As filed with the Securities and Exchange Commission on January 12, 1996
File No. 811-7774
U.S. Bond Index Portfolio
Equity 500 Equal Weighted Index Portfolio
Small Cap Index Portfolio
EAFE(R) Equity Index Portfolio
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 10
BT INVESTMENT PORTFOLIOS
(Exact Name of Registrant as Specified in Charter)
6 St. James Avenue, Boston, Massachusetts 02116
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: 617-423-0800
Philip W. Coolidge, 6 St. James Avenue, Boston, Massachusetts 02116
(Name and Address of Agent for Service)
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BT0300E
EXPLANATORY NOTE
This Registration Statement on Form N-1A (the "Registration Statement") has been
filed by the Registrant pursuant to Section 8(b) of the Investment Company Act
of 1940, as amended. However, beneficial interests in the series of the
Registrant are not being registered under the Securities Act of 1933, as amended
(the "1933 Act"), because such interests will be issued solely in private
placement transactions that do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act. Investments in the Registrant's series
may only be made by investment companies, insurance company separate accounts,
common or commingled trust funds or similar organizations or entities that are
"accredited investors" within the meaning of Regulation D under the 1933 Act.
The Registration Statement does not constitute an offer to sell, or the
solicitation of an offer to buy, any beneficial interests in any series of the
Registrant.
This Amendment No. 10 (the "Amendment") to the Registration Statement includes
Part A and Part B relating to U.S. Bond Index Portfolio, Equity 500 Equal
Weighted Index Portfolio, Small Cap Index Portfolio and EAFE(R) Equity Index
Portfolio, each an active series of the Registrant, and incorporates by
reference herein: Part A and Part B of Amendment No. 4 relating to International
Bond Portfolio; Part A and Part B of Amendment No. 5 relating to European Equity
Portfolio; Part A and Part B of Amendment No. 7 relating to Global High Yield
Securities Portfolio, Latin American Equity Portfolio, Small Cap Portfolio and
Pacific Basin Equity Portfolio; Part A and Part B of Amendment No. 8 relating to
Liquid Assets Portfolio and Part A and Part B of Amendment No. 9 relating to
Asset Management Portfolio II and Asset Management Portfolio III.
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BT0300E
BT INVESTMENT PORTFOLIOS
U.S. BOND INDEX PORTFOLIO
EQUITY 500 EQUAL WEIGHTED INDEX PORTFOLIO
SMALL CAP INDEX PORTFOLIO
AND
EAFE(R) EQUITY INDEX 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.
BT Investment Portfolios (the "Trust") is a no-load, open-end management
investment company which was organized as a trust under the laws of the State of
New York on March 27, 1993.
Beneficial interests in the Trust are divided into separate series, each having
distinct investment objectives and policies, only four of which, U.S. Bond Index
Portfolio, Equity 500 Equal Weighted Index Portfolio, Small Cap Index Portfolio
and EAFE(R) Equity Index Portfolio (each a "Portfolio" and collectively, the
"Portfolios"), are described herein. Beneficial interests in the Portfolios 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 Portfolios 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.
Investments in the Portfolios are neither insured nor guaranteed by the U.S.
Government. Investments in the Portfolios are not obligations of, or guaranteed
by, Bankers Trust Company ("Bankers Trust"), the Trust's investment adviser (the
"Adviser") with respect to the Portfolios, and are not Federally insured by the
Federal Deposit Insurance Corporation, the Federal Reserve Board or any other
agency.
The U.S. Bond Index Portfolio seeks to replicate as closely as possible (before
deduction of Expenses) the investment performance of the Aggregate Bond Index, a
broad market weighted index which encompasses four major classes of investment
grade fixed-income securities in the United States: U.S. Treasury and agency
securities, corporate bonds, international (dollar-denominated) bonds, and
mortgage-backed securities, with maturities greater than one year.
As of September 30, 1995, the major classes of fixed-income securities
represented the following proportions of the Index's total market value:
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Aggregate
Bond Index
U.S. Treasury and agency securities 54%
Corporate bonds 14%
International (dollar- denominated) bonds 3%
Mortgage-backed securities 28%
Asset Backed Securities 1%
Dollar-weighted average maturity (Years) 8.6 yrs
The U.S. Bond Index Portfolio will be unable to hold all of the individual
issues which comprise the Index because of the large number of securities
involved. Instead, the Portfolio will hold a representative sample of the
securities in the Index, selecting one or two issues to represent entire
"classes" or types of securities in the Index. The Portfolio will be constructed
so as to match as closely as possible the composition of the Index by investing
in fixed-income securities approximating their relative proportion of the
Index's total market value.
At the broadest level, the U.S. Bond Index Portfolio will seek to hold
securities and other investments which reflect the weighting of the major asset
classes in the Index, these classes include U.S. Treasury and agency securities,
corporate bonds, and mortgage-backed securities. For example, if U.S. Treasury
and agency securities represent approximately 60% of the Index's interest rate
risk, then approximately 60% of the Portfolio's interest rate risk will come
from such securities and other investments. Similarly, if corporate bonds
represent 20% of the interest rate risk of the Index, then they will represent
approximately 20% of the interest rate risk of the Portfolio. Such a sampling
technique is expected to be an effective means of substantially replicating the
income and capital returns provided by the Index before deduction of Portfolio
expenses.
The Portfolio may, from time to time, substitute one type of investment grade
bond for another. For instance, a Portfolio may hold more short-term corporate
bonds (and, in turn, hold fewer short U.S. Treasury bonds) than represented in
the Index so as to increase income. This corporate substitution strategy will
entail the assumption of additional credit risk; however, substantial
diversification within the corporate sector should moderate issue-specific
credit risk. Overall, credit risk is expected to be very low for the U.S. Bond
Index Portfolio.
Fixed-income securities will be primarily of investment grade quality - i.e.,
those rated at least Baa by Moody's Investors Service, Inc. ("Moody's") or BBB-
by Standard & Poor's Corporation ("S&P"). Securities rated Baa or BBB possess
some speculative characteristics.
The Portfolio may invest in U.S. Treasury bills, notes and bonds and other "full
faith and credit" obligations of the U.S. Government and in U.S. Government
agency securities, which are debt obligations issued or guaranteed by agencies
or instrumentalities of the U.S. Government ("U.S. Government Securities"). Such
"agency" securities may not be backed by the "full faith and credit" of the U.S.
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Government. Such U.S. Government agencies may include the Federal Farm Credit
Banks, the Resolution Trust Corporation and the Government National Mortgage
Association. Even though they all carry top (AAA) credit ratings, "agency"
obligations are not explicitly guaranteed by the U.S. Government and so are
perceived as somewhat riskier than comparable Treasury bonds.
As a mutual fund investing primarily in fixed-income securities, the Portfolio
is subject to interest rate, income, call and credit risks. Since the Portfolio
also invests in mortgage-backed securities, it is also subject to prepayment
risk. See "Risk Factors and Certain Securities and Investment Practices."
The Equity 500 Equal Weighted Index Portfolio seeks to replicate as closely as
possible the total return of the S&P 500 Equal Weighted Index. The S&P 500 Equal
Weighted Index is comprised of all stocks that make up the Standard & Poor's 500
Composite Stock Price Index with each security having the same weight. The S&P
500 Equal Weighted Index is re-balanced to these equal weights at the end of
each calendar month. The S&P 500 Equal Weighted Index is calculated by Wilshire
Associates. Investing in a fund designed to replicate this benchmark provides
investors with diversified equity exposure with a small cap tilt and value
investment attributes.
The Equity 500 Equal Weighted Index Portfolio allocates its assets equally among
the equity securities which compose the S&P 500 Equal Weighted Index. The
Portfolio may omit or remove any S&P 500 Equal Weighted Index stock from the
Portfolio if, following objective criteria, Bankers Trust judges the stock to be
insufficiently liquid or believes the merit of the investment has been
substantially impaired by extraordinary events or financial conditions. Bankers
Trust will not purchase the stock of Bankers Trust New York Corporation, which
is included in the Index, and instead will overweight its holdings of companies
engaged in similar businesses.
The Equity 500 Equal Weighted Index Portfolio is not sponsored, endorsed, sold
or promoted by Wilshire Associates. Wilshire makes no representation or
warranty, express or implied, to the investors in the Portfolio or any member of
the public regarding the advisability of investing in securities generally or in
the Portfolio particularly or the ability of the index to track general stock
market performance.
The S&P 500 is an index of 500 common stocks, most of which trade on the New
York Stock Exchange Inc. (the "NYSE"). Bankers Trust believes that the S&P 500
is representative of the performance of publicly traded common stocks in the
U.S.
in general.
About the S&P 500. The S&P 500 is composed of 500 common stocks which are chosen
by S&P on a statistical basis to be included in the Index. The inclusion of a
stock in the S&P 500 in no way implies that S&P believes the stock to be an
attractive investment. The 500 securities, most of which trade on the NYSE,
represented, as of September 30, 1995, approximately 81% of the market value of
all U.S. common stocks. Each stock in the S&P 500 is weighted by its market
value. Bankers Trust believes that the performance of the S&P 500 is
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representative of the performance of publicly traded common stocks in general.
The composition of the S&P 500 is determined by S&P and is based on such factors
as the market capitalization and trading activity of each stock and its adequacy
as a representation of stocks in a particular industry group, and may be changed
from time to time.
The Equity 500 Equal Weighted Portfolio is not sponsored, endorsed, sold or
promoted by Standard & Poor's Corporation. S&P makes no representation or
warranty, express or implied, to the investors in the Portfolio or any member of
the public regarding the advisability of investing in securities generally or in
the Portfolio particularly or the ability of the S&P 500 to track general stock
market performance.
S&P does not guarantee the accuracy and/or the completeness of the S&P 500 or
any data included therein.
S&P makes no warranty, express or implied, as to the results to be obtained by
the Portfolio, owners of the Portfolio, or any other person or entity from the
use of the S&P 500 or any data included therein. S&P makes no express or implied
warranties and hereby expressly disclaims all such warranties of merchantability
or fitness for a particular purpose or use with respect to the S&P 500 or any
data included therein.
For more information about the performance of the S&P 500, see Appendix B to
Part B.
The Small Cap Index Portfolio seeks to replicate as closely as possible (before
deduction of expenses of the Portfolio) the total return of the Russell 2000.
The Russell 2000 Index is composed of approximately 2,000 small-capitalization
common stocks. A company's stock market capitalization is the total market value
of its floating outstanding shares. As of September 30, 1995, the average stock
market capitalization of the Russell 2000 was $280 million and the weighted
average stock market capitalization of the Russell 2000 was $480 million.
The Small Cap Portfolio is neither sponsored by nor affiliated with the Frank
Russell Company. Frank Russell's only relationship to the Portfolio is the
licensing of the use of the Russell 2000 Small Stock Index. Frank Russell
Company is the owner of the trademarks and copyrights relating to the Russell
indices.
The Small Cap Portfolio invests in a statistically selected sample of the
approximately 2,000 stocks included in the Russell 2000 Index. The stocks of the
Russell 2000 to be included in the Small Cap Index Portfolio will be selected
utilizing a statistical sampling technique known as "optimization." This process
selects stocks for the Portfolio so that various industry weightings, market
capitalizations and fundamental characteristics (e.g. price-to-book, price-to-
earnings, debt-to-asset ratios, and dividend yields) closely approximate those
of the Russell 2000. For instance, if 10% of the capitalization of the Russell
2000 consists of utility companies with relatively small capitalizations, then
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the Small Cap Portfolio is constructed so that approximately 10% of the
Portfolio's assets are invested in the stocks of utility companies with
relatively small capitalizations. The stocks held by the Portfolio are weighted
to make the Portfolio's aggregate investment characteristics similar to those of
the Russell 2000 Index as a whole.
The EAFE Equity Index Portfolio seeks to replicate as closely as possible
(before deduction of expenses of the Portfolio) the total return of the EAFE
Index. The Portfolio attempts to achieve this objective by investing in a
statistically selected sample of the equity securities included in the EAFE
Index.
The EAFE Index is a capitalization-weighted index containing approximately 1,100
equity securities of companies located outside the United States. The countries
currently included in the EAFE Index are Australia, Austria, Belgium, Denmark,
Finland, France, Germany, Hong Kong, Ireland, Italy, Japan, Malaysia, The
Netherlands, New Zealand, Norway, Singapore, Spain, Sweden, Switzerland and
United Kingdom.
Inclusion of a security in the EAFE Index in no way implies an opinion by Morgan
Stanley as to its attractiveness as an investment. The Portfolio is neither
sponsored by nor affiliated with Morgan Stanley.
The EAFE(R) Equity Index Portfolio is constructed to have aggregate investment
characteristics similar to those of the EAFE Index. The Portfolio invests in a
statistically selected sample of the securities included in the EAFE Index,
although not all companies within a country will be represented in the Portfolio
at the same time. Stocks are selected for inclusion in the Portfolio based on
country of origin, market capitalization, yield, volatility and industry sector.
Banker Trust will manage the Portfolio using advanced statistical techniques to
determine which stocks are to be purchased or sold to replicate the EAFE Index.
From time to time, adjustments may be made in the Portfolio because of changes
in the composition of the EAFE Index, but such changes should be infrequent.
The EAFE Index is the exclusive property of Morgan Stanley. Morgan Stanley
Capital International is a service mark of Morgan Stanley and has been licensed
for use by Bankers Trust Company.
This Portfolio is not sponsored, endorsed, sold or promoted by Morgan Stanley.
