o Office of the Secretary, 130 Liberty Street,
New York, NY 10006. Director, Bankers Trust Company; Director, CVS
Corporation; Director, Community Foundation for Palm Beach and Martin
Counties; Trustee Emerita, Cornell University.
George J. Vojta, Bankers Trust Company, 130 Liberty Street, New York, NY
10006. Vice Chairman, Bankers Trust New York Corporation and Bankers Trust
Company; Director, bankers Trust Company; Director; Alicorp S.A.; Director;
Northwest Airlines; Director, Private Export Funding Corp.; Director, New
York State Banking Board; Director, St. Lukes-Roosevelt Hospital Center;
Partner, New York City Partnership; and Chairman, Wharton Financial
Services Center.
Paul A. Volcker, Bankers Trust Company, 130 Liberty Street, New York, New
York 10006. Director, Bankers Trust Company; Director, American Stock
Exchange; Director, Nestle S.A.; Director, Prudential Insurance Company;
Director, UAL Corporation; Chairman, Group of 30; North American Chairman,
Trilateral Commission; Co-Chairman, Bretton Woods Committee; Co-Chairman,
U.S./Hong Kong Economic Cooperation Committee; Director, American Council
on Germany; Director, Aspen Institute; Director, Council on Foreign
Relations; Director, The Japan Society; and Trustee, The American Assembly.
Melvin A. Yellin, Bankers Trust Company, 130 Liberty Street, New York, New
York 10006. Senior Managing Director and General Counsel of Bankers Trust
New York Corporation and Bankers Trust Company; Director, 1136 Tenants
Corporation; and Director, ABA Securities Association.
Item 29. Principal Underwriters:
a) Edgewood Service, Inc., the placement agent for shares of the
Registrant, also acts as principal underwriter for the following open-end
investment companies: BT Investment Funds, BT Advisor Funds, BT Pyramid
Mutual Funds, BT Institutional Funds, Excelsior Institutional Trust
(formerly, UST Master Funds, Inc.), Excelsior Tax-Exempt Funds, Inc.
(formerly, UST Master Tax-Exempt Funds, Inc.), Excelsior Institutional
Trust, FTI Funds, FundManager Portfolios, Marketvest Funds, Marketvest
Funds, inc. and Old Westbury Funds, Inc.
b)
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Distributor With Registrant
Lawrence Caracciolo Director, President, --
Federated Investors Tower Edgewood Services, Inc.
Pittsburgh, PA 15222-3779
Arthur L. Cherry Director, --
Federated Investors Tower Edgewood Services, Inc.
Pittsburgh, PA 15222-3779
J. Christopher Donahue Director, --
Federated Investors Tower Edgewood Services, Inc.
Pittsburgh, PA 15222-3779
Ronald M. Petnuch Vice President, President and Treasurer
Federated Investors Tower Edgewood Services, Inc.
Pittsburgh, PA 15222-3779
Thomas P. Schmitt Vice President, --
Federated Investors Tower Edgewood Services, Inc.
Pittsburgh, PA 15222-3779
Ernest L. Linane Assistant Vice President, --
Federated Investors Tower Edgewood Services, Inc.
Pittsburgh, PA 15222-3779
S. Elliott Cohan Secretary, Assistant Secretary
Federated Investors Tower Edgewood Services, Inc.
Pittsburgh, PA 15222-3779
Thomas J. Ward Assistant Secretary, --
Federated Investors Tower Edgewood Services, Inc.
Pittsburgh, PA 15222-3779
Kenneth W. Pegher, Jr. Treasurer, --
Federated Investors Tower Edgewood Services, Inc.
Pittsburgh, PA 15222-3779
(c) None
ITEM 30. Location of Accounts and Records:
Registrant: Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Bankers Trust Company: 130 Liberty Street,
(Investment Adviser, Custodian New York, New York 10006.
and Administrator)
Investors Fiduciary Trust Company: 127 West 10th Street,
(Transfer Agent and Dividend Kansas City, MO 64105.
Distribution Agent)
Edgewood Services, Inc.: Clearing Operations, P.O. Box 897,
(Placement Agent Pittsburgh, Pennsylvania 15230-0897.
and Sub-Administrator)
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 No. 6 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 30th day of May, 1997.
UTILITY PORTFOLIO
By: /s/ Jay S. Neuman
Jay S. Neuman, Secretary
June 2, 1997
EXHIBIT 8 UNDER FORM N-1A
EXHIBIT 10 UNDER ITEM 601/REG. S-K
BANKERS TRUST COMPANY
One Bankers Trust Plaza, New York, New York 10006
Mailing Address:
P.O. Box 318, Church Street Station
New York, New York 10008
Mutual Fund/Business Trust/Non-Series
CUSTODIAN AGREEMENT
AGREEMENT dated as of July 1, 1996 between BANKERS TRUST COMPANY (the
`Custodian'') and UTILITY PORTFOLIO (the ``Customer'').
WHEREAS, the Customer desires to appoint the Custodian as custodian on
behalf of the Customer under the terms and conditions set forth in this
Agreement, and the Custodian has agreed to so act as custodian.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements herein contained, the parties hereto agree as follows:
1. Employment of Custodian. The Customer hereby employs the
Custodian as custodian of all assets of the Customer which are delivered to
and accepted by the Custodian or any Subcustodian (as that term is defined
in Section 4) (the `Property'') pursuant to the terms and conditions set
forth herein. Without limitation, such Property shall include stocks and
other equity interests of every type, evidences of indebtedness, other
instruments representing same or rights or obligations to receive,
purchase, deliver or sell same and other non-cash investment property of
the Customer which is acceptable for deposit (`Securities'') and cash from
any source and in any currency (`Cash''). The Custodian shall not be
responsible for any property of the Customer held or received by the
Customer or others and not delivered to the Custodian or any Subcustodian.
2. Maintenance of Securities and Cash at Custodian and Subcustodian
Locations. Pursuant to Instructions, the Customer shall direct the
Custodian to (a) settle Securities transactions and maintain cash in the
country or other jurisdiction in which the principal trading market for
such Securities is located, where such Securities are to be presented for
payment or where such Securities are acquired and (b) maintain cash and
cash equivalents in such countries in amounts reasonably necessary to
effect the Customer's transactions in such Securities. Instructions to
settle Securities transactions in any country shall be deemed to authorize
the holding of such Securities and Cash in that country.