Morgan Stanley makes no representation or warranty, express or implied, to the
owners of this Portfolio or any member of the public regarding the advisability
of investing in securities generally or in this Portfolio particularly or the
ability of the EAFE Index to track general stock market performance. Morgan
Stanley is the licensor of certain trademarks, service marks and trade names of
Morgan Stanley and of the EAFE Index which is determined, composed and
calculated by Morgan Stanley without regard to the issuer of this Portfolio or
this Portfolio. Morgan Stanley has no obligation to take the needs of the issuer
of this Portfolio or the owners of this Portfolio into consideration in
determining, composing or calculating the EAFE Index. Inclusion of a security in
the EAFE Index in no way implies an opinion by Morgan Stanley as to its
attractiveness as an investment. Morgan Stanley is not responsible for and has
not participated in
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the determination of the timing of, prices at, or quantities of this Portfolio
to be issued or in the determination or calculation of the equation by which
this Portfolio is redeemable for cash. Morgan Stanley has no obligation or
liability to owners of this Portfolio in connection with the administration,
marketing or trading of this Portfolio. This Portfolio is neither sponsored by
nor affiliated with Morgan Stanley.
ALTHOUGH MORGAN STANLEY SHALL OBTAIN INFORMATION FOR INCLUSION IN OR FOR USE IN
THE CALCULATION OF THE INDEXES FROM SOURCES WHICH MORGAN STANLEY CONSIDERS
RELIABLE, MORGAN STANLEY DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS
OF THE INDEXES OR ANY DATA INCLUDED THEREIN. MORGAN STANLEY MAKES NO WARRANTY,
EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE, LICENSEE'S
CUSTOMERS AND COUNTERPARTIES, OWNERS OF THE PRODUCTS, OR ANY OTHER PERSON OR
ENTITY FROM THE USE OF THE INDEXES OR ANY DATA INCLUDED THEREIN IN CONNECTION
WITH THE RIGHTS LICENSED HEREUNDER OR FOR ANY OTHER USE. MORGAN STANLEY MAKES NO
EXPRESS OR IMPLIED WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE INDEXES
OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT
SHALL MORGAN STANLEY HAVE ANY LIABILITY FOR ANY DIRECT, INDIRECT, SPECIAL,
PUNITIVE, CONSEQUENTIAL OR ANY OTHER DAMAGES (INCLUDING LOST PROFITS) EVEN IF
NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES. GENERAL
Over time, the correlation between the performance of each Portfolio, before the
deduction of Expenses, and the respective Index is expected to be 0.95 or higher
before deduction of Expenses of the Portfolio. A correlation of 1.00 would
indicate perfect correlation, which would be achieved when the net asset value
of the Portfolio, including the value of its dividend and any capital gain
distributions, increases or decreases in exact proportion to changes in the
Index. Each Portfolio's ability to track its respective index may be affected
by, among other things, transaction costs, administration and other expenses
incurred by the Portfolio, changes in either the composition of the Index or the
assets of a Portfolio, and the timing and amount of Portfolio investor
contributions and withdrawals, if any. In the unlikely event that a high
correlation is not achieved, the Board of Trustees will consider alternatives.
Because each Portfolio seeks to track the respective index, Bankers Trust will
not attempt to judge the merits of any particular stock as an investment.
Under normal circumstances, each Portfolio will invest at least 80% of its
assets in the securities of its respective Index.
As diversified funds, no more than 5% of the assets of each Portfolio may be
invested in the securities of one issuer (other than U.S. Government
Securities), except that up to 25% of each Portfolio's assets may be invested
without regard to this limitation. Each 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 Portfolios which may not be changed
without investor approval. No more than 15% of each Portfolio's net assets may
be invested in illiquid or not readily marketable securities (including
repurchase agreements and time deposits maturing in more than seven days).
Additional investment
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policies of each Portfolio are contained in the Part B of the Portfolios'
Registration Statement.
Each Portfolio may maintain up to 25% of its assets in short-term debt
securities and money market instruments to meet redemption requests or to
facilitate investment in the securities of the respective Index. Securities
index futures contracts and related options, warrants, convertible securities
and swap agreements may be used for several reasons: to simulate full investment
in the underlying Index while retaining a cash balance for fund management
purposes, to facilitate trading, or to reduce transaction costs or to seek
higher investment returns when a futures contract, option, warrant, convertible
security or swap agreement is priced more attractively than the underlying
equity security or Index. These instruments may be considered derivatives. See
"Risk Factors and Certain Securities and Investment Practices -- Derivatives."
The use of derivatives for non-hedging purposes may be considered speculative.
While each of these securities can be used as leveraged investments, a Portfolio
may not use them to leverage its net assets. No Portfolio will invest in such
instruments as part of a temporary defensive strategy (such as altering the
aggregate maturity of the Portfolio) to protect the Portfolio against potential
market declines.
Each Portfolio may lend its investment securities and purchase securities on a
when-issued and a delayed delivery basis. The U.S. Bond Index Portfolio may
invest in mortgage-related and other asset-backed securities. The EAFE Equity
Index Portfolio may engage in foreign currency forward and futures transactions
for the purpose of enhancing portfolio returns or hedging against foreign
exchange risk arising from the Portfolio's investment or anticipated investment
in securities denominated in foreign currencies. See "Risk Factors and Certain
Securities and Investment Practices" for more information about the investment
practices of the Portfolios.
RISK FACTORS AND CERTAIN SECURITIES AND INVESTMENT PRACTICES
The following pages contain more detailed information about types of instruments
in which a Portfolio may invest and strategies Bankers Trust may employ in
pursuit of a Portfolio's investment objective. A summary of risks and
restrictions associated with these instrument types and investment practices is
included as well.
Bankers Trust may not buy all of these instruments or use all of these
techniques to the full extent permitted unless it believes that doing so will
help a Portfolio achieve its goal. Holdings and recent investment strategies are
described in the financial reports of the Portfolios, which are sent to
Portfolio investors twice a year.
Fixed Income Security Risk - U.S. Bond Index Portfolio
Investors in the U.S. Bond Index Portfolio are exposed to four types of risk
from fixed income securities. (1) Interest rate risk is the potential for
fluctuations in bond prices due to changing interest rates. (2) Income risk is
the potential for a decline in a Portfolio's income due to falling market
interest rates. (3)
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Credit risk is the possibility that a bond issuer will fail to make timely
payments of either interest or principal to the Portfolio. (4) Prepayment risk
or call risk is the likelihood that, during periods of falling interest rates,
securities with high stated interest rates will be prepaid (or "called") prior
to maturity, requiring the Portfolio to invest the proceeds at generally lower
interest rates.
Market Risk - Equity 500 Equal Weighted Index Portfolio, Small Cap Index
Portfolio and EAFE Equity Index Portfolio As mutual funds investing primarily in
common stocks, these Portfolios are subject to market risk -- i.e., the
possibility that common stock prices will decline over short or even extended
periods. The U.S. and foreign stock markets tend to be cyclical, with periods
when stock prices generally rise and periods when prices generally decline.
Risks of Investing in Medium- and Small-Capitalization Stocks - Small Cap Index
Portfolio Historically, medium- and small-capitalization stocks have been more
volatile in price that the larger-capitalization stocks included in the S&P 500.
Among the reasons for the greater price volatility of these securities are the
less certain growth prospects of smaller firms, the lower degree of liquidity in
the markets for such stocks, and the greater sensitivity of medium- and
small-size companies to changing economic conditions. In addition to exhibiting
greater volatility, medium- and small-size company stocks may fluctuate
independently of larger company stocks. Medium- and small-size company stocks
may decline in price as large company stocks rise, or rise in prices as large
company stocks decline.
Risks of Investing in Foreign Securities - EAFE Equity Index Portfolio Investors
should realize that investing in securities of foreign issuers involves
considerations not typically associated with investing in securities of
companies organized and operated in the United States. Investors should realize
that the value of a Portfolio's foreign 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
foreign countries. In addition, changes in government administrations or
economic or monetary policies in the United States or abroad could result in
appreciation or depreciation of portfolio securities and could favorably or
unfavorably affect the Portfolio's operations. Furthermore, the economies of
individual foreign nations may differ from the U.S. economy, whether favorably
or unfavorably, in areas such as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments position; it may also be more difficult to obtain and enforce a
judgment against a foreign issuer. In general, less information is publicly
available with respect to foreign issuers than is available with respect to U.S.
companies. Most foreign companies are also not subject to the uniform accounting
and financial reporting requirements applicable to issuers in the United States.
Any foreign investments made by the Portfolio must be made in compliance with
U.S. and foreign currency restrictions and tax laws restricting the amounts and
types of foreign investments.
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Because foreign securities generally are denominated and pay dividends or
interest in foreign currencies, the value of the net assets of the Portfolio as
measured in U.S. dollars will be affected favorably or unfavorably by changes in
exchange rates. In order to protect against uncertainty in the level of future
foreign currency exchange rates, the Portfolio is also authorized to enter into
certain foreign currency exchange transactions. Furthermore, the Portfolio's
foreign investments may be less liquid and their prices may be more volatile
than comparable investments in securities of U.S. companies. The settlement
periods for foreign securities, which are often longer than those for securities
of U.S. issuers, may affect portfolio liquidity. Finally, there is generally
less government supervision and regulation of securities exchanges, brokers and
issuers in foreign countries than in the United States.
Securities and Investment Practices
Short-Term Investments. Each Portfolio may invest in certain short-term fixed
income securities. Such securities may be used to invest uncommitted cash
balances, to maintain liquidity to meet investor redemptions or to serve as
collateral for the obligations underlying a Portfolio's investment in securities
index futures or related options or warrants. These securities include:
obligations issued or guaranteed by the U.S. Government or any of its agencies
or instrumentalities or by any of the states, repurchase agreements, time
deposits, certificates of deposit, bankers' acceptances and commercial paper.
U.S. Government Securities are obligations of, or guaranteed by, the U.S.
Government, its agencies or instrumentalities. Some U.S. Government securities,
such as Treasury bills, notes and bonds, are supported by the full faith and
credit of the United States; others, such as those of the Federal Home Loan
Banks, are supported by the right of the issuer to borrow from the Treasury;
others, such as those of the Federal National Mortgage Association, are
supported by the discretionary authority of the U.S. Government to purchase the
agency's obligations; and still others, such as those of the Student Loan
Marketing Association, are supported only by the credit of the instrumentality.
Securities Lending. Each Portfolio may lend its investment securities to
qualified institutional investors for either short-term or long-term purposes of
realizing additional income. Loans of securities by a Portfolio will be
collateralized by cash, letters of credit, or securities issued or guaranteed by
the U.S. Government or its agencies. The collateral will equal at least 100% of
the current market value of the loaned securities, and such loans may not exceed
30% of the value of a Portfolio's net assets. The risks in lending portfolio
securities, as with other extensions of credit, consist of possible loss of
rights in the collateral should the borrower fail financially. In determining
whether to lend securities, Bankers Trust will consider all relevant facts and
circumstances, including the creditworthiness of the borrower.
When Issued and Delayed Delivery Securities. Each 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
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fluctuation during this period and no income accrues to the Portfolio until
settlement takes place. The Portfolio maintains with the Custodian a segregated
account containing high grade liquid securities in an amount at least equal to
these commitments.
Mortgage-Related Securities. As part of its effort to duplicate the investment
performance of its Index, the U.S. Bond Index Portfolio may invest in
mortgage-backed securities. Mortgage-backed securities represent an interest in
an underlying pool of mortgages. Unlike ordinary fixed-income securities, which
generally pay a fixed rate of interest and return principal upon maturity,
mortgage-backed securities repay both interest income and principal as part of
their periodic payments. Because the mortgages underlying mortgage-backed
certificates can be prepaid at any time by homeowners or corporate borrowers,
mortgage-backed securities give rise to certain unique "pre-payment" risks. See
"Risk Factors and Certain Securities and Investment Practices."
The U.S. Bond Index Portfolio may purchase mortgage-backed securities issued by
the Government National Mortgage Association (GNMA), the Federal Home Loan
Mortgage Corporation (FHLMC), the Federal National Mortgage Association (FNMA),
and the Housing Authority (FHA). GNMA securities are guaranteed by the U.S.
Government as to the timely payment of principal and interest; securities from
other Government-sponsored entities are generally not secured by an explicit
pledge of the U.S. Government. The U.S. Bond Index Portfolio may also invest in
conventional mortgage securities, which are packaged by private corporation and
are not guaranteed by the U.S. Government. Mortgage securities that are
guaranteed by the U.S. Government are guaranteed only as to the timely payment
of principal and interest. The market value of such securities is not guaranteed
and may fluctuate.
Derivatives
Each 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 as a low cost method of gaining exposure to a particular
securities market without investing directly in those securities. Derivatives
will not be used to increase portfolio risk above the level that could be
achieved using only traditional investment securities or to acquire exposure to
changes in the value of assets or indexes that by themselves would not be
purchased for the Portfolio.
Securities Index Futures and Related Options. Each Portfolio may enter into
securities index futures contracts and related options provided that not more
than 5% of its assets are required as a margin deposit for futures contracts or
options and provided that not more than 20% of a Portfolio's assets are invested
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in futures and options at any time. When a Portfolio has cash from new
investments in the Portfolio or holds a portion of its assets in money market
instruments, it may enter into index futures or options to attempt to increase
its exposure to the market. Strategies the Portfolio could use to accomplish
this include purchasing futures contracts, writing put options, and purchasing
call options. When the Portfolio wishes to sell securities, because of investor
redemptions or otherwise, it may use index futures or options to hedge against
market risk until the sale can be completed. These strategies could include
selling futures contracts, writing call options, and purchasing put options.
Swap Agreements. Each Portfolio may enter into swap agreements only to the
extent that obligations under such agreements represent not more than 10% of the
Portfolio's total assets. Swap agreements are contracts between parties in which
one party agrees to make payments to the other party based on the change in
market value of a specified index or asset. In return, the other party agrees to
make payments to the first party based on the return of a different specified
index or asset.
Although swap agreements entail the risk that a party will default on its
payment obligations thereunder, a Portfolio will minimize this risk by entering
into agreements that mark to market no less frequently than quarterly. Swap
agreements also bear the risk that a Portfolio will not be able to meet its
obligation to the counterparty, This risk will be mitigated by investing a
Portfolio in the specific asset for which it is obligated to pay a return.
Warrants. Each Portfolio's investment in warrants will not exceed more than 5%
of its assets (2% with respect to warrants not listed on the New York or
American Stock Exchanges). Warrants are instruments which entitle the holder to
buy underlying equity securities at a specific price for a specific period of
time.
A warrant tends to be more volatile than its underlying securities and ceases to
have value if it is not exercised prior to its expiration date. In addition,
changes in the value of a warrant do not necessarily correspond to changes in
the value of its underlying securities.
Convertible Securities. Each Portfolio may invest in convertible securities
which are a bond or preferred stock which may be converted at a stated price
within a specific period of time into a specified number of shares of common
stock of the same or different issuer. Convertible securities are senior to
common stock in a corporation's capital structure, but usually are subordinated
to non-convertible debt securities. While providing a fixed income stream --
generally higher in yield than in the income derived from a common stock but
lower than that afforded by a non-convertible debt security -- a convertible
security also affords an investor the opportunity, through its conversion
feature, to participate in the capital appreciation of common stock into which
it is convertible.
In general, the market value of a convertible security is the higher of its
investment value (its value as a fixed income security) or its conversion value
(the value of the underlying shares of common stock if the security is
<PAGE>
A-12
converted). As a fixed income security, the market value of a convertible
security generally increases when interest rates decline and generally decreases
when interest rates rise; however, the price of a convertible security generally
increases as the market value of the underlying stock increases, and generally
decreases as the market value of the underlying stock declines. Investments in
convertible securities generally entail less risk than investments in the common
stock of the same issuer.
Further risks associated with the use of futures contracts, options, warrants,
convertible securities and swap agreements. The risk of loss associated with
futures contracts in some strategies can be substantial due to both the low
margin deposits required and the extremely high degree of leverage involved in
futures pricing. As a result, a relatively small price movement in a futures
contract may result in an immediate and substantial loss or gain. However, the
Portfolios will not use futures contracts, options, warrants, convertible
securities and swap agreements for speculative purposes or to leverage their net
assets. Accordingly, the primary risks associated with the use of futures
contracts, options, warrants, convertible securities and swap agreements by the
Portfolios are: (i) imperfect correlation between the change in market value of
the securities held by a Portfolio and the prices of futures contracts, options,
warrants, convertible securities and swap agreements; and (ii) possible lack of
a liquid secondary market for a futures contract and the resulting inability to
close a futures position prior to its maturity date. The risk of imperfect
correlation will be minimized by investing only in those contracts whose
behavior is expected to resemble that of a Portfolio's underlying securities.
The risk that a Portfolio will be unable to close out a futures position will be
minimized by entering into stock transactions on an exchange with an active and
liquid secondary market. However options, warrants, convertible securities and
swap agreements purchased or sold over-the-counter may be less liquid than
exchange-traded securities. Illiquid securities, in general, may not represent
more than 15% of the net assets of a Portfolio.
Foreign Currency Forward, Futures and Related Options Transactions. The EAFE
Equity Index Portfolio may enter into foreign currency forward and foreign
currency futures contracts in order to maintain the same currency exposure as
the EAFE Index. The Portfolio may not enter into such contracts as a way of
protecting against anticipated adverse changes in exchange rates between foreign
currencies and the U.S. dollar. A foreign currency forward contract is an
obligation 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 agreed upon by the
parties, at a price set at the time of the contract. Such contracts do not
eliminate fluctuations in the underlying prices of securities held by the
Portfolios. Although such contracts tend to minimize the risk of loss due to a
decline in the value of a currency that has been sold forward, and the risk of
loss due to an increase in the value of a currency that has been purchased
forward, at the same time they tend to limit any potential gain that might be
realized should the value of such currency increase.
Asset Coverage. To assure that a Portfolio's use of futures and related options,
as well as when-issued and delayed-delivery securities, interest rate swaps and
<PAGE>
A-13
foreign currency forward futures and related options transactions are not used
to achieve excessive investment leverage, a Portfolio will cover such
transactions, as required under applicable interpretations of the SEC, either by
owning the underlying securities, entering into an off-setting transaction, or
by establishing a segregated account with the Portfolio's custodian containing
high grade liquid debt securities in an amount at all times equal to or
exceeding the Portfolio's commitment with respect to these instruments or
contracts.
Item 5. Management of the Fund.
The Board of Trustees of the Trust provides broad supervision over the affairs
of the Trust. A majority of the Trust's Trustees are not affiliated with the
Adviser. As the administrator (the "Administrator"), Bankers Trust supervises
the overall administration of the Trust. The Trust's fund accountant, transfer
agent and custodian is also Bankers Trust.
Investment Adviser
Each Portfolio has retained the services of Bankers Trust as investment adviser.
Bankers Trust Company and Its Affiliates
Bankers Trust Company, 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 September 30, 1995, Bankers Trust New York Corporation was the seventh
largest bank holding company in the United States with total assets of
approximately $104 billion. Bankers Trust is a worldwide merchant bank dedicated
to servicing the needs of corporations, governments, financial institutions and
private clients through a global network of over 120 offices in more than 40
countries. Investment management is a core business of Bankers Trust, built on a
tradition of excellence from its roots as a trust bank founded in 1903. The
scope of Bankers Trust's investment management capability is unique due to its
leadership positions in both active and passive quantitative management and its
presence in major equity and fixed income markets around the world. Bankers
Trust is one of the nation's largest and most experienced investment managers
with approximately $200 billion in assets under management globally. Of that
total, approximately $83 billion are in U.S. equity index assets alone. When
bond and international funds are included, Bankers Trust manages approximately
$96 billion in total index assets. This makes Bankers Trust one of the nation's
leading managers of index funds.
Bankers Trust has more than 50 years of experience managing retirement assets
for the nations's largest corporations and institutions. Bankers Trust's
officers have had extensive experience in managing investment portfolios having
objectives similar to those of each portfolio.
Bankers Trust, subject to the supervision and direction of the Board of Trustees
of each Portfolio, manages each Portfolio in accordance with the Portfolio's
<PAGE>
A-14
investment objective and stated investment policies, makes investment decisions
for the Portfolio, places orders to purchase and sell securities and other
financial instruments on behalf of the Portfolio and employs professional
investment managers and securities analysts who provide research services to the
Portfolio. Bankers Trust may utilize the expertise of any of its world wide
subsidiaries and affiliates to assist it in its role as investment adviser. All
orders for investment transactions on behalf of a 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.
The Investment Advisory Agreements provide for each Portfolio to pay Bankers
Trust a fee from each Portfolio, accrued daily and paid monthly, equal on an
annual basis to the following percentages of the average daily net assets of the
Portfolio for its then-current fiscal year: U.S. Bond Index Portfolio, 0.15%;
Equity 500 Equal Weighted Index Portfolio, 0.25%; Small Cap Index Portfolio,
0.15%; and EAFE Equity Index Portfolio, 0.25%.
Bankers Trust has been advised by its counsel that, in counsel's opinion,
Bankers Trust currently may perform the services for the Trust and the
Portfolios described herein without violation of the Glass-Steagall Act or other
applicable banking laws or regulations. State laws on this issue may differ from
the interpretations of relevant Federal law, and banks and financial
institutions may be required to register as dealers pursuant to state securities
law.
Bankers Trust investment personnel may invest in securities for their own
account pursuant to a code of ethics that establishes procedures for personal
investing and restricts certain transactions.
Portfolio Managers
Frank Salerno, Managing Director of Bankers Trust, is responsible for the
management of the Equity 500 Equal Weighted Index Portfolio and the Small Cap
Portfolio. Mr. Salerno oversees administration, management and trading of
international and domestic equity index strategies. He has been employed by
Bankers Trust since 1981 and has managed the Portfolios' assets since each
Portfolio commenced operations.
Richard J. Vella, Managing Director of Bankers Trust, is responsible for the
day-to-day management of the EAFE Equity Index Portfolio. Mr. Vella has been
employed by Bankers Trust since 1985 and has ten years of trading and investment
experience.
Louis R. D'Arienzo, Vice President of Bankers Trust, is responsible for the day-
to-day management of the U.S. Bond Index Portfolio. Mr. D'Arienzo has been
employed by Bankers Trust since 1981 and has twelve years of trading and
investment experience in fixed income securities.
<PAGE>
A-15
Administrator
Under an Administration and Services Agreement with each Portfolio, Bankers
Trust calculates the value of the assets of the Portfolio and generally assists
the respective Board of Trustees in all aspects of the administration and
operation of the Portfolios. The Administration and Services Agreement provides
for each Portfolio to pay Bankers Trust a fee, accrued daily and paid monthly,
equal on an annual basis to the following percentages of the Portfolio's average
daily net assets for its then-current fiscal year: U.S. Bond Index Portfolio,
0.05%; Equity 500 Equal Weighted Index Portfolio, 0.05%; Small Cap Index
Portfolio, 0.05%; and EAFE Equity Index Portfolio, 0.10%. Under each
Administration and Services Agreement, Bankers Trust may delegate one or more of
its responsibilities to others, including Signature Broker-Dealer Services, Inc.
("Signature"), each Portfolio's placement agent and sub-administrator, at
Bankers Trust's expense.
Custodian and Transfer Agent
Bankers Trust acts as custodian of the assets of each Portfolio and serves as
the transfer agent (the "Transfer Agent") for each Portfolio under the
Administration and Services Agreement with each Portfolio.
Each Portfolio bears its own expenses. Operating expenses for each Portfolio
generally consist of all costs not specifically borne by Bankers Trust or
Signature including investment advisory and administration and service fees,
fees for necessary professional services, the costs associated with regulatory
compliance and maintaining legal existence and investor relations.
Item 6. Capital Stock and Other Securities.
The Trust 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 separate series of the Trust, such as 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 his investment at any time at net asset
value. 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.
The Trust reserves the right to add additional series in the future, in which
case investments in each series would participate equally in the earnings and
assets of the particular series. Currently, the Trust has fifteen series: the
Portfolios, Liquid Assets Portfolio, Asset Management Portfolio II, Asset
Management Portfolio III, Global High Yield Securities Portfolio, Latin American
Equity Portfolio, Small Cap Portfolio, Pacific Basin Equity Portfolio, European
Equity Portfolio, International Bond Portfolio, Growth and Income Portfolio and
100% Treasury Portfolio.
Investments in the Portfolio have no pre-emptive or conversion rights and are
fully paid and non-assessable, except as set forth below. The Trust is not
<PAGE>
A-16
required and has no current intention to hold annual meetings of investors, but
the Trust 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.
These meetings may be called to elect or remove trustees, change fundamental
policies, approve Portfolio investment advisory agreement, or for other
purposes. Investors not attending these meetings are encouraged to vote by
proxy. The Trust's Transfer Agent will mail proxy materials in advance,
including a voting card and information about the proposals to be voted on.
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 percentage of the
aggregate value of the Trust's outstanding interests) 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. Each series of the Trust will vote separately on
any matter involving the corresponding Portfolio. Investors of all of the series
of the Trust will, however, vote together to elect Trustees of the Trust and for
certain other matters. Under certain circumstances, the investors of one or more
series could control the outcome of these votes.
The net asset value of a Portfolio is determined each day on which the Portfolio
is open ("Portfolio Business Day") (and on such other days as are deemed
necessary in order to comply with Rule 22c-1 under the 1940 Act). This
determination is made twice during each such day as of 12:00 noon, New York time
and as of the close of regular trading on the New York Stock Exchange Inc.
("NYSE") which is currently 4:00 p.m., New York time (each, a "Valuation Time").
Each investor in a Portfolio may add to or reduce its investment in the
Portfolio on each Portfolio Business Day. At each Valuation Time on each such
business day, the value of each investor's beneficial interest in the Portfolio
will be determined by multiplying the net asset value of the Portfolio by the
percentage, effective for that day, which 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 recomputed as the percentage equal to the fraction (i) the
numerator of which is the value of such investor's investment in the Portfolio
as of the Valuation Time, on such day plus or minus, as the case may be, the
amount of net additions to or withdrawals from the investor's investment in the
Portfolio effected as of the close of business on such day, and (ii) the
denominator of which is the aggregate net asset value 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.
<PAGE>
A-17
The net income of a 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 ("Net Income"). 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 a
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 Trust, the Portfolios will not
be subject to any income tax. However, each investor in a Portfolio will be
taxable on its share (as determined in accordance with the governing instruments
of the Trust) 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 each 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 each 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 Registrant" above.
An investment in a Portfolio may be made without a sales load. All investments
are made at the net asset value next determined if an order is received by the
Portfolio by the designated cutoff time for each accredited investor. The net
asset value of the Portfolio is determined on each Portfolio Business Day. The
Portfolios' securities are valued at amortized cost, which the Trustees of the
Trust have determined in good faith constitutes fair value for the purposes of
complying with the 1940 Act. This valuation method will continue to be used with
respect to the Portfolios until such time as the Trustees of the Trust determine
that it does not constitute fair value for such purposes.
There is no minimum initial or subsequent investment in a Portfolio. However,
because each 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
Trust's custodian bank by a Federal Reserve Bank).
The Trust and Signature reserve the right to cease accepting investments in the
Portfolio at any time or to reject any investment order.
The placement agent for the Trust is Signature. The principal business address
of Signature is 6 St. James Avenue, Boston, Massachusetts 02116. Signature
<PAGE>
A-18
receives no additional compensation for serving as the placement agent for the
Trust.
Item 8. Redemption or Repurchase.
An investor in a Portfolio may withdraw all or any portion of its investment at
the net asset value 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. Each Portfolio reserves the
right to pay redemptions in kind. Investments in a 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 such Exchange is restricted, or, to the extent otherwise permitted by the
1940 Act, if an emergency exists.
Item 9. Pending Legal Proceedings.
Not applicable.