3. Custody Account. The Custodian agrees to establish and maintain
custody account or accounts on its books in the name of the Customer (the
`Account'') for any and all Property from time to time received and
accepted by the Custodian or any Subcustodian for the Account of the
Customer. The Custodian shall have the right, in its sole discretion, to
refuse to accept any Property that is not in proper form for deposit for
any reason. The Customer acknowledges its responsibility as a principal
for all of its obligations to the Custodian arising under or in connection
with this Agreement, warrants its authority to deposit in the Account any
Property received therefor by the Custodian or a Subcustodian and to give,
and authorize others to give, instructions relative thereto. The
Custodian may deliver securities of the same class in place of those
deposited in the Account.
The Custodian shall hold, keep safe and protect as custodian for the
Account, on behalf of the Customer, all Property in such Account. All
transactions, including, but not limited to, foreign exchange transactions,
involving the Property shall be executed or settled solely in accordance
with Instructions, except that until the Custodian receives Instructions to
the contrary, the Custodian will:
(a) collect all interest and dividends and all other income and
payments, whether paid in cash or in kind, on the Property, as
the same become payable and credit the same to the Account;
(b) present for payment all Securities held in the Account which are
called, redeemed or retired or otherwise become payable and all
coupons and other income items which call for payment upon
presentation to the extent that the Custodian or Subcustodian is
actually aware of such opportunities and hold the cash received
in the Account pursuant to this Agreement;
(c) (i) exchange Securities where the exchange is purely ministerial
(including, without limitation, the exchange of temporary
securities for those in definitive form and the exchange of
warrants, or other documents of entitlement to securities, for
the Securities themselves) and (ii) when notification of a tender
or exchange offer (other than ministerial exchanges described in
(i) above is received for the Account, endeavor to receive
Instructions, provided that if such Instructions are not received
in time for the Custodian to take timely action, no action shall
be taken with respect thereto;
(d) whenever notification of a rights entitlement or a fractional
interest resulting from a rights issue, stock dividend or stock
split is received for the Account and such rights entitlement or
fractional interest bears an expiration date, if after
endeavoring to obtain Instructions such Instructions are not
received in time for the Custodian to take timely action or if
actual notice of such actions was received too late to seek
Instructions, sell in the discretion of the Custodian (which sale
the Customer hereby authorizes the Custodian to make) such rights
entitlement or fractional interest and credit the Account with
the net proceeds of such sale;
(e) execute in the Customer's name for the Account, whenever the
Custodian deems it appropriate, such ownership and other
certificates as may be required to obtain the payment of income
from the Property in the Account;
(f) pay for the Account, any and all taxes and levies in the nature
of taxes imposed on interest, dividends or other similar income
on the Property in the Account by any governmental authority. In
the event there is insufficient Cash available in the Account to
pay such taxes and levies, the Custodian shall notify the
Customer of the amount of the shortfall and the Customer, at its
option, may deposit additional Cash in the Account or take steps
to have sufficient Cash available. The Customer agrees, when
and if requested by the Custodian and required in connection with
the payment of any such taxes to cooperate with the Custodian in
furnishing information, executing documents or otherwise; and
(g) appoint brokers and agents for any of the ministerial
transactions involving the Securities described in (a) - (f),
including, without limitation, affiliates of the Custodian or any
Subcustodian.
4. Subcustodians and Securities Systems. The Customer authorizes and
instructs the Custodian to hold the Property in the Account in custody
accounts which have been established by the Custodian with (a) one of its
U.S. branches or another U.S. bank or trust company or branch thereof
located in the U.S. which is itself qualified under the Investment Company
Act of 1940, as amended (`1940 Act''), to act as custodian (individually,
a `U.S. Subcustodian''), or a U.S. securities depository or clearing agent
or system in which the Custodian or a U.S. Subcustodian participates
(individually, a `U.S. Securities System'') or (b) one of its non-U.S.
branches or majority-owned non-U.S. subsidiaries, a non-U.S. branch or
majority-owned subsidiary of a U.S. bank or a non-U.S. bank or trust
company, acting as custodian (individually, a `non- U.S. Subcustodian'';
U.S. Subcustodians and non-U.S. Subcustodians, collectively,
`Subcustodians''), or a non-U.S. depository or clearing agency or system
in which the Custodian or any Subcustodian participates (individually, a
`non-U.S. Securities System''; U.S. Securities System and non-U.S.
Securities System, collectively, `Securities System''), provided that in
each case in which a U.S. Subcustodian or U.S. Securities System is
employed, each such Sub-Custodian or Securities System shall have been
approved by Instructions; provided further that in each case in which a
non-U.S. Subcustodian or non-U.S. Securities System is employed, (a) such
Subcustodian or Securities System either (i) a `qualified U.S. bank'' as
defined by Rule 17f-5 under the 1940 Act (`Rule 17f-5'') or (ii) an
`eligible foreign custodian'' within the meaning of rule 17f-5 or such
Subcustodian or Securities System is the subject of an order granted by the
U.S. Securities and Exchange Commission (`SEC'') exempting such agent or
the subcustody arrangements thereto from all or part of the provisions of
Rule 17f-5 and (b) the agreement between the Custodian and such non-U.S.
Subcustodian has been approved by Instructions; it being understood that
the Custodian shall have no liability or responsibility for determining
whether the approval by the Customer of any Subcustodian or Securities
System has been proper under the 1940 Act or any rule or regulations
thereunder.
Upon receipt of Instructions, the Custodian agrees to cease the
employment of any Subcustodian or Securities System with respect to the
Customer, and if desirable and practicable, appoint a replacement
subcustodian or securities system in accordance with the provisions of this
Section. In addition, the Custodian may, at any time in its discretion,
upon written notification to the Customer, terminate the employment of any
Subcustodian or Securities System.
Upon request of the Customer, the Custodian shall deliver to the
Customer annually a certificate stating: (a) the identity of each non-U.S.
Subcustodian and non-U.S. Securities System then acting on behalf of the
Custodian and the name and address of the governmental agency or other
regulatory authority that supervises or regulates such non-U.S.