<PAGE>
BT0300E
BT INVESTMENT PORTFOLIOS
U.S. BOND INDEX PORTFOLIO
EQUITY 500 EQUAL WEIGHTED INDEX PORTFOLIO
SMALL CAP INDEX PORTFOLIO
AND
EAFE(R) EQUITY INDEX PORTFOLIO
PART B
Item 10. Cover Page.
Not applicable.
Item 11. Table of Contents. Page
General Information and History . . . . . . . . . . . B-1
Investment Objectives and Policies . . . . . . . . . B-1
Management of the Fund . . . . . . . . . . . . . . . B-31
Control Persons and Principal Holders
of Securities . . . . . . . . . . . . . . . . B-33
Investment Advisory and Other Services . . . . . . . B-33
Brokerage Allocation and Other Practices . . . . . . B-36
Capital Stock and Other Securities . . . . . . . . . B-37
Purchase, Redemption and Pricing of
Securities Being Offered . . . . . . . . . . B-39
Tax Status . . . . . . . . . . . . . . . . . . . . . B-42
Underwriters . . . . . . . . . . . . . . . . . . . . B-42
Calculation of Performance Data . . . . . . . . . . . B-42
Financial Statements . . . . . . . . . . . . . . . . B-42
Item 12. General Information and History.
Not applicable.
Item 13. Investment Objectives and Policies.
Part A contains additional information about the investment objectives and
policies of U.S. Bond Index Portfolio, Equity 500 Equal Weighted Index
Portfolio, Small Cap Index Portfolio and EAFE(R) Equity Index Portfolio (each a
"Portfolio" and collectively, the "Portfolios"), each a series of BT Investment
Portfolios (the "Trust"). This Part B should only be read in conjunction with
Part A. This section contains supplemental information concerning the types of
securities and other instruments in which the Portfolios may invest, the
investment policies and portfolio strategies that the Portfolios may utilize and
certain risks attendant to those investments, policies and strategies.
<PAGE>
B-2
Investment Practices
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 Appendix A to this Part B.
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 maturity of longer than seven days. Securities which have not been
registered under the 1933 Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and a mutual fund
might be unable to dispose of restricted or other illiquid securities promptly
or at reasonable prices and might thereby experience difficulty satisfying
redemptions within seven days. A mutual fund might also have to register such
restricted securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.
In recent years, however, a large institutional market has developed for certain
securities that are not registered under the 1933 Act, including repurchase
agreements, commercial paper, foreign securities, municipal securities and
corporate bonds and notes. Institutional investors depend on an efficient
institutional market in which the unregistered security can be readily resold or
<PAGE>
B-3
on an issuer's ability to honor a demand for repayment. The fact that there are
contractual or legal restrictions on resale of such investments to the general
public or to certain institutions may not be indicative of their liquidity.
The Securities and Exchange Commission (the "SEC") has adopted Rule 144A, which
allows a broader institutional trading market for securities otherwise subject
to restriction on their resale to the general public. Rule 144A establishes a
"safe harbor" from the registration requirements of the 1933 Act of resales of
certain securities to qualified institutional buyers. The Adviser anticipates
that the market for certain restricted securities such as institutional
commercial paper will expand further as a result of this regulation and the
development of automated systems for the trading, clearance and settlement of
unregistered securities of domestic and foreign issuers, such as the PORTAL
System sponsored by the National Association of Securities Dealers, Inc.
The Adviser will monitor the liquidity of Rule 144A securities in each
Portfolio's portfolio under the supervision of the Portfolio's Board of
Trustees. In reaching liquidity decisions, the Adviser will consider, among
other things, the following factors: (i) the frequency of trades and quotes for
the security; (ii) the number of dealers and other potential purchasers wishing
to purchase or sell the security; (iii) dealer undertakings to make a market in
the security and (iv) the nature of the security and of the marketplace trades
(e.g., the time needed to dispose of the security, the method of soliciting
offers and the mechanics of the transfer).
Lending of Portfolio Securities. Each Portfolio has the authority to lend
portfolio securities to brokers, dealers and other financial organizations. The
Portfolio will not lend securities to Bankers Trust Company ("Bankers Trust"),
Signature Broker-Dealer Services, Inc. ("Signature") or their affiliates. By
lending its securities, a 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. A Portfolio
will adhere to the following conditions whenever its securities are loaned: (i)
the Portfolio must receive at least 100 percent cash collateral or equivalent
securities from the borrower; (ii) the borrower must increase this collateral
whenever the market value of the securities including accrued interest rises
above the level of the collateral; (iii) the Portfolio must be able to terminate
the loan at any time; (iv) the Portfolio must receive reasonable interest on the
loan, as well as any dividends, interest or other distributions on the loaned
securities, and any increase in market value; (v) the Portfolio may pay only
reasonable custodian fees in connection with the loan; and (vi) voting rights on
the loaned securities may pass to the borrower; provided, however, that if a
material event adversely affecting the investment occurs, the Board of Trustees
of the Portfolio must terminate the loan and regain the right to vote the
securities.
<PAGE>
B-4
Short-Term Instruments. When a Portfolio experiences large cash inflows through
the sale of securities and desirable equity securities, that are consistent with
the Portfolio's investment objective, which 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 S&P or Aa or higher by Moody's or, if unrated, of
comparable quality in the opinion of Bankers Trust; (iii) commercial paper; (iv)
bank obligations, including negotiable certificates of deposit, time deposits
and banker's acceptances; and (v) repurchase agreements. At the time the
Portfolio invests in commercial paper, bank obligations or repurchase
agreements, the issuer of the issuer's parent must have outstanding debt rated
AA or higher by S&P or Aa or higher by Moody's or outstanding commercial paper
or bank obligations rated A-1 by S&P or Prime-1 by Moody's; or, if no such
ratings are available, the instrument must be of comparable quality in the
opinion of Bankers Trust. These instruments may be denominated in U.S dollars or
in foreign currencies.
When-Issued and Delayed Delivery Securities. Each Portfolio may purchase
securities on a when-issued or delayed delivery basis. For example, delivery of
and payment for these securities can take place a month or more after the date
of the purchase commitment. The purchase price and the interest rate payable, if
any, on the securities are fixed on the purchase commitment date or at the time
the settlement date is fixed. The value of such securities is subject to market
fluctuation and no interest accrues to a Portfolio until settlement takes place.
At the time a Portfolio makes the commitment to purchase securities on a
when-issued or delayed delivery basis, it will record the transaction, reflect
the value each day of such securities in determining its net asset value and, if
applicable, calculate the maturity for the purposes of average maturity from
that date. At the time of settlement a when-issued security may be valued at
less than the purchase price. To facilitate such acquisitions, each Portfolio
will maintain with the Custodian a segregated account with liquid assets,
consisting of cash, U.S. Government securities or other appropriate securities,
in an amount at least equal to such commitments. On delivery dates for such
transactions, each Portfolio will meet its obligations from maturities or sales
of the securities held in the segregated account and/or from cash flow. If a
Portfolio chooses to dispose of the right to acquire a when-issued security
prior to its acquisition, it could, as with the disposition of any other
portfolio obligation, incur a gain or loss due to market fluctuation. It is the
current policy of each Portfolio not to enter into when-issued commitments
exceeding in the aggregate 15% of the market value of the Portfolio's total
assets, less liabilities other than the obligations created by when-issued
commitments.
Additional U.S. Government Obligations. Each Portfolio may invest in obligations
issued or guaranteed by U.S. Government agencies or instrumentalities. These
obligations may or may not be backed by the "full faith and credit" of the
United States. In the case of securities not backed by the full faith and credit
of the United States, each Portfolio must look principally to the federal agency
issuing or guaranteeing the obligation for ultimate repayment, and may not be
able to assert a claim against the United States itself in the event the agency
or
<PAGE>
B-5
instrumentality does not meet its commitments. Securities in which each
Portfolio may invest that are not backed by the full faith and credit of the
United States include, but are not limited to, obligations of the Tennessee
Valley Authority, the Federal Home Loan Mortgage Corporation and the U.S. Postal
Service, each of which has the right to borrow from the U.S. Treasury to meet
its obligations, and obligations of the Federal Farm Credit System and the
Federal Home Loan Banks, both of whose obligations may be satisfied only by the
individual credits of each issuing agency. Securities which are backed by the
full faith and credit of the United States include obligations of the Government
National Mortgage Association, the Farmers Home Administration, and the
Export-Import Bank.
Equity Investments. With the exception of the U.S. Bond Index Portfolio, each
Portfolio may invest in equity securities listed on any domestic or foreign
securities exchange or traded in the over-the-counter market as well as certain
restricted or unlisted securities. They may or may not pay dividends or carry
voting rights. Common stock occupies the most junior position in a company's
capital structure.
Swap Agreements. Swap agreements are contracts entered into by two parties,
primarily institutional investors, for periods ranging from a few weeks to more
than one year. In a standard swap transaction, two parties agree to exchange the
returns (or differentials in rates of return) earned or realized on particular
predetermined investments or instruments. The gross returns to be exchanged or
swapped between the parties are calculated with respect to a notional amount,
i.e., the return on or increase in value of a particular dollar amount invested
at a particular interest rate, in a particular foreign currency, or in a basket
of securities representing a particular index. The notional amount of the swap
agreement is only a fictive basis on which to calculate the obligations which
the parties to a swap agreement have agreed to exchange. A Portfolio's
obligations (or rights) under a swap agreement will generally be equal only to
the net amount to be paid or received under the agreement based on the relative
values of the positions held by each party to the agreement (the "net amount").
A Portfolio's obligations under a swap agreement will be accrued daily (offset
against any amounts owing to the Portfolio) and any accrued but unpaid net
amounts owed to a swap counterparty will be covered by the maintenance of a
segregated account consisting of cash, U.S. Government securities, or high grade
debt obligations, to avoid any potential leveraging of the Portfolio's
portfolio.
The use of swap agreements will be successful in furthering its investment
objective will depend on the Adviser's ability to correctly predict whether
certain types of investments are likely to produce greater returns than other
investments. Swap agreements may be considered to be illiquid because they are
two party contracts and because they may have terms of greater than seven days.
Moreover, a Portfolio bears the risk of loss of the amount expected to be
received under a swap agreement in the event of the default or bankruptcy of a
swap agreement counterparty. A Portfolio will enter into swap agreements only
with counterparties that would be eligible for consideration as repurchase
agreement counterparties under the Portfolio's repurchase agreement guidelines.
Certain restrictions imposed on the Portfolios by the Internal Revenue Code may
<PAGE>
B-6
limit the Portfolios' ability to use swap agreements. The swaps market is a
relatively new market and is largely unregulated. It is possible that
developments in the swaps market, including potential government regulation,
could adversely affect a Portfolio's ability to terminate existing swap
agreements or to realize amounts to be received under such agreements.
Certain swap agreements are exempt from most provisions of the Commodity
Exchange Act (the "CEA") and, therefore, are not regulated as futures or
commodity option transactions under the CEA, pursuant to regulations approved by
the Commodity Futures Trading Commission (the "CFTC") effective February 22,
1993. To qualify for this exemption, a swap agreement must be entered into by
eligible participants, which includes the following, provided the participant's
total assets exceed established levels: a bank or trust company, savings
association or credit union, insurance company, investment company subject to
regulation under the Investment Company Act of 1940, as amended (the "1940
Act"), commodity pool, corporation, partnership, proprietorship, organization,
trust or other entity, employee benefit plan, governmental entity,
broker-dealer, futures commission merchant, natural person, or regulated foreign
person. To be eligible, natural persons and most other entities must have total
assets exceeding $10 million; commodity pools and employee benefit plans must
have asset exceeding $5 million. In addition, an eligible swap transaction must
meet three conditions. First, the swap agreement may not be part of a fungible
class of agreements that are standardized as to their material economic terms.
Second, the creditworthiness of parties with actual or potential obligations
under the swap agreement must be a material consideration in entering into or
determining the terms of the swap agreement, including pricing, cost or credit
enhancement terms. Third, swap agreements may not be entered into and traded on
or through a multilateral transaction execution facility.
This exemption is not exclusive, and participants may continue to rely on
existing exclusions for swaps, such as the Policy Statement issued in July 1989
which recognized a "safe harbor" for swap transactions from regulation as
futures or commodity option transactions under the CEA or its regulations. The
Policy Statement applies to swap transactions settled in cash that: (i) have
individually tailored terms; (ii) lack exchange style offset and the use of a
clearing organization or margin system; (iii) are undertaken in conjunction with
a line of business; and (iv) are not marketed to the public.
Reverse Repurchase Agreements. The Portfolios may borrow funds for temporary or
emergency purposes, such as meeting larger than anticipated redemption requests,
and not for leverage, by among other things, agreeing to sell portfolio
securities to financial institutions such as banks and broker-dealers and to
repurchase them at a mutually agreed date and price (a "reverse repurchase
agreement"). At the time a Portfolio enters into a reverse repurchase agreement
it will place in a segregated custodial account cash, U.S. Government
Obligations or high-grade debt obligations having a value equal to the
repurchase price, including accrued interest. Reverse repurchase agreements
involve the risk that the market value of the securities sold by a Portfolio may
decline below the repurchase price of those securities. Reverse repurchase
agreements are considered to be borrowings by a Portfolio.
<PAGE>
B-7
Warrants. Warrants entitle the holder to buy common stock from the issuer at a
specific price (the strike price) for a specific period of time. The strike
price of warrants sometimes is much lower than the current market price of the
underlying securities, yet warrants are subject to similar price fluctuations.
As a result, warrants may be more volatile investments than the underlying
securities.
Warrants do not entitle the holder to dividends or voting rights with respect to
the underlying securities and do not represent any rights in the assets of the
issuing company. Also, the value of the warrant does not necessarily change with
the value of the underlying securities and a warrant ceases to have value if it
is not exercised prior to the expiration date.
Convertible Securities. Convertible securities may be a debt security or
preferred stock which may be converted into common stock or 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.