Subcustodian and non-U.S. Securities System; (b) the countries in which
each non-U.S. Subcustodian or non-U.S. Securities System is located; and
(c) so long as Rule 17f-5 requires the Customer's Board of Trustees to
directly approve its foreign custody arrangements, such other information
relating to such non-U.S. Subcustodians and non-U.S. Securities Systems as
may reasonably be requested by the Customer to ensure compliance with Rule
17f-5. So long as Rule 17f-5 requires the Customer's Board of Trustees to
directly approve its foreign custody arrangements, the Custodian also shall
furnish annually to the Customer information concerning such non-U.S.
Subcustodians and non-U.S. Securities Systems similar in kind and scope as
that furnished to the Customer in connection with the initial approval of
this Agreement. Custodian agrees to promptly notify the Customer, if in
the normal course of its custodian activities, the Custodian has reason to
believe that any non-U.S. Subcustodian or non-U.S. Securities System has
ceased to be a qualified U.S. bank or an eligible foreign custodian each
within the meaning of Rule 17f-5 or has ceased to be subject to an
exemptive order from the SEC.
5. Use of Subcustodian. With respect to Property in the Account
which is maintained by the Custodian in the custody of a Subcustodian
employed pursuant to Section 4:
(a) The Custodian will identify on its books as belonging to the
Customer any Property held by such Subcustodian.
(b) Any Property in the Account held by a Subcustodian will be
subject only to the instructions of the Custodian or its agents.
(c) Property deposited with a Subcustodian will be maintained in an
account holding only assets for customers of the Custodian.
(d) Any agreement the Custodian shall enter into with a non-U.S.
Subcustodian with respect to the holding of Property shall
require that (i) the Account will be adequately indemnified or
its losses adequately insured; (ii) the Securities are not
subject to any right, charge, security interest, lien or claim of
any kind in favor of such Subcustodian or its creditors except a
claim for payment in accordance with such agreement for their
safe custody or administration and expenses related thereto,
(iii) beneficial ownership of such Securities be freely
transferable without the payment of money or value other than for
safe custody or administration and expenses related thereto, (iv)
adequate records will be maintained identifying the Property held
pursuant to such Agreement as belonging to the Custodian, on
behalf of its customers and (v) to the extent permitted by
applicable law, officers of or auditors employed by, or other
representatives of or designated by, the Custodian, including the
independent public accountants of or designated by, the Customer
be given access to the books and records of such Subcustodian
relating to its actions under its agreement pertaining to any
Property by it thereunder or confirmation of or pertinent
information contained in such books and records be furnished to
such persons designated by the Custodian.
6. Use of Securities System. With respect to Property in the
Account which are maintained by the Custodian or any Subcustodian in the
custody of a Securities System employed pursuant to Section 4:
(a) The Custodian shall, and the Subcustodian will be required by its
agreement with the Custodian to, identify on its books such
Property as being held for the account of the Custodian or
Subcustodian for its customers.
(b) Any Property held in a Securities System for the account of the
Custodian or a Subcustodian will be subject only to the
instructions of the Custodian or such Subcustodian, as the case
may be.
(c) Property deposited with a Securities System will be maintained in
an account holding only assets for customers of the Custodian or
Subcustodian, as the case may be, unless precluded by applicable
law, rule, or regulation.
(d) The Custodian shall provide the Customer with any report obtained
by the Custodian on the Securities System's accounting system,
internal accounting control and procedures for safeguarding
securities deposited in the Securities System.
7. Agents. The Custodian may at any time or times in its sole
discretion appoint (or remove) any other U. S. bank or trust company which
is itself qualified under the 1940 Act to act as custodian, as its agent to
carry out such of the provisions of this Agreement as the Custodian may
from time to time direct; provided, however, that the appointment of any
agent shall not relieve the Custodian of its responsibilities or
liabilities hereunder.
8. Records, Ownership of Property, Statements, Opinions of
Independent Certified Public Accountants.
(a) The ownership of the Property whether Securities, Cash and/or
other property, and whether held by the Custodian or a Subcustodian or in a
Securities System as authorized herein, shall be clearly recorded on the
Custodian's books as belonging to the Account and not for the Custodian's
own interest. The Custodian shall keep accurate and detailed accounts of
all investments, receipts, disbursements and other transactions for the
Account. All accounts, books and records of the Custodian relating
thereto shall be open to inspection and audit at all reasonable times
during normal business hours by any person designated by the Customer. All
such accounts shall be maintained and preserved in the form reasonably
requested by the Customer. The Custodian will supply to the Customer from
time to time, as mutually agreed upon, a statement in respect to any
Property in the Account held by the Custodian or by a Subcustodian. In the
absence of the filing in writing with the Custodian by the Customer of
exceptions or objections to any such statement within sixty (60) days of
the mailing thereof, the Customer shall be deemed to have approved such
statement within sixty (60) days of the mailing thereof, the Customer shall
be deemed to have approved such statement and in such case or upon written
approval of the Customer of any such statement, such statement shall be
presumed to be for all purposes correct with respect to all information set
forth therein.
(b) The Custodian shall take all reasonable action as the Customer
may request to obtain from year to year favorable opinions from the
Customer's independent certified public accountants with respect to the
Custodian's activities hereunder in connection with the preparation of the
Customer's Form N-1A and the Customer's Form N-SAR or other periodic
reports to the SEC and with respect to any other requirements of the SEC.
(c) At the request of the Customer, the Custodian shall deliver to
the Customer a written report prepared by the Custodian's independent
certified public accountants with respect to the services provided by the
Custodian under this Agreement, including, without limitation, the
Custodian's accounting system, internal accounting control and procedures
for safeguarding Cash and Securities, including Cash and Securities
deposited and/or maintained in a securities system or with a Subcustodian.
Such report shall be of sufficient scope and in sufficient detail as may
reasonably be required by the Customer and as may reasonably be obtained by
the Custodian.
(d) The Customer may elect to participate in any of the electronic
on-line service and communications systems offered by the Custodian which
can provide the Customer, on a daily basis, with the ability to view on-
line or to print on hard copy various reports of Account activity and of
Securities and/or Cash being held in the Account. To the extent that such
service shall include market values in Securities in the Account, the
Customer hereby acknowledges that the Custodian now obtains and may in the
future obtain information on such values from outside sources that the
Custodian considers to be reliable and the Customer agrees that the
Custodian (i) does not verify or represent or warrant either the
reliability of such service nor the accuracy or completeness of any such
information furnished or obtained by or through such service and (ii) shall
be without liability in selecting and utilizing such service or furnishing
any information derived therefrom.
9. Holding of Securities, Nominees, etc. Securities in the Account
which are held by the Custodian or any Subcustodian may be held by such
entity in the name of the Customer in the Custodian's or Subcustodian's
name, in the name of the Custodian's or Subcustodian's nominee, or in
bearer form. Securities that are held by a Subcustodian or which are
eligible for deposit in a Securities System as provided above may be
maintained in the Subcustodian or the Securities System in an account for
the Customer's or Subcustodian's customers, unless prohibited by law, rule,
or regulation. The Custodian or Subcustodian, as the case may be, may
combine certificates representing Securities held in the Account with
certificates of the same issue held by it as fiduciary or as a custodian.
In the event that any Securities in the name of the Custodian or its
nominee or held by a Subcustodian and registered in the name of such
Subcustodian or its nominee are called for partial redemption by the issuer
of such Security, the Custodian may, subject to the rules or regulations
pertaining to allocation of any Securities System in which such Securities
have been deposited, allot, or cause to be allotted, the called portion of
the respective beneficial holders of such class of security in any manner
the Custodian deems to be fair and equitable.
10. Proxies, etc. With respect to any proxies, notices, reports or
other communications relative to any of the Securities in the Account, the
Custodian shall perform such services and only such services relative
thereto as are (i) set forth in Section 3 of this Agreement, (ii) described
in Exhibit A attached hereto (as such service therein described may be in
effect from time to time) (the `Proxy Service'') and (iii) as may
otherwise be agreed upon between the Custodian and the Customer. The
liability and responsibility of the Custodian in connection with the Proxy
Service referred to in (ii) of the immediately preceding sentence and in
connection with any additional services which the Custodian and the
Customer may agree upon as provided in (iii) of the immediately preceding
sentence shall be as set forth in the description of the Proxy Service and
as may be agreed upon by the Custodian and the Customer in connection with
the furnishing of any such additional service and shall not be affected by
any other term of this Agreement. Neither the Custodian nor its nominees
or agents shall vote upon or in respect of any of the Securities in the
Account, execute any form of proxy to vote thereon, or give any consent or
take any action (except as provided in Section 3) with respect thereto
except upon the receipt of Instructions relative thereto.
11. Segregated Account. To assist the Customer in complying with the
requirements of the 1940 Act and the rules and regulations thereunder, the
Custodian shall, upon receipt of Instructions, establish and maintain a
segregated account or accounts on its books for and on behalf of the
Customer.
12. Settlement Procedures. Securities will be transferred, exchanged
or delivered by the Custodian or a Subcustodian upon receipt by the
Custodian of Instructions which include all information required by the
Custodian. Settlement and payment for Securities received for the Account
and delivery of Securities out of the Account may be effected in accordance
with the customary or established securities trading or securities
processing practices and procedures in the jurisdiction or market in which
the transaction occurs, including, without limitation, delivering
Securities to the purchaser thereof or to a dealer therefor (or an agent
for such purchaser or dealer) against a receipt with the expectation of
receiving later payment for such Securities from such purchaser or dealer,
as such practices and procedures may be modified or supplemented in
accordance with the standard operating procedures of the Custodian in
effect from time to time for that jurisdiction or market. Provided that
the Custodian effects transactions in accordance with the customary or
established securities trading or securities processing practice or
procedures in the applicable jurisdiction or market, it shall not be
responsible for any loss arising therefrom. Subject to the exercise of
reasonable care, the Custodian may elect to effect transactions otherwise
in a jurisdiction or market.
Notwithstanding that the Custodian may settle purchases and sales
against, or credit income to, the Account, on a contractual basis, as
outlined in the Investment Manager User Guide provided to the Customer by
the Custodian, the Custodian may, at its sole option, reverse such credits
or debits to the Account in the event that the transaction does not settle,
or the income is not received in a timely manner, and the Customer agrees
to hold the Custodian harmless from any losses which may result therefrom.
Except as otherwise may be agreed upon by the parties hereto, the
Custodian shall not be required to comply with Instructions to settle the
purchase of any Securities for the Account unless there is sufficient Cash
in the Account at the time or to settle the sale of any Securities in the
Account unless such Securities are in deliverable form. Notwithstanding
the foregoing, if the purchase price of such securities exceeds the amount
of Cash in the Account at the time of settlement of such purchase, the
Custodian may, in its sole discretion, but in no way shall have any
obligation to, permit an overdraft in the Account in the amount of the
difference solely for the purpose of facilitating the settlement of such
purchase of securities for prompt delivery to the Account. The Customer
agrees to immediately repay the amount of any such overdraft in the
ordinary course of business and further agrees to indemnify and hold the
Custodian harmless from and against any and all losses, costs, including,
without limitation the cost of funds, and expenses incurred in connection
with such overdraft. The Customer agrees that it will not use the Account
to facilitate the purchase of securities without sufficient funds in the
Account (which funds shall not include the proceeds of the sale of the
purchased securities).
13. Permitted Transactions. The Customer agrees that it will cause
transactions to be made pursuant to this Agreement only upon Instructions
in accordance Section 14 and only for the purposes listed below.
(a) In connection with the purchase or sale of Securities at prices
as confirmed by Instructions.
(b) When Securities are called, redeemed or retired, or otherwise
become payable.
(c) In exchange for or upon conversion into other securities alone or
other securities and cash pursuant to any plan or merger, consolidation,
reorganization, recapitalization or readjustment.
(d) Upon conversion of Securities pursuant to their terms into other
securities.
(e) Upon exercise of subscription, purchase or other similar rights
represented by Securities.
(f) For the payment of interest, taxes, management or supervisory
fees, distributions or operating expenses.
(g) In connection with any borrowings by the Customer requiring a
pledge of Securities, but only against receipt of amounts borrowed.
(h) In connection with any loans, but only against receipt of
collateral as specified in Instructions which shall reflect any
restrictions applicable to the Customer.
(i) For the purpose of redeeming shares of the capital stock of the
Customer against delivery of the shares to be redeemed to the Custodian, a
Subcustodian or the Customer's transfer agent.
(j) For the purpose of redeeming in kind shares of the Customer
against delivery of the shares to be redeemed to the Custodian, a
Subcustodian or the Customer's transfer agent.