The terms of any convertible security determine its ranking in a company's
capital structure. In the case of subordinated convertible debentures, the
holders' claims on assets and earnings are subordinated to the claims of other
creditors, and are senior to the claims of preferred and common shareholders. In
the case of convertible preferred stock, the holders' claims on assets and
earnings are subordinated to the claims of all creditors and are senior to the
claims of common shareholders.
Ginnie Mae Certificates. Ginnie Mae is a wholly-owned corporate instrumentality
of the United States within the Department of Housing and Urban Development. The
National Housing Act of 1934, as amended (the "Housing Act"), authorizes Ginnie
Mae to guarantee the timely payment of the principal of and interest on
certificates that are based on and backed by a pool of mortgage loans insured by
the Federal Housing Administration under the Housing Act, or Title V of the
Housing Act of 1949 ("FHA Loans"), or guaranteed by the Department of Veterans
Affairs under the Servicemen's Readjustment Act of 1944, as amended ("VA
Loans"), or by pools of other eligible mortgage loans. The Housing Act provides
that the full faith and credit of the U.S. Government is pledged to the payment
of all amounts that may be required to be paid under any GNMA guaranty. In order
to meet its obligations under such guaranty, Ginnie Mae is authorized to borrow
from the U.S. Treasury with no limitations as to amount.
The Ginnie Mae Certificates in which the U.S. Bond Index Portfolio will invest
will represent a pro rata interest in one or more pools of the following types
of mortgage loans: (i) fixed-rate level payment mortgage loans; (ii) fixed-rate
graduated payment mortgage loans; (iii) fixed-rate growing equity mortgage
loans; (iv) fixed-rate mortgage loans secured by manufactured (mobile) homes;
(v) mortgage loans on multifamily residential properties under construction;
(vi) mortgage loans on completed multifamily projects; (vii) fixed-rate mortgage
loans as to which escrowed funds are used to reduce the borrower's monthly
payments during the early years of the mortgage loans ("buydown" mortgage
loans); (viii) mortgage loans that provide for adjustments in payments based on
periodic
<PAGE>
B-8
changes in interest rates or in other payment terms of the mortgage loans; and
(ix) mortgage-backed serial notes. All of these mortgage loans will be FHA Loans
or VA Loans and, except as otherwise specified above, will be fully-amortizing
loans secured by first liens on one- to four-family housing units.
Fannie Mae Certificates. Fannie Mae is a federally chartered and privately owned
corporation organized and existing under the Federal National Mortgage
Association Charter Act of 1938. The obligations of FNMA are not backed by the
full faith and credit of the U.S. Government.
Each Fannie Mae Certificate will represent a pro rata interest in one or more
pools of FHA Loans, VA Loans or conventional mortgage loans (i.e., mortgage
loans that are not insured or guaranteed by any governmental agency) of the
following types: (i) fixed-rate level payment mortgage loans; (ii) fixed-rate
growing equity mortgage loans; (iii) fixed-rate graduated payment mortgage
loans; (iv) variable rate mortgage loans; (v) other adjustable rate mortgage
loans; and (vi) fixed-rate and adjustable mortgage loans secured by multifamily
projects.
Freddie Mac Certificates. Freddie Mac is a corporate instrumentality of the
United States created pursuant to the Emergency Home Finance Act of 1970, as
amended (the "FHLMC Act"). The obligations of Freddie Mac are obligations solely
of Freddie Mac and are not backed by the full faith and credit of the U.S.
Government.
Freddie Mac Certificates represent a pro rata interest in a group of mortgage
loans (a "Freddie Mac Certificate group") purchased by Freddie Mac. The mortgage
loans underlying the Freddie Mac Certificates will consist of fixed-rate or
adjustable rate mortgage loans with original terms to maturity of between ten
and thirty years, substantially all of which are secured by first liens on one-
to four-family residential properties or multifamily projects. Each mortgage
loan must meet the applicable standards set forth in the FHLMC Act. A Freddie
Mac Certificate group may include whole loans, participating interests in whole
loans and undivided interests in whole loans and participations comprising
another Freddie Mac Certificate group.
Adjustable Rate Mortgages - Interest Rate Indices. Adjustable rate mortgages in
which the U.S. Bond Index Portfolio invests may be adjusted on the basis of one
of several indices. The One Year Treasury Index is the figure derived from the
average weekly quoted yield on U.S. Treasury Securities adjusted to a constant
maturity of one year. The Cost of Funds Index reflects the monthly weighted
average cost of funds of savings and loan associations and savings banks whose
home offices are located in Arizona, California and Nevada (the "FHLB Eleventh
District") that are member institutions of the Federal Home Loan Bank of San
Francisco (the "FHLB of San Francisco"), as computed from statistics tabulated
and published by the FHLB of San Francisco. The FHLB of San Francisco normally
announces the Cost of Funds Index on the last working day of the month following
the month in which the cost of funds was incurred.
A number of factors affect the performance of the Cost of Funds Index and may
cause the Cost of Funds Index to move in a manner different from indices based
upon specific interest rates, such as the One Year Treasury Index. Because of
<PAGE>
B-9
the various origination dates and maturities of the liabilities of members of
the FHLB Eleventh District upon which the Cost of Funds Index is based, among
other things, at any time the Cost of Funds Index may not reflect the average
prevailing market interest rates on new liabilities of similar maturities. There
can be no assurance that the Cost of Funds Index will necessarily move in the
same direction or at the same rate as prevailing interest rates since as longer
term deposits or borrowings mature and are renewed at market interest rates, the
Cost of Funds Index will rise or fall depending upon the differential between
the prior and the new rates on such deposits and borrowings. In addition,
dislocations in the thrift industry in recent years have caused and may continue
to cause the cost of funds of thrift institutions to change for reasons
unrelated to changes in general interest rate levels. Furthermore, any movement
in the Cost of Funds Index as compared to other indices based upon specific
interest rates may be affected by changes instituted by the FHLB of San
Francisco in the method used to calculate the Cost of Funds Index. To the extent
that the Cost of Funds Index may reflect interest changes on a more delayed
basis than other indices, in a period of rising interest rates, any increase may
produce a higher yield later than would be produced by such other indices, and
in a period of declining interest rates, the Cost of Funds Index may remain
higher than other market interest rates which may result in a higher level of
principal prepayments on mortgage loans which adjust in accordance with the Cost
of Funds Index than mortgage loans which adjust in accordance with other
indices.
LIBOR, the London interbank offered rate, is the interest rate that the most
creditworthy international banks dealing in U.S. dollar-denominated deposits and
loans charge each other for large dollar-denominated loans. LIBOR is also
usually the base rate for large dollar-denominated loans in the international
market. LIBOR is generally quoted for loans having rate adjustments at one,
three, six or twelve month intervals.
Asset-Backed Securities. The asset-backed securities in which the U.S. Bond
Index Portfolio may invest are limited to those which are readily marketable,
dollar-denominated and rated BBB or higher by Standard & Poor's Corporation
("S&P") or Baa or higher by Moody's Investors Services, Inc. ("Moody's"). Asset-
backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities do not have the benefit
of the same type of security interest in the related collateral. Credit card
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
give such debtors the right to avoid payment of certain amounts owed on the
credit cards, thereby reducing the balance due. Most issuers of automobile
receivables permit the servicer to retain possession of the underlying
obligations. If the servicer were to sell these obligations to another party,
there is a risk that the purchaser would acquire an interest superior to that of
the holders of the related automobile receivables. In addition, because of the
large number of vehicles involved in a typical issuance and technical
requirements under state laws, the trustee for the holders of the automobile
receivables may not have a proper security interest in all of the obligations
backing such receivables. Therefore, there is the possibility that recoveries on
repossessed collateral may not, in some cases, be available to support payments
on these securities.
<PAGE>
B-10
Mortgage-Backed Securities and Asset-Backed Securities--Types of Credit Support.
The mortgage-backed securities in which the U.S. Bond Index Portfolio may invest
are limited to those relating to residential mortgages. Mortgage-backed
securities and asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failure by obligors on underlying assets to make payments, such
securities may contain elements of credit support. Such credit support falls
into two categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the pass-through of
payments due on the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default enhances the likelihood of
ultimate payment of the obligations on at least a portion of the assets in the
pool. Such protection may be provided through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor from third parties, through
various means of structuring the transaction or through a combination of such
approaches. The U.S. Bond Index Portfolio will not pay any additional fees for
such credit support, although the existence of credit support may increase the
price of a security.
The ratings of mortgage-backed securities and asset-backed securities for which
third-party credit enhancement provides liquidity protection or protection
against losses from default are generally dependent upon the continued
creditworthiness of the provider of the credit enhancement. The ratings of such
securities could be subject to reduction in the event of deterioration in the
creditworthiness of the credit enhancement provider even in cases where the
delinquency and loss experience on the underlying pool of assets is better than
expected.
Examples of credit support arising out of the structure of the transaction
include "senior-subordinated securities" (multiple class securities with one or
more classes subordinate to other classes as to the payment of principal thereof
and interest thereon, with the result that defaults on the underlying assets are
borne first by the holders of the subordinated class), creation of "reserve
funds" (where cash or investments, sometimes funded from a portion of the
payments on the underlying assets, are held in reserve against future losses)
and "over-collateralization" (where the scheduled payments on, or the principal
amount of, the underlying assets exceed those required to make payment of the
securities and pay any servicing or other fees). The degree of credit support
provided for each issue is generally based on historical information with
respect to the level of credit risk associated with the underlying assets.
Delinquency or loss in excess of that which is anticipated could adversely
affect the return on an investment in such a security.
Stripped Mortgage-Backed Securities. The cash flows and yields on IO and PO
classes are extremely sensitive to the rate of principal payments (including
prepayments) on the related underlying mortgage assets. For example, a rapid or
slow rate of principal payments may have a material adverse effect on the yield
to maturity of IOs or POs, respectively. If the underlying mortgage assets
experience greater than anticipated prepayments of principal, an investor may
<PAGE>
B-11
fail to recoup fully its initial investment in an IO class of a stripped
mortgage-backed security, even if the IO class is rated AAA or Aaa. Conversely,
if the underlying mortgage assets experience slower than anticipated prepayments
of principal, the yield on a PO class will be affected more severely than would
be the case with a traditional mortgage-backed security.
Foreign Securities: Special Considerations Concerning Hong Kong, Malaysia,
Singapore and Japan. Many Asian countries may be subject to a greater degree of
social, political and economic instability than is the case in the United States
and European countries. Such instability may result from (i) authoritarian
governments or military involvement in political and economic decision-making;
(ii) popular unrest associated with demands for improved political, economic and
social conditions; (iii) internal insurgencies; (iv) hostile relations with
neighboring countries; and (v) ethnic, religious and racial disaffection.
The economies of most of the Asian countries are heavily dependent upon
international trade and are accordingly affected by protective trade barriers
and the economic conditions of their trading partners, principally, the United
States, Japan, China and the European Community. The enactment by the United
States or other principal trading partners of protectionist trade legislation,
reduction of foreign investment in the local economies and general declines in
the international securities markets could have a significant adverse effect
upon the securities markets of the Asian countries.
Hong Kong's impending return to Chinese dominion in 1997 has not initially had a
positive effect on its economic growth which was vigorous in the 1980s. However,
authorities in Beijing have agreed to maintain a capitalist system for 50 years
that, along with Hong Kong's economic growth, continued to further strong stock
market returns. In preparation for 1997, Hong Kong has to develop trade with
China, where it is the largest foreign investor, while also maintaining its
longstanding export relationship with the United States. Spending on
infrastructure improvements is a significant priority of the colonial government
while the private sector continues to diversify abroad based on its position as
an established international trade center in the Far East.
The Hong Kong stock market is undergoing a period of growth and change which may
result in trading volatility and difficulties in the settlement and recording of
transactions, and in interpreting and applying the relevant law and regulations.
The Malaysian economy continued to perform well, growing at an average annual
rate of 9% from 1987 through 1991. This placed Malaysia as one of the fastest
growing economies in the Asian-Pacific region. Malaysia has become the world's
third-largest producer of semiconductor devices (after the US and Japan) and the
world's largest exporter of semiconductor devices. More remarkable is the
country's ability to achieve rapid economic growth with relative price stability
(2% inflation over the past five years) as the government followed prudent
fiscal/monetary policies. Malaysia's high export dependence level leaves it
vulnerable to a recession in the Organization for Economic Cooperation and
Development countries or a fall in world commodity prices.
<PAGE>
B-12
Singapore has an open entrepreneurial economy with strong service and
manufacturing sectors and excellent international trading links derived from its
entrepot history. During the 1970's and early 1980's, the economy expanded
rapidly, achieving an average annual growth rate of 9%. Per capita GDP is among
the highest in Asia. Singapore holds a position as a major oil refining and
services center.
Investing in Japanese securities may involve the risks associated with investing
in foreign securities generally. In addition, because it invests in Japan, the
EAFE(R) Equity Index Portfolio will be subject to the general economic and
political conditions in Japan.
Share prices of companies listed on Japanese stock exchanges and on the Japanese
OTC market reached historical peaks (which were later referred to as the
"bubble") as well as historically high trading volumes in 1989 and 1990. Since
then, stock prices in both markets decreased significantly, with listed stock
prices reaching their lowest levels in the third quarter of 1992 and OTC stock
prices reaching their lowest levels in the fourth quarter of 1992. During the
period from January 1, 1989 through December 31, 1994, the highest Nikkei stock
average and Nikkei OTC average were 38,915.87 and 4,149.20, respectively, and
the lowest for each were 14,309.41 and 1,099.32, respectively. There can be no
assurance that additional market corrections will not occur.
The common stocks of many Japanese companies continue to trade at high price
earnings ratios in comparison with those in the United States, even after the
recent market decline. Differences in accounting methods make it difficult to
compare the earnings of Japanese companies with those of companies in other
countries, especially the United States.