(k) For delivery in accordance with the provisions of any agreement
among the Customer, the Custodian and a broker-dealer registered under the
Securities Exchange Act of 1934 and a member of the National Association of
Securities Dealers, Inc., relating to compliance with the rules of The
Options Clearing Corporation, the Commodities Futures Trading Commission
and of any registered national securities exchange, or of any similar
organization or organizations, regarding escrow or other arrangements in
connection with transactions by the Customer.
(l) For release of Securities to designated brokers under covered
call options, provided, however, that such Securities shall be released
only upon payment to the Custodian of monies for the premium due and a
receipt for the Securities which are to be held in escrow. Upon exercise
of the option, or at expiration, the Custodian will receive the Securities
previously deposited from broker. The Custodian will act strictly in
accordance with Instructions in the delivery of Securities to be held in
escrow and will have no responsibility or liability for any such Securities
which are not returned promptly when due other than to make proper request
for such return.
(m) For spot or forward foreign exchange transactions to facilitate
security trading or receipt of income from Securities related transactions.
(n) Upon the termination of this Agreement as set forth in Section
20.
(o) For other proper purposes.
The Customer agrees that the Custodian shall have no obligation to
verify the purpose for which a transaction is being effected.
14. Instructions. The term `Instructions'' means instructions from
the Customer in respect of any of the Custodian's duties hereunder which
have been received by the Custodian at its address set forth in Section 21
below (i) in writing (including, without limitation, facsimile
transmission) or by tested telex signed or given by such one or more person
or persons as the Customer shall have from time to time authorized in
writing to give the particular class of Instructions in question and whose
name and (if applicable) signature and office address have been filed with
the Custodian, or (ii) which have been transmitted electronically through
an electronic on-line service and communications system offered by the
Custodian or other electronic instruction system acceptable to the
Custodian, or (iii) a telephonic or oral communication by one or more
persons as the Customer shall have from time to time authorized to give the
particular class of Instructions in question and whose name has been filed
with the Custodian; or (iv) upon receipt of such other form of instructions
as the Customer may from time to time authorize in writing and which the
Custodian has agreed in writing to accept. Instructions in the form of
oral communications shall be confirmed by the Customer by tested telex or
writing in the manner set forth in clause (i) above, but the lack of such
confirmation shall in no way affect any action taken by the Custodian in
reasonable reliance upon such oral instructions prior to the Custodian's
receipt of such confirmation. Instructions may relate to specific
transactions or to types or classes of transactions, and may be in the form
of standing instructions.
The Custodian shall have the right to assume in the absence of notice
to the contrary from the Customer that any person whose name is on file
with the Custodian pursuant to this Section has been authorized by the
Customer to give the Instructions in question and that such authorization
has not been revoked. The Custodian may act upon and conclusively rely on,
without any liability to the Customer or any other person or entity for any
losses resulting therefrom, any Instructions reasonably believed by it to
be furnished by the proper person or persons as provided above.
15. Standard of Care. The Custodian shall be responsible for the
performance of only such duties as are set forth herein or contained in
Instructions given to the Custodian which are not contrary to the
provisions of this Agreement. The Custodian will use reasonable care with
respect to the safekeeping of Property in the Account and, except as
otherwise expressly provided herein, in carrying out its obligations under
this Agreement. So long as and to the extent that it has exercised
reasonable care, the Custodian shall not be responsible for the title,
validity or genuineness of any Property or other property or evidence of
title thereto received by it or delivered by it pursuant to this Agreement
and shall be held harmless in acting upon, and may conclusively rely on,
without liability for any loss resulting therefrom, any notice, request,
consent, certificate or other instrument reasonably believed by it to be
genuine and to be signed or furnished by the proper party or parties,
including, without limitation, Instructions, and shall be indemnified by
the Customer for any losses, damages, costs and expenses (including,
without limitation, the fees and expenses of counsel) incurred by the
Custodian and arising out of action taken or omitted with reasonable care
by the Custodian hereunder or under any Instructions. The Custodian shall
be liable to the Customer for any act or omission to act of any
Subcustodian to the same extent as if the Custodian committed such act
itself. Where, under applicable law, regulation, or practice (in order to
facilitate the settlement of transactions related thereto), or where the
Customer otherwise elects, Securities are held in a Securities System in a
particular market, the Custodian shall only be responsible or liable for
losses arising from employment of such Securities System caused by the
Custodian's own failure to exercise reasonable care. Where the Custodian
otherwise elects to employ a Securities System to hold Securities in a
particular market, the Custodian shall be liable to the Customer for any
act or omission of any Securities System to the same extent as if the
Custodian committed such act itself. In the event of any loss to the
Customer by reason of the failure of the Custodian or a Subcustodian to
utilize reasonable care, the Custodian shall be liable to the Customer to
the extent of the Customer's actual damages at the time such loss was
discovered without reference to any special conditions or circumstances.
In no event shall the Custodian be liable for any consequential or special
damages. The Custodian shall be entitled to rely, and may act, on advice
of counsel (who may be counsel for the Customer) on all matters and shall
be without liability for any action reasonably taken or omitted pursuant to
such advice.
In the event the Customer subscribes to an electronic on-line service
and communications system offered by the Custodian, the Customer shall be
fully responsible for the security of the Customer's connecting terminal,
access thereto and the proper and authorized use thereof and the initiation
and application of continuing effective safeguards with respect thereto and
agree to defend and indemnify the Custodian and hold the Custodian harmless
from and against any and all losses, damages, costs and expenses (including
the fees and expenses of counsel) incurred by the Custodian as a result of
any improper or unauthorized use of such terminal by the Customer or by any
others.
All collections of funds or other property paid or distributed in
respect of Securities in the Account, including funds involved in third-
party foreign exchange transactions, shall be made at the risk of the
Customer.
Subject to the exercise of reasonable care, the Custodian shall have
no liability for any loss occasioned by delay in the actual receipt of
notice by the Custodian or by a Subcustodian of any payment, redemption or
other transaction regarding Securities in the Account in respect of which
the Custodian has agreed to take action as provided in Section 3 hereof.
The Custodian shall not be liable for any loss resulting from, or caused
by, or resulting from acts of governmental authorities (whether de jure or
de facto), including, without limitation, nationalization, expropriation,
and the imposition of currency restrictions; devaluations of or
fluctuations in the value of currencies; changes in laws and regulations
applicable to the banking or securities industry; market conditions that
prevent the orderly execution of securities transactions or affect the
value of Property; acts of war, terrorism, insurrection or revolution;
strikes or work stoppages; the inability of a local clearing and settlement
system to settle transactions for reasons beyond the control of the
Custodian; hurricane, cyclone, earthquake, volcanic eruption, nuclear
fusion, fission or radioactivity, or other acts of God.
The Custodian shall have no liability in respect of any loss, damage
or expense suffered by the Customer, insofar as such loss, damage or
expense arises from the performance of the Custodian's duties hereunder by
reason of the Custodian's reliance upon records that were maintained for
the Customer by entities other than the Custodian prior to the Custodian's
employment under this Agreement.
The provisions of this Section shall survive termination of this
Agreement.
16. Investment Limitations and Legal or Contractual Restrictions or
Regulations. The Custodian shall not be liable to the Customer and the
Customer agrees to indemnify the Custodian and its nominees, for any loss,
damage or expense suffered or incurred by the Custodian or its nominees
arising out of any violation of any investment restriction or other
restriction or limitation applicable to the Customer pursuant to any
contract or any law or regulation. The provisions of this Section shall
survive termination of this Agreement.
17. Fees and Expenses. The Customer agrees to pay to the Custodian
such compensation for its services pursuant to this Agreement as may be
mutually agreed upon in writing from time to time and the Custodian's
reasonable out-of-pocket or incidental expenses in connection with the
performance of this Agreement, including (but without limitation) legal
fees as described herein and/or deemed necessary in the judgment of the
Custodian to keep safe or protect the Property in the Account. The initial
fee schedule is attached hereto as Exhibit B. The Customer hereby agrees
to hold the Custodian harmless from any liability or loss resulting from
any taxes or other governmental charges, and any expense related thereto,
which may be imposed, or assessed with respect to any Property in the
Account and also agrees to hold the Custodian, its Subcustodians, and their
respective nominees harmless from any liability as a record holder of
Property in the Account. The Custodian is authorized to charge the Account
for such items and the Custodian shall have a lien on the Property in the
Account for any amount payable to the Custodian under this Agreement,
including but not limited to amounts payable pursuant to the last paragraph
of Section 12 and pursuant to indemnities granted by the Customer under
this Agreement. The provisions of this Section shall survive the
termination of this Agreement.
18. Tax Reclaims. With respect to withholding taxes deducted and
which may be deducted from any income received from any Property in the
Account, the Custodian shall perform such services with respect thereto as
are described in Exhibit C attached hereto and shall in connection
therewith be subject to the standard of care set forth in such Exhibit C.
Such standard of care shall not be affected by any other term of this
Agreement.
19. Amendment, Modifications, etc. No provision of this Agreement
may be amended, modified or waived except in a writing signed by the
parties hereto. No waiver of any provision hereto shall be deemed a
continuing waiver unless it is so designated. No failure or delay on the
part of either party in exercising any power or right under this Agreement
operates as a waiver, nor does any single or partial exercise of any power
or right preclude any other or further exercise thereof or the exercise of
any other power or right.
20. Termination. This Agreement may be terminated by the Customer or
the Custodian by ninety (90) days' written notice to the other; provided
that notice by the Customer shall specify the names of the persons to whom
the Customer shall deliver the Securities in the Account and to whom the
Cash in the Account shall be paid. If notice of termination is given by
the Custodian, the Customer shall, within ninety (90) days following the
giving of such notice, deliver to the Custodian a written notice specifying
the names of the persons to whom the Custodian shall deliver the Securities
in the Account and to whom the Cash in the Account shall be paid. In
either case, the Custodian shall deliver such Securities and Cash to the
persons so specified, after deducting therefrom any amounts which the
Custodian determines to be owed to it under Sections 12, 17, and 22. In
addition, the Custodian may in its discretion withhold from such delivery
such Cash and Securities as may be necessary to settle transactions pending
at the time of such delivery. The Customer grants to the Custodian a lien
and right of setoff against the Account and all Property held therein from
time to time in the full amount of the foregoing obligations. If within
ninety (90) days following the giving of a notice of termination by the
Custodian, the Custodian does not receive from the Customer a written
notice specifying the names of the persons to whom the Custodian shall
deliver the Securities in the Account and to whom the Cash in the Account
shall be paid, the Custodian, at its election, may deliver such Securities
and pay such Cash to a bank or trust company doing business in the State of
New York to be held and disposed of pursuant to the provisions of this
Agreement, or may continue to hold such Securities and Cash until a written
notice as aforesaid is delivered to the Custodian, provided that the
Custodian's obligations shall be limited to safekeeping.
21. Notices. Except as otherwise provided in this Agreement, all
requests, demands or other communications between the parties or notices in
connection herewith (a) shall be in writing, hand delivered to sent by
telex, cable, facsimile or other means of electronic communication agreed
upon by the parties hereto addressed, if to the Customer, to:
Utility Portfolio
Signature Financial
6 St. James Avenue
Boston, MA 02116
Attention: Thomas M. Lenz
Phone: (617) 423-0800
Fax: (617) 542-5815
with a copy to:
Bankers Trust Company
4 Albany Street, 2nd Floor
New York, NY 10006
Attention: William O'Dell
Phone: (212) 250-2838
Fax: (212) 250-4462
if to the Custodian, to:
Bankers Trust Company
16 Wall Street, 4th Floor
New York, NY 10005
Attention: Vince Fiordimondo
Phone: (212) 618-3602
Fax: (212) 618-3823
or in either case to such other address as shall have been furnished to the
receiving party pursuant to the provisions hereof and (b) shall be deemed
effective when received, or, in the case of a telex, when sent to the
proper number and acknowledged by a proper answerback.
22. Security for Payment. To secure payment of all obligations due
hereunder, the Customer hereby grants to Custodian a continuing security
interest in and right of setoff against the Account and all Property held
therein from time to time in the full amount of such obligations. Should
the Customer fail to pay promptly any amounts owed hereunder, Custodian
shall be entitled to use available Cash in the Account and to dispose of
Securities in the Account as is necessary. In any such case and without
limiting the foregoing, Custodian shall be entitled to take such other
action(s) or exercise such other options, powers and rights as Custodian
now or hereafter has a secured creditor under the New York Uniform
Commercial Code or any other applicable law.