Since the EAFE Equity Index Portfolio invests in securities denominated in yen,
changes in exchange rates between the U.S. dollar and the yen affect the U.S.
dollar value of the EAFE Equity Index Portfolio's assets. Such rate of exchange
is determined by forces of supply and demand on the foreign exchange markets.
These forces are in turn affected by the international balance of payments and
other economic, political and financial conditions, government intervention,
speculation and other factors.
Japanese securities held by the EAFE Equity Index Portfolio are not registered
with the SEC nor are the issuers thereof subject to its reporting requirements.
There may be less publicly available information about issuers of Japanese
securities than about U.S. companies and such issuers may not be subject to
accounting, auditing and financial reporting standards and requirements
comparable to those to which U.S. companies are subject.
Japan's success in exporting its products has generated a sizeable trade
surplus. Such trade surplus has caused tensions at times between Japan and some
of its trading partners. In particular, Japan's trade relations with the United
States have recently been the subject of discussion and negotiation between the
two nations. The United States has imposed certain measures designed to address
trade issues in specific industries. These measures and similar measures in the
future may adversely affect the performance of the EAFE Equity Index Portfolio.
<PAGE>
B-13
Japan's economy has typically exhibited low inflation and low interest rates.
There can be no assurance that low inflation and low interest rates will
continue, and it is likely that a reversal of such factors would adversely
affect the Japanese economy. Moreover, the Japanese economy may differ,
favorably or unfavorably, from the U.S. economy in such respects as growth of
gross national product, rate of inflation, capital reinvestment, resources,
self-sufficiency and balance of payments position.
Japan has a parliamentary form of government. In 1993 a coalition government was
formed which, for the first time since 1955, did not include the Liberal
Democratic Party. Since mid-1993, there have been several changes in leadership
in Japan. What, if any, effect the current political situation will have on
prospective regulatory reforms of the economy in Japan cannot be predicted.
Recent and future developments in Japan and neighboring Asian countries may lead
to changes in policy that might adversely affect the EAFE Equity Index
Portfolio.
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, a
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.
Successful use of the futures contract and related options are subject to
special risk considerations. A liquid secondary market for any futures or
options contract may not be available when a futures or options position is
sought to be closed. In addition, there may be an imperfect correlation between
movements in the securities or currency in the Portfolio. Successful use of
futures or options contracts is further dependent on Bankers Trust's ability to
correctly predict movements in the securities or foreign currency markets and no
assurance can be given that its judgement will be correct. Successful use of
options on securities or stock indices are subject to similar risk
considerations. In addition, by writing covered call options, the Portfolio
gives up the opportunity, while the option is in effect, to profit from any
price increase in the underlying securities above the options exercise price.
Futures Contracts. Each 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 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
<PAGE>
B-14
contracts as between the clearing members of the exchange. Each 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, GNMA modified pass-through mortgage-backed
securities and three-month U.S. Treasury Bills. A 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 the case of a
Portfolio which 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.
<PAGE>
B-15
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, a 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 a 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 Portfolios, if the Adviser's investment
judgment about the general direction of interest rates is incorrect, a
Portfolio's overall performance would be poorer than if it had not entered into
any such contract. For example, if a 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 a 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. A
Portfolio may have to sell securities at a time when it may be disadvantageous
to do so.
Options on Futures Contracts. Each Portfolio may purchase and write options on
futures contracts for hedging purposes. The purchase of a call option on a
futures contract is similar in some respects to the purchase of a call option on
<PAGE>
B-16
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 a 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 underlying security or foreign currency which is
deliverable upon exercise of the futures contract. If the futures price at
expiration of the option is below the exercise price, a 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 underlying security or foreign currency which
is deliverable upon exercise of the futures contract. If the futures price at
expiration of the option is higher than the exercise price, the 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,
a 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 a Portfolio assumes when it purchases an option on a futures
contract is the premium paid for the option plus related transaction costs. In
addition to the correlation risks discussed above, the purchase of an option
also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the option purchased.
The Board of Trustees of each Portfolio has adopted the requirement that futures
contracts and options on futures contracts be used as a hedge and not for
speculation. Index funds may also use stock index futures on continual basis to
equitize cash so that the fund may maintain 100% equity exposure. In addition to
this requirement, the Board of Trustees of each Portfolio has also adopted a
restriction 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 (other than
those entered into for bona fide hedging purposes) would exceed 5% of the market
value of the total assets of the Portfolio.
<PAGE>
B-17
Options on Foreign Currencies. The EAFE Equity Index 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 EAFE Equity Index 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 EAFE Equity Index 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 EAFE Equity Index
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 EAFE Equity Index 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
<PAGE>
B-18
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 EAFE Equity Index 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 a 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
forward currency option positions entered into on a national securities exchange
are cleared and guaranteed by the Options Clearing Corporation (the "OCC"),
thereby reducing the risk of counterparty default. Further, a liquid secondary
market in options traded on a national securities exchange may be more readily
available than in the over-the-counter market, potentially permitting a
Portfolio
<PAGE>
B-19
to liquidate open positions at a profit prior to exercise or expiration, or to
limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however, is
subject to the risks of the availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effects of other political and
economic events. In addition, exchange-traded options on foreign currencies
involve certain risks not presented by the over-the-counter market. For example,
exercise and settlement of such options must be made exclusively through the
OCC, which has established banking relationships in applicable foreign countries
for this purpose. As a result, the OCC may, if it determines that foreign
governmental restrictions or taxes would prevent the orderly settlement of
foreign currency option exercises, or would result in undue burdens on the OCC
or its clearing member, impose special procedures on exercise and settlement,
such as technical changes in the mechanics of delivery of currency, the fixing
of dollar settlement prices or prohibitions on exercise.
As in the case of forward contracts, certain options on foreign currencies are
traded over-the-counter and involve liquidity and credit risks which may not be
present in the case of exchange-traded currency options. A Portfolio's ability
to terminate over-the-counter options will be more limited than with
exchange-traded options. It is also possible that broker-dealers participating
in over-the-counter options transactions will not fulfill their obligations.
Until such time as the staff of the SEC changes its position, each Portfolio
will treat purchased over-the-counter options and assets used to cover written
over-the-counter options as illiquid securities. With respect to options written
with primary dealers in U.S. Government securities pursuant to an agreement
requiring a closing purchase transaction at a formula price, the amount of
illiquid securities may be calculated with reference to the repurchase formula.
In addition, futures contracts, options on futures contracts, forward contracts
and options on foreign currencies may be traded on foreign exchanges. Such
transactions are subject to the risk of governmental actions affecting trading
in or the prices of foreign currencies or securities. The value of such
positions also could be adversely affected by: (i) other complex foreign
political and economic factors; (ii) lesser availability than in the United
States of data on which to make trading decisions; (iii) delays in the
Portfolio's ability to act upon economic events occurring in foreign markets
during nonbusiness hours in the United States; (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States; and (v) lesser trading volume.
Options on Securities. Each 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.
<PAGE>
B-20
When a 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 a 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.
A Portfolio may terminate its obligation as the writer of a call or put option
by purchasing an option with the same exercise price and expiration date as the
option previously written. This transaction is called a "closing purchase
transaction." The Portfolio will realize a profit or loss 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. 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 a 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
<PAGE>
B-21
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.
A 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.
A 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.
Each Portfolio has adopted certain other nonfundamental policies concerning
option transactions which are discussed below. The Portfolio's activities in
options may also be restricted by the requirements of the Internal Revenue Code
of 1986, as amended (the "Code"), for qualification as a regulated investment
company.
The hours of trading for options on securities may not conform to the hours
during which the underlying securities are traded. To the extent that the option
markets close before the markets for the underlying securities, significant
price and rate movements can take place in the underlying securities markets
that cannot be reflected in the option markets. It is impossible to predict the
volume of trading that may exist in such options, and there can be no assurance
that viable exchange markets will develop or continue.
A 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
<PAGE>
B-22
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 Portfolios' Trustees.
Options on Securities Indices. In addition to options on securities, each
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."
EAFE Equity Index Portfolio may, to the extent allowed by Federal and state
securities laws, invest in securities indices instead of investing directly in
individual foreign 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 a Portfolio's portfolio 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 each 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, each 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. A 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.
<PAGE>
B-23
A forward foreign currency exchange contract is an obligation by a 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. Each 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.
Each 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, a 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 the
Prospectus may be restricted. Forward contracts may reduce the potential gain
from a positive change in the relationship between the U.S. dollar and foreign
currencies. Unanticipated changes in currency prices may result in poorer
overall performance for the 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 a Portfolio's foreign currency denominated portfolio
securities and the use of such techniques will subject a 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, a
<PAGE>
B-24
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 a
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 a
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 a 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 a Portfolio
to eliminate the obligation from its portfolio, but Bankers Trust will consider
such an event in its determination of whether a Portfolio should continue to
hold the obligation. A description of the ratings used herein and in Part A of
the Portfolios' Registration Statement is set forth in the Appendix A herein.
Investment Restrictions
The following investment restrictions are "fundamental policies" of each
Portfolio and may not be changed with respect to Portfolio without the approval
of a "majority of the outstanding voting securities" of the Portfolio. "Majority
of the outstanding voting securities" under the 1940 Act, and as used in this
Part B and Part A, means, with respect to the Portfolio, the lesser of (i) 67%
or more of the total beneficial interests of the Portfolio present at a meeting,
if the holders of more than 50% of the total beneficial interests of the
Portfolio are present or represented by proxy or (ii) more than 50% of the total
beneficial interests of the Portfolio.
As a matter of fundamental policy, no Portfolio may:
(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 (redemption of shares) while
effecting an orderly liquidation of portfolio securities or to maintain
liquidity in the event of an unanticipated failure to complete a portfolio
security transaction or other similar situations) or reverse repurchase
agreements, provided that collateral arrangements with respect to options and
futures, including deposits of initial
<PAGE>
B-25
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 Portfolios may not engage in dollar roll
transactions);
(2) underwrite securities issued by other persons except insofar as a
Portfolio or the Trust 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 (under current regulations, the Portfolio's fundamental
policy with respect to 20% risk weighing for financial institutions prevent the
Portfolio from engaging in securities lending);
(4) purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or interests therein),
interests in oil, gas or mineral leases, commodities or commodity contracts
(except futures and option contracts) in the ordinary course of business (except
that the Portfolio may hold and sell, for the Portfolio's portfolio, real estate
acquired as a result of the Portfolio's ownership of securities);
(5) concentrate its investments in any particular industry (excluding
U.S. Government securities), but if it is deemed appropriate for the achievement
of a Portfolio's investment objective(s), up to 25% of its total assets may be
invested in any one industry; and
(6) issue any senior security (as that term is defined in the 1940 Act)
if such issuance is specifically prohibited by the 1940 Act or the rules and
regulations promulgated thereunder, provided that collateral arrangements with
respect to options and futures, including deposits of initial deposit and
variation margin, are not considered to be the issuance of a senior security for
purposes of this restriction.
State and Federal Restrictions. In order to comply with certain state and
Federal statutes and policies each Portfolio will not as a matter of operating
policy:
(i) borrow money (including through reverse repurchase or forward
roll transactions) for any purpose in excess of 5% of the
Portfolio's total assets (taken at cost), except that the
Portfolio may borrow for temporary or emergency purposes up to
1/3 of its total assets;
(ii) pledge, mortgage or hypothecate for any purpose in excess of
10% of the Portfolio's total assets (taken at market value),
provided that
<PAGE>
B-26
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 securities it does not own such that the dollar amount
of such short sales at any one time exceeds 25% of the net
equity of the Portfolio, and the value of securities of any
one issuer in which the Portfolio is short exceeds the lesser
of 2.0% of the value of the Portfolio's net assets or 2.0% of
the securities of any class of any U.S. issuer and, provided
that short sales may be made only in those securities which
are fully listed on a national securities exchange or a
foreign exchange (This provision does not include the sale of
securities of the Portfolio contemporaneously owns or has the
right to obtain securities equivalent in kind and amount to
those sold, i.e., short sales against the box.) (the
Portfolios have no current intention to engage in short
selling);
(v) invest for the purpose of exercising control or management;
(vi) purchase securities issued by any investment company except
by purchase in the open market where no commission or profit
to a sponsor or dealer results from such purchase other than
the customary broker's commission, or except when such
purchase, though not made in the open market, is part of a
plan of merger or consolidation; provided, however, that
securities of any investment company will not be purchased
for the Portfolio if such purchase at the time thereof would
cause: (a) more than 10% of the Portfolio's total assets
(taken at the greater of cost or market value) to be invested
in the securities of such issuers; (b) more than 5% of the
Portfolio's total assets (taken at the greater of cost or
market value) to be invested in any one investment company;
or (c) more than 3% of the outstanding voting securities of
any such issuer to be held for the Portfolio; provided
further that, except in the case of a merger or
consolidation, the Portfolio shall not purchase any
securities of any open-end investment company unless the
Portfolio (1) waives the investment advisory fee with respect
to assets invested in other open-end investment companies and
(2) incurs no sales charge in connection with the investment;
(vii) invest more than 10% of the Portfolio's total assets (taken at
the greater of cost or market value) in securities (excluding
Rule 144A securities) that are restricted as to resale under
the 1933 Act;
<PAGE>
B-27
(viii) invest more than 15% of the Portfolio's total assets (taken
at the greater of cost or market value) in (a) securities
(including Rule 144A securities) that are restricted as to
resale under the 1933 Act, and (b) securities that are issued
by issuers which (including predecessors) have been in
operation less than three years (other than U.S. Government
securities), provided, however, that 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;
(ix) 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;
(x) 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;
(xi) invest in securities issued by an issuer any of whose
officers, directors, trustees or security holders is an
officer or Trustee of the Trust, or is an officer or 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;
(xii) invest in warrants (other than warrants acquired by the
Portfolio as part of a unit or attached to securities at the
time of purchase) if, as a result, the investments (valued at
the lower of cost or market) would exceed 5% of the value of
the Portfolio's net assets or if, as a result, more than 2%
of the Portfolio's net assets would be invested in warrants
not listed on a recognized United States or foreign stock
exchange, to the extent permitted by applicable state
securities laws;
(xiii) write puts and calls on securities unless each of the
following conditions are met: (a) the security underlying the
put or call is within the Investment Practices of the
Portfolio and the option is issued by the Options Clearing
Corporation, except for put and call options issued by
non-U.S. entities or listed on non-U.S. securities or
commodities exchanges; (b) the aggregate value of the
obligations underlying the puts determined as of the date the
options are sold shall not exceed 5% 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
<PAGE>
B-28
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
(xiv) 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.