23. Representations and Warranties.
(a) The Customer hereby represents and warrants to the Custodian that:
(i) the employment of the Custodian and the terms of this
Agreement do not violate any obligation by which the Customer is bound,
whether arising by contract, operation of law or otherwise;
(ii) this Agreement has been duly authorized by appropriate
action and when executed and delivered will be binding upon the Customer in
accordance with its terms; and
(iii) the Customer will deliver to the Custodian such
evidence of such authorization as the Custodian may reasonably require,
whether by way of a certified resolution or otherwise.
(b) The Custodian hereby represents and warrants to the Customer that:
(i) its employment as Custodian and the terms of this Agreement
do not violate any obligation by which the Custodian is bound, whether
arising by contract, operation of law or otherwise;
(ii) this Agreement has been duly authorized by appropriate
action and when executed and delivered will be binding upon the Custodian
in accordance with its terms;
(iii) the Custodian will deliver to the Customer such
evidence of such authorization as the Customer may reasonably require,
whether by way of a certified resolution or otherwise; and
(iv) Custodian is qualified as a custodian under Section 26(a) of
the 1940 Act and warrants that it will remain so qualified or upon ceasing
to be so qualified shall promptly notify the Customer in writing.
24. Governing Law and Successors and Assigns. This Agreement shall
be governed by the law of the State of New York and shall not be assignable
by either party, but shall bind the successors in interest of the Customer
and the Custodian.
25. Publicity. Customer shall furnish to Custodian at its office
referred to in Section 21 above, prior to any distribution thereof, copies
of any material prepared for distribution to any persons who are not
parties hereto that refer in any way to the Custodian, provided that the
Customer may refer in its prospectus and other documents to the Custodian
in the manner set forth in Exhibit D attached to this contract. Customer
shall not distribute or permit the distribution of such materials if
Custodian reasonably objects in writing within ten (10) business days of
receipt thereof (or such other time as may be mutually agreed) after
receipt thereof. The provisions of this Section shall survive the
termination of this Agreement.
26. Representative Capacity and Binding Obligation. Notice is hereby
given that this Agreement is not executed on behalf of the Trustees of the
Customer as individuals, and the obligations of this Agreement are not
binding upon any of the Trustees, officers or shareholders of the Customer
individually but are biding only upon the assets and property of the
Customer.
The Custodian agrees that no shareholder, trustee or officer of the
Customer may be held personally liable or responsible for any obligations
of the Customer arising out of this Agreement.
27. Affiliation Between Custodian and Adviser and Customer. It is
understood that the trustees, officers, employees, agents and shareholders
of the Customer, and the officers, directors, employees, agents and
shareholders of the Customer's Investment Adviser, Bankers Trust Company
(`Adviser''), are or may be interested in Custodian as directors,
officers, employees, agents, stockholders, or otherwise, and that the
directors, officers, employees, agents or stockholders of Custodian may be
interested in the Customer as trustees, officers, employees, agents,
shareholders, or otherwise, or in Adviser as officers, directors,
employees, agents, shareholders or otherwise.
(i) No trustee, officer, employee or agent of the Customer, and no
officer, director, employee or agent of the Adviser acting pursuant to
any provision of the Investment Advisory Agreement (the `Advisory
Agreement') between the Customer and Adviser, shall have physical
access to the assets of the Customer held by Custodian or be
authorized or permitted to withdraw any investments of the Customer,
nor shall Custodian deliver any assets of the Customer to any such
person. No officer, director, employee or agent of Custodian who
holds any similar position with the Customer or who performs duties
under the Advisory Agreement shall have access to the assets of the
Trust.
(ii) Subject to Section 14 hereof, nothing in this Section 27 shall
prohibit any officer, employee or agent of the Customer, or any
officer, employee or agent of the Adviser, from giving Instructions to
Custodian as long as no such Instruction results in delivery or of
access to assets of the Customer prohibited by subclause (i) of this
Section 27.
28. Submission to Jurisdiction. Any suit, action or proceeding
arising out of this Agreement may be instituted in any State or Federal
court sitting in the City of New York, State of New York, United States of
America, and the Customer irrevocably submits to the non-exclusive
jurisdiction of any such court in any such suit, action or proceeding and
waives, to the fullest extent permitted by law, any objection which it may
now or hereafter have to the laying of venue of any such suit, action or
proceeding brought in such a court and any claim that such suit, action or
proceeding was brought in an inconvenient forum.
29. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original. This Agreement
shall become effective when one or more counterparts have been signed and
delivered by each of the parties hereto.
30. Confidentiality. The parties hereto agree that each shall treat
confidentially the terms and conditions of this Agreement and all
information provided by each party to the other regarding its business and
operations. All confidential information provided by a party hereto shall
be used by any other party hereto solely for the purpose of rendering
services pursuant to this Agreement and, except as may be required in
carrying out this Agreement, shall not be disclosed to any third party
without the prior consent of such providing party. The foregoing shall not
be applicable to any information that is publicly available when provided
or thereafter becomes publicly available other than through a breach of
this Agreement, or that is required or requested to be disclosed by any
bank or other regulatory examiner of the Custodian, Customer, or any
Subcustodian, any auditor of the parties hereto, by judicial or
administrative process or otherwise by applicable law or regulation.
31. Severability. If any provision of this Agreement is determined
to be invalid or unenforceable, such determination shall not affect the
validity or enforceability of any other provision of this Agreement.
32. Headings. The heading of the paragraphs hereof are included for
convenience of reference only and do not form a part of this Agreement.
UTILITY PORTFOLIO
By: /s/ Thomas M. Lenz
Name: Thomas M. Lenz
Title: Secretary
BANKERS TRUST COMPANY
By: /s/ John P. Zori
Name: John P. Zori
Title: Vice President
EXHIBIT A
To Custodian Agreement dated as of July 1, 1996 between Bankers Trust
Company and Utility Portfolio
PROXY SERVICE
The following is a description of the Proxy Service referred to in
Section 10 of the above referred to Custodian Agreement. Terms used herein
as defined terms shall have the meanings ascribed to them therein unless
otherwise defined below.
The Custodian provides a service, described below, for the
transmission of corporate communications in connection with shareholder
meetings relating to Securities held in Argentina, Australia, Austria,
Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Indonesia,
Ireland, Italy, Japan, Korea, Malaysia, Mexico, Netherlands, New Zealand,
Pakistan, Poland, Singapore, South Africa, Spain, Sri Lanka, Sweden, United
Kingdom, United States, and Venezuela. For the United States and Canada,
the term `corporate communications'' means the proxy statements or meeting
agenda, proxy cards, annual reports and any other meeting materials
received by the Custodian. For countries other than the United States and
Canada, the term `corporate communications'' means the meeting agenda only
and does not include any meeting circulars, proxy statements or any other
corporate communications furnished by the issuer in connection with such
meeting. Non-meeting related corporate communications are not included in
the transmission service to be provided by the Custodian except upon
request as provided below.
The Custodian's process for transmitting and translating meeting
agendas will be as follows:
1) If the meeting agenda is not provided by the issuer in the
English language, and if the language of such agenda is in the
official language of the country in which the related security is
held, the Custodian will as soon as practicable after receipt of
the original meeting agenda by a Subcustodian provide an English
translation prepared by that Subcustodian.
2) If an English translation of the meeting agenda is furnished, the
local language agenda will not be furnished unless requested.
Translations will be free translations and neither the Custodian nor
any Subcustodian will be liable or held responsible for the accuracy
thereof or any direct or indirect consequences arising therefrom, including
without limitation arising out of any action taken or omitted to be taken
based thereon.
If requested, the Custodian will, on a reasonable efforts basis,
endeavor to obtain any additional corporate communication such as annual or
interim reports, proxy statements, meeting circulars, or local language
agenda, and provide them in the form obtained.
Timing in the voting process is important and, in that regard, upon
receipt by the Custodian of notice from a Subcustodian, the Custodian will
provide a notice to the Customer indicating the deadline for receipt of its
instructions to enable the voting process to take place effectively and
efficiently. As voting procedures will vary from market to market,
attention to any required procedures will be very important. Upon timely
receipt of voting instructions, the Custodian will promptly forward such
instructions to the applicable Subcustodian. If voting instructions are
not timely received, the Custodian shall have no liability or obligation to
take any action.
For Securities held in markets other than those set forth in the first
paragraph, the Custodian will not furnish the material described above or
seek voting instructions. However, if requested to exercise voting rights
at a specific meeting, the Custodian will endeavor to do so on a reasonable
efforts basis without any assurance that such rights will be so exercised
at such meeting.
If the Custodian or any Subcustodian incurs extraordinary expenses in
exercising voting rights related to any Securities pursuant to appropriate
instructions or directions (e.g., by way of illustration only and not by
way of limitation, physical presence is required at a meeting and/or travel
expenses are incurred), such expenses will be reimbursed out of the Account
unless other arrangements have been made for such reimbursement.
It is the intent of the Custodian to expand the Proxy Service to
include jurisdictions which are not currently included as set forth in the
second paragraph hereof. The Custodian will notify the Customer as to the
inclusion of additional countries or deletion of existing countries after
their inclusion or deletion and this Exhibit A will be deemed to be
automatically amended to include or delete such countries as the case may
be.
Dated as of: July 1, 1996 UTILITY PORTFOLIO
By: /s/ Thomas M. Lenz
Name: Thomas M. Lenz
Title: Secretary
BANKERS TRUST COMPANY
By: /s/ John P. Zori
Name: John P. Zori
Title: Vice President
EXHIBIT B
To Custodian Agreement dated as of July 1, 1996 between Bankers Trust
Company and Utility Portfolio.
CUSTODY FEE SCHEDULE
This Exhibit B shall be amended upon delivery by the Custodian of a new
Exhibit B to the Customer and acceptance thereof by the Customer and shall
be effective as of the date of acceptance by the Customer or a date agreed
upon between the Custodian and the Customer.
EXHIBIT C
To Custodian Agreement dated as of July 1, 1996 between Bankers Trust
Company and Utility Portfolio.
TAX RECLAIMS
Pursuant to Section 18 of the above referred to Custodian Agreement,
the Custodian shall perform the following services with respect to
withholding taxes imposed or which may be imposed on income from Property
in the Account. Terms used herein as defined terms shall unless otherwise
defined have the meanings ascribed to them in the above referred to
Custodian Agreement.
When withholding tax has been deducted with respect to income from any
Property in an Account, the Customer will actively pursue on a reasonable
efforts basis the reclaim process, provided that the Custodian shall not be
required to institute any legal or administrative proceeding against any
Subcustodian or other person. The Custodian will provide fully detailed
advices/vouchers to support reclaims submitted to the local authorities by
the Custodian or its designee. In all cases of withholding, the Custodian
will provide full details to the Customer. If exemption from withholding
at the source can be obtained in the future, the Custodian will notify the
Customer and advise what documentation, if any, is required to obtain the
exemption. Upon receipt of such documentation from the Customer, the
Custodian will file for exemption on the Customer's behalf and notify the
Customer when it has been obtained.
In connection with providing the foregoing service, the Custodian
shall be entitled to apply categorical treatment of the Customer according
to the Customer's nationality, the particulars of its organization and
other relevant details that shall be supplied by the Customer. It shall be
the duty of the Customer to inform the Customer of any change in the
organization, domicile or other relevant fact concerning tax treatment of
the Customer and further to inform the Custodian if the customer is or
becomes the beneficiary of any special ruling or treatment not applicable
to the general nationality and category or entity of which the Customer is
a part under general laws and treaty provisions. The Custodian may rely on
any such information provided by the Customer.
In connection with providing the foregoing service, the Custodian may
also rely on professional tax services published by a major international
accounting firm and/or advice received from a Subcustodian in the
jurisdictions in question. In addition, the Custodian may seek the advice
of counsel or other professional tax advisers in such jurisdictions. The
Custodian is entitled to rely, and may act, on information set forth in
such services and on advice received from a Subcustodian, counsel or other
professional tax advisers and shall be without liability to the Customer
for any action reasonably taken or omitted pursuant to information
contained in such services or such advice.
Dated as of: July 1, 1996UTILITY PORTFOLIO
By: /s/ Thomas M. Lenz
Name: Thomas M. Lenz
Title: Secretary
BANKERS TRUST COMPANY
By: /s/ John P. Zori
Name: John P. Zori
Title: Vice President
EXHIBIT D
To Custodian Agreement dated as of July 1, 1996 between Bankers Trust
Company and Utility Portfolio.
APPROVED REFERENCE TO CUSTODIAN
`Bankers Trust acts as Custodian of the assets of the Trust and the
Portfolio...'