There will be no violation of any investment restriction if that restriction is
complied with at the time the relevant action is taken notwithstanding a later
change in market value of an investment, in net or total assets, in the
securities rating of the investment, or any other later change.
Each 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.
Portfolio Transactions and Brokerage Commissions. The frequency of Portfolio
transactions-the Portfolio's portfolio turnover rate-will vary from year to year
depending on market conditions and the Portfolio's cash flows. Each Portfolio's
annual portfolio turnover rate is not expected to exceed 100%.
Description of 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.
<PAGE>
B-29
Description of Moody's Corporate Bond Ratings:
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edge."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa securities.
A - Bonds rated A possess many favorable investment attributes and are to be
considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa - Bonds rated Baa are considered as medium-grade obligations, i.e. they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such, bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba - Bonds rated Ba are judged to have speculative elements. Their future cannot
be considered as well assured. Often the protection of interest and principal
payments may be very moderate and thereby not well safeguarded during both (good
and bad times over the future. Uncertainty of position characterizes bonds in
this class.
B - Bonds rated B generally lack characteristics of a desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked short-comings.
C - Bonds rated C are the lowest-rated class of bonds and issued so rated can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
Moody's applies numerical modifiers, 1, 2, and 3, in each generic rating
classification from Aa through B in its corporate bond system. The modifier 1
<PAGE>
B-30
indicates that the security ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
Description of S&P's Corporate Bond Ratings:
AAA - Debt rated AAA has the highest rating assigned by S&P to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.
AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher-rated issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to weakened capacity to pay interest and repay principal for debt
in this category than in higher-rated categories.
BB - Debt rate BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments.
B - Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB- rating.
CCC - Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal.
CC - Debt rated CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating.
C -The rating C is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC- debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed but debt service
payments are continued.
CI - The rating CI is reserved for income bonds on which no interest is being
paid.
<PAGE>
B-31
D - Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating will also be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
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 Portfolios they
represent. In addition, the Trustees review contractual arrangements with
companies that provide services to the Portfolios and review the Portfolios'
performance.
The Trustees and officers of the Trust and their principal occupations during
the past five years are set forth below. Their titles may have varied during
that period. Asterisks indicate those Trustees and officers who are "interested
persons" (as defined in the 1940 Act) of the Trust. Unless otherwise indicated,
the address of each Trustee and officer is 6 St. James Avenue, Boston,
Massachusetts 02116.
Trustees
PHILIP SAUNDERS, JR. -- 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.
CHARLES P. BIGGAR -- 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 -- Trustee; Retired; Director, Coutts & Co. Group, Coutts & Co.
(U.S.A.) International; 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.
RICHARD J. HERRING -- Trustee; Professor, Finance Department, The Wharton
School, University of Pennsylvania. His address is The Wharton School,
University of Pennsylvania Finance Department, 3303 Steinberg Hall/Dietrich
Hall, Philadelphia, Pennsylvania 19104.
PHILIP W. COOLIDGE* -- President and Trustee; Chairman, Chief Executive Officer
and President, Signature Financial Group, Inc. ("SFG") (since December, 1988)
and Signature (since April, 1989).
<PAGE>
B-32
Officers of the Trust
JOHN R. ELDER - Treasurer; Vice President, SFG (since April, 1995); Treasurer,
Phoenix Family of Mutual Funds (prior to April, 1995); Audit Manager, Price
Waterhouse (prior to 1983).
DAVID G. DANIELSON -- Assistant Treasurer; Assistant Manager, SFG (since May,
1991); Graduate Student, Northeastern University (from April, 1990 to March,
1991); Tax Accountant & Systems Analyst, Putnam Companies (prior to March,
1990).
JAMES S. LELKO, JR. -- Assistant Treasurer; Assistant Manager, SFG (since
January 1993); Senior Tax Compliance Accountant, Putnam Investments (prior to
December 1992).
BARBARA M. O'DETTE -- Assistant Treasurer; Assistant Treasurer, SFG (since
December, 1988) and Signature (since April, 1989); Administrative Controller,
Massachusetts Financial Services Company (prior to December, 1988).
DANIEL E. SHEA -- Assistant Treasurer; Assistant Manager, SFG (since November
1993); Supervisor and Senior Technical Advisor, Putnam Investments (prior to
November 1993).
THOMAS M. LENZ -- Secretary; Vice President and Associate General Counsel, SFG
(since November, 1989); Assistant Secretary, Signature (since February, 1991);
Attorney, Ropes & Gray (prior to November, 1989).
LINDA T. GIBSON -- Assistant Secretary; Legal Counsel and Assistant Secretary,
SFG (since May, 1992); Assistant Secretary, Signature (since October, 1992);
student, Boston University School of Law (September, 1989 to May, 1992); Product
Manager, SFG (January, 1989 to September, 1989).
MOLLY S. MUGLER -- Assistant Secretary; Legal Counsel and Assistant Secretary,
SFG (since December, 1988); Assistant Secretary, Signature (since April, 1989).
ANDRES E. SALDANA -- Assistant Secretary; Legal Counsel, SFG (since November,
1992); Assistant Secretary, Signature (since September, 1993); Attorney, Ropes &
Gray (September, 1990 to November, 1992); law student, Yale Law School
(September, 1987 to May, 1990).
Messrs. Coolidge, Danielson, Elder, Lelko, Lenz, Saldana and Shea and Mss.
Gibson, Mugler and O'Dette also hold similar positions for other investment
companies for which Signature or an affiliate serves as the principal
underwriter.
No person who is an officer or director of Bankers Trust is an officer or
Trustee of the Trust. No director, officer or employee of Signature or any of
its affiliates will receive any compensation from the Trust for serving as an
officer or Trustee of the Trust. The Trust, EAFE Equity, Capital Appreciation,
Cash Management, Treasury Money, Tax Free Money, NY Tax Free Money, Utility,
Short/Intermediate U.S. Government Securities, Intermediate Tax Free, Asset
<PAGE>
B-33
Management, BT Investment Funds and BT Advisor Funds (collectively the "Fund
Complex") collectively pay an annual fee of $10,000 per annum plus $1,250 per
meeting attended and reimburses for travel and out-of-pocket expenses to each
Trustee who is not a director, officer or employee of the Adviser, the Placement
Agent, the Administrator or any of their affiliates.
The Trust'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
Trust, unless, as to liability to the Trust or the investors in a Portfolio or
any other series of the Trust, it is finally adjudicated that they engaged in
wilful 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 Trust. 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 wilful misfeasance, bad faith, gross negligence or reckless disregard of
their duties.
Item 15. Control Persons and Principal Holders of Securities.
As of January 5, 1996, Bond Index Fund, Equity 500 Equal Weighted Fund, Small
Cap Index Fund and EAFE Equity Index Fund (each a "Fund"), each a series of
shares of BT Advisor Funds, owned approximately 100% of the value of the
outstanding interests in the corresponding Portfolio. Because each Fund controls
the corresponding Portfolio, it may take actions without the approval of any
other investor in the Portfolio.
Each Fund has informed the Trust that whenever it is requested to vote on
matters pertaining to the fundamental policies of the corresponding 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 any of the Portfolios will follow the same or
a similar practice.
Item 16. Investment Advisory and Other Services.
Under the terms of each Portfolio's investment advisory agreement (the "Advisory
Agreement"), Bankers Trust (the "Adviser") manages the Portfolio subject to the
supervision and direction of Board of Trustees of the Portfolio. Bankers Trust
will: (i) act in strict conformity with the each 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 each Portfolio in accordance with the
Portfolio's investment objectives, restrictions and policies; (iii) make
investment decisions for each Portfolio; and (iv) place purchase and sale orders
for securities and other financial instruments on behalf of each Portfolio.
<PAGE>
B-34
Bankers Trust bears all expenses in connection with the performance of services
under each Advisory Agreement. Each Portfolio bears certain other expenses
incurred in its operation, including: taxes, interest, brokerage fees and
commissions, if any; fees of Trustees of the Portfolio who are not officers,
directors or employees of Bankers Trust, Signature or any of their affiliates;
SEC fees; charges of custodians and transfer and dividend disbursing agents;
certain insurance premiums; outside auditing and legal expenses; costs of
maintenance of corporate existence; costs attributable to investor services,
including, without limitation, telephone and personnel expenses; costs of
preparing and printing offering materials for regulatory purposes and for
distribution to existing investors; costs of investors' reports and meetings of
investors, officers and Trustees of the Portfolio; and any extraordinary
expenses.
Bankers Trust may have deposit, loan and other commercial banking relationships
with the issuers of obligations which may be purchased on behalf of the
Portfolios, including outstanding loans to such issuers which could be repaid in
whole or in part with the proceeds of securities so purchased. Such affiliates
deal, trade and invest for their own accounts in such obligations and are among
the leading dealers of various types of such obligations. Bankers Trust has
informed the Portfolios that, in making its investment decisions, it does not
obtain or use material inside information in its possession or in the possession
of any of its affiliates. In making investment recommendations for the
Portfolios, Bankers Trust will not inquire or take into consideration whether an
issuer of securities proposed for purchase or sale by a Portfolio is a customer
of Bankers Trust, its parent or its subsidiaries or affiliates and, in dealing
with its customers, Bankers Trust, its parent, subsidiaries and affiliates will
not inquire or take into consideration whether securities of such customers are
held by any fund managed by Bankers Trust or any such affiliate.
Bankers Trust may not recoup any waived investment advisory or administration
and services fees. Such waivers by Bankers Trust shall stay in effect for at
least 12 months.
Administrator.
Under the administration and services agreements, Bankers Trust is obligated on
a continuous basis to provide such administrative services as the Board of
Trustees of the Portfolios reasonably deems necessary for the proper
administration of the Portfolios. Bankers Trust will: generally assist in all
aspects of each Portfolios' operations; supply and maintain office facilities
(which may be in Bankers Trust's own offices), statistical and research data,
data processing services, clerical, accounting, bookkeeping and recordkeeping
services (including without limitation the maintenance of such books and records
as are required under the 1940 Act and the rules thereunder, except as
maintained by other agents), internal auditing, 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 Declarations of Trust, by-laws, investment objectives
and policies and with
<PAGE>
B-35
Federal and state securities laws; arrange for appropriate insurance coverage;
calculate net asset values, net income and realized capital gains or losses; and
negotiate arrangements with, and supervise and coordinate the activities of,
agents and others to supply services. Bankers Trust also provides fund
accounting and transfer agency to the Portfolios pursuant to the Administration
Agreement.
Pursuant to a sub-administration agreement (the "Sub-Administration Agreement"),
Signature performs such sub-administration duties for the Trust as from time to
time may be agreed upon by Bankers Trust and Signature. The Sub-Administration
Agreement provides that Signature will receive such compensation as from time to
time may be agreed upon by Signature and Bankers Trust. All such compensation
will be paid by Bankers Trust.
Banking Regulatory Matters.
Bankers Trust has been advised by its counsel that in its opinion Bankers Trust
may perform the services for the Portfolios contemplated by the Advisory
Agreements and other activities for the Portfolios described in Part A and Part
B, herein, without violation of the Glass-Steagall Act or other applicable
banking laws or regulations. However, counsel has pointed out that future
changes in either Federal or state statutes and regulations concerning the
permissible activities of banks or trust companies, as well as future judicial
or administrative decisions or interpretations of present and future statutes
and regulations, might prevent Bankers Trust from continuing to perform those
services for the Portfolios. State laws on this issue may differ from the
interpretations of relevant Federal law and banks and financial institutions may
be required to register as dealers pursuant to state securities law. If the
circumstances described above should change, the Boards of Trustees would review
the relationships with Bankers Trust and consider taking all actions necessary
in the circumstances.
Custodian and Transfer Agent.
Bankers Trust serves as Custodian for the Portfolios pursuant to the
administration and services agreements. As Custodian, it holds each Portfolio's
assets. Bankers Trust also serves as transfer agent of each Portfolio pursuant
to the respective administration and services agreement. Bankers Trust may be
reimbursed by the Portfolios for its out-of-pocket expenses. Bankers Trust will
comply with the self-custodian provisions of Rule 17f-2 under the 1940 Act.
Independent Accountants.
Coopers & Lybrand L.L.P. are the Independent Accountants for the Trust,
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 1100 Main, Suite 900,
Kansas City, Missouri 64105.
<PAGE>
B-36
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 each 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 a
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 a 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 a
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
National Association of Securities Dealers, Inc. and such other policies as the
Trustees of the Portfolio may determine, the Adviser may consider sales of
beneficial interests of the Trust and of other investment company clients of
Bankers Trust as a factor in the selection of broker-dealers to execute
portfolio transactions. Bankers Trust will make such allocations if commissions
are
<PAGE>
B-37
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 a Portfolio and to the Adviser, it is the opinion of
the management of the Portfolios that such information is only supplementary to
the Adviser's own research effort, since the information must still be analyzed,
weighed and reviewed by the Adviser's staff. Such information may be useful to
the Adviser in providing services to clients other than the Portfolios, and not
all such information is used by the Adviser in connection with the Portfolios.
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 Portfolios.
In certain instances there may be securities which are suitable for a Portfolio
as well as for one or more of the Adviser's other clients. Investment decisions
for a 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 a Portfolio is concerned. However, it is believed that
the ability of a Portfolio to participate in volume transactions will produce
better executions for the Portfolio.
Item 18. Capital Stock and Other Securities.
Under the Declaration of Trust, the Trustees are authorized to issue
beneficial interests in separate series, such as the Portfolio. No series of the
Trust has any preference over any other series. Investors in the Portfolio 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 net assets of the Portfolio
available for distribution to investors. Investments in the Portfolio have no
<PAGE>
B-38
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.
Each investor in the Portfolio is entitled to a vote in proportion to
the amount of its investment. The Portfolio and the other series of the Trust
will all vote together in certain circumstances (e.g., election of the Trust's
Trustees and auditors, as required by the 1940 Act and the rules thereunder).
One or more series of the Trust could control the outcome of these votes.
Investors do not have cumulative voting rights, and investors holding more than
50% of the aggregate beneficial interests in the Trust, or in a series as the
case may be, may control the outcome of votes and in such event the other
investors in the Portfolio, or in the series, would not be able to elect any
Trustee. The Trust is not required and has no current intention to hold annual
meetings of investors but the Trust will hold special meetings of investors when
in the judgment of the Trust's Trustees it is necessary or desirable to submit
matters for an investor vote. No material amendment may be made to the Trust'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 Trust, with respect to 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 the Portfolio's investors (with the vote of each being
in proportion to its percentage of the beneficial interests in the Portfolio),
except that if the Trustees of the Trust 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 of the Trust by written notice to its
investors.
The Trust is organized as a trust under the laws of the State of New
York. Investors in the Portfolio or any other series of the Trust will be held
personally liable for its obligations and liabilities, subject, however, to
indemnification by the Trust in the event that there is imposed upon an investor
a greater portion of the liabilities and obligations than its proportionate
beneficial interest. The Declaration of Trust also provides that the Trust shall
maintain appropriate insurance (for example, fidelity bonding and errors and
omissions insurance) for the protection of the Trust, 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 Trust itself was unable to meet its obligations with respect to any
series thereof.
The Declaration of Trust further provides that obligations of a
Portfolios or any other series of the Trust are not binding upon the Trustees
individually but only upon the property of the Portfolio or other series of the
Trust, as the case may be, and that the Trustees will not be liable for any
action or failure
<PAGE>
B-39
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 wilful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his office.
The Trust reserves the right to create and issue a number of series, in
which case investments in each series would participate equally in the earnings
and assets of the particular series. Investors in each series would be entitled
to vote separately to approve advisory agreements or changes in investment
policy, but investors of all series may vote together in the election or
selection of Trustees, principal underwriters and accountants. Upon liquidation
or dissolution of any series of the Trust, the investors in that series would be
entitled to share pro rata in the net assets of that series available for
distribution to investors.
Item 19. Purchase, Redemption and Pricing of Securities Being Offered.
Equity and debt securities (other than short-term debt obligations maturing in
60 days or less), including listed securities and securities for which price
quotations are available, will normally be valued on the basis of market
valuations furnished by a pricing service. Short-term debt obligations and money
market securities maturing in 60 days or less are valued at amortized cost,
which approximates market.
Securities for which market quotations are not available are valued by Bankers
Trust pursuant to procedures adopted by each Portfolio's Board of Trustees. It
is generally agreed that securities for which market quotations are not readily
available should not be valued at the same value as that carried by an
equivalent security which is readily marketable.
The problems inherent in making a good faith determination of value are
recognized in the codification effected by SEC Financial Reporting Release No. 1
("FRR 1" (formerly Accounting Series Release No. 113)) which concludes that
there is "no automatic formula" for calculating the value of restricted
securities. It recommends that the best method simply is to consider all
relevant factors before making any calculation. According to FRR 1 such factors
would include consideration of the:
type of security involved, financial statements, cost at date
of purchase, size of holding, discount from market value of
unrestricted securities of the same class at the time of
purchase, special reports prepared by analysts, information as
to any transactions or offers with respect to the security,
existence of merger proposals or tender offers affecting the
security, price and extent of public trading in similar
securities of the issuer or comparable companies, and other
relevant matters.
To the extent that a Portfolio purchases securities which are restricted as to
resale or for which current market quotations are not available, the Adviser of
<PAGE>
B-40
the Portfolio will value such securities based upon all relevant factors as
outlined in FRR 1.
Each Portfolio reserve the right, if conditions exist which make cash payments
undesirable, to honor any request for redemption or repurchase order by making
payment in whole or in part in readily marketable securities chosen by the
Portfolio and valued as they are for purposes of computing the Portfolio's net
asset value, as the case may be (a redemption in kind). If payment is made to in
securities, an investor may incur transaction expenses in converting these
securities into cash. Each Portfolio has elected, however, to be governed by
Rule 18f-1 under the 1940 Act as a result of which each Portfolio is obligated
to redeem beneficial interests with respect to any one investor during any
90-day period, solely in cash up to the lesser of $250,000 or 1% of the net
asset value of the Portfolio at the beginning of the period.
Each Portfolio has agreed to make a redemption in kind to the corresponding Fund
whenever the Fund wishes to make a redemption in kind and therefore shareholders
of the Fund that receive redemptions in kind will receive portfolio securities
of the corresponding Portfolio and in no case will they receive a security
issued by the Portfolio. Each Portfolio will not redeem in kind except in
circumstances in which the corresponding Fund is permitted to redeem in kind or
unless requested by the Fund.
Each investor in a Portfolio may add to or reduce its investment in the
Portfolio on each day the Portfolio determines its net asset value. At the close
of each such business day, the value of each investor's beneficial interest in
the Portfolio will be determined by multiplying the net asset value of the
Portfolio by the percentage, effective for that day, which represents that
investor's share of the aggregate beneficial interests in the Portfolio. Any
additions or withdrawals which are to be effected as of the close of business on
that day will then be effected. The investor's percentage of the aggregate
beneficial interests in the Portfolio will then be recomputed as the percentage
equal to the fraction (i) the numerator of which is the value of such investor's
investment in the Portfolio as of the close of business on such day plus or
minus, as the case may be, the amount of net additions to or withdrawals from
the investor's investment in the Portfolio effected as of the close of business
on such day, and (ii) the denominator of which is the aggregate net asset value
of the Portfolio as of the close of business on such day plus or minus, as the
case may be, the amount of net additions to or withdrawals from the aggregate
investments in the Portfolio by all investors in the Portfolio. The percentage
so determined will then be applied to determine the value of the investor's
interest in the Portfolio as the close of business on the following business
day.
Each Portfolio may, at its own option, accept securities in payment for
interests. The securities delivered in payment for interests are valued by the
method described under "Net Asset Value" as of the day the Portfolio receives
the securities. This is a taxable transaction to the investor. Securities may be
accepted in payment for interests only if they are, in the judgment of Bankers
Trust, appropriate investments for the Portfolio. In addition, securities
accepted in payment for shares of beneficial interest must: (i) meet the
investment objective and policies of the acquiring Portfolio; (ii) be acquired
<PAGE>
B-41
by the applicable Portfolio for investment and not for resale; (iii) be liquid
securities which are not restricted as to transfer either by law or liquidity of
market; and (iv) if stock, have a value which is readily ascertainable as
evidenced by a listing on a stock exchange, over-the-counter market or by
readily available market quotations from a dealer in such securities. Each
Portfolio reserves the right to accept or reject at its own option any and all
securities offered in payment for its interests.
The Portfolio determines its net asset value as of 12:00 noon and 4:00 p.m., New
York time, on each day on which the Portfolio is open ("Portfolio Business
Day"), 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 Portfolio is open every weekday except for: (a) the following
holidays: New Year's Day, Martin Luther King Day, Presidents' Day, Memorial Day,
Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day and
Christmas Day 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.
The valuation of each Portfolio's securities is based on their amortized cost,
which does not take into account unrealized capital gains or losses. Amortized
cost valuation involves initially valuing an instrument at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium, generally without regard to the impact of fluctuating interest rates on
the market value of the instrument. Although this method provides certainty in
valuation, it may result in periods during which value, as determined by
amortized cost, is higher or lower than the price the Portfolio would receive if
it sold the instrument.
Each Portfolio's use of the amortized cost method of valuing its securities is
permitted by a rule adopted by the SEC.
Pursuant to the rule, the Board of Trustees of the Trust also has established
procedures designed to allow investors in a Portfolio to stabilize, to the
extent reasonably possible, the investors' price per share as computed for the
purpose of sales and redemptions. These procedures include review of a
Portfolio's holdings by the Trust's Board of Trustees, at such intervals as it
deems appropriate, to determine whether the value of the Portfolio's assets
calculated by using available market quotations or market equivalents deviates
from such valuation based on amortized cost.
The rule also provides that the extent of any deviation between the value of a
Portfolio's assets based on available market quotations or market equivalents
and such valuation based on amortized cost must be examined by the Trust's Board
of Trustees. In the event the Board of Trustees determines that a deviation
exists that may result in material dilution or other unfair results to
investors, pursuant to the rule, the Trust's Board of Trustees must cause the
Portfolio to take such corrective action as the Board of Trustees regards as
necessary and
<PAGE>
B-42
appropriate, including: selling portfolio instruments prior to maturity to
realize capital gains or losses or to shorten average portfolio maturity; paying
distributions from capital or capital gains; redeeming interests in kind; or
valuing the Portfolio's assets by using available market quotations.
Item 20. Tax Status.
The Trust is organized as a trust under New York law. Under the
anticipated method of operation of the Trust, 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 Trust)
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 Trust's taxable year-end is December 31. Although, as described
above, the Portfolio will not be subject to Federal income tax, the Trust will
file appropriate income tax returns with respect to the Portfolio.
It is intended that the assets, income and distributions of the
Portfolio 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.
Item 21. Underwriters.
The placement agent for the Trust is Signature, 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 financial statements included herein have been included in reliance
upon the report of Coopers & Lybrand L.L.P., Independent Accountants, as experts
in accounting and auditing.
<PAGE>
B-43
BT INVESTMENT PORTFOLIOS --
U.S. BOND INDEX PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
JANUARY 2, 1996
Assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . $ 10
Deferred organization expenses . . . . . . . . . . . . 9,000
-------
Total assets . . . . . . . . . . . . . . . . . 9,010
Liabilities:
Accrued organization expenses . . . . . . . . . . . . 9,000
------
Net assets . . . . . . . . . . . . . . . . . . $ 10
=======
NOTES:
(1) BT Investment Portfolios, a New York master trust, (the "Portfolio
Trust") was organized on March 27, 1993 and has been inactive since
that date with respect to U.S. Bond Index Portfolio (the "Portfolio")
except for matters relating to the Portfolio's establishment and
designation as a subtrust or series of the Portfolio Trust, and the
sale of a beneficial interest therein at the purchase price of $10.00
to BT Advisor Funds -- Institutional U.S. Bond Index Fund (the "Fund")
(the "Initial Interests"). The Portfolio is one of fifteen series of
the Portfolio Trust.
(2) Organization expenses of the Portfolio are being deferred and will be
amortized on a straight-line basis over a period not to exceed five
years from the commencement of investment operations of the Portfolio.
Any amount received by the Portfolio from the Fund as a result of a
redemption by Signature Financial Group, Inc. will be applied so as to
reduce the amount of unamortized organization expenses. The amount paid
by the Portfolio Trust on any withdrawal by the Fund of an Initial
Interest in the Portfolio will be reduced by a portion of any
unamortized organization expenses of the Portfolio, determined by the
proportion of the amount of the Initial Interest withdrawn to the
aggregate amount of the Initial Interests in the Portfolio
then-outstanding after taking into account any prior withdrawals of any
of the Initial Interests in the Portfolio.
(3) At 4:00 p.m., New York time, on each business day of the Portfolio, the
value of an investor's beneficial interest in the Portfolio is equal to
the product of (i) the aggregate net asset value of the Portfolio
multiplied by (ii) the percentage representing that investor's share of
the aggregate beneficial interests in the Portfolio effective for that
day.
(4) The Portfolio Trust has entered into an Investment Advisory Agreement
with Bankers Trust Company and an Administration and Services Agreement
with Bankers Trust Company under which Bankers Trust Company provides
administration, custody and transfer agency services to the Portfolio
Trust.
<PAGE>
B-44
BT INVESTMENT PORTFOLIOS --
EQUITY 500 EQUAL WEIGHTED INDEX PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
JANUARY 2, 1996
Assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . $ 10
Deferred organization expenses . . . . . . . . . . . . 9,000
-------
Total assets . . . . . . . . . . . . . . . . . 9,010
Liabilities:
Accrued organization expenses . . . . . . . . . . . . 9,000
------
Net assets . . . . . . . . . . . . . . . . . . $ 10
=======
NOTES:
(1) BT Investment Portfolios, a New York master trust, (the "Portfolio
Trust") was organized on March 27, 1993 and has been inactive since
that date with respect to Equity 500 Equal Weighted Index Portfolio
(the "Portfolio") except for matters relating to the Portfolio's
establishment and designation as a subtrust or series of the Portfolio
Trust, and the sale of a beneficial interest therein at the purchase
price of $10.00 to BT Advisor Funds -- Institutional Equity 500 Equal
Weighted Index Fund (the "Fund") (the "Initial Interests"). The
Portfolio is one of fifteen series of the Portfolio Trust.
(2) Organization expenses of the Portfolio are being deferred and will be
amortized on a straight-line basis over a period not to exceed five
years from the commencement of investment operations of the Portfolio.
Any amount received by the Portfolio from the Fund as a result of a
redemption by Signature Financial Group, Inc. will be applied so as to
reduce the amount of unamortized organization expenses. The amount paid
by the Portfolio Trust on any withdrawal by the Fund of an Initial
Interest in the Portfolio will be reduced by a portion of any
unamortized organization expenses of the Portfolio, determined by the
proportion of the amount of the Initial Interest withdrawn to the
aggregate amount of the Initial Interests in the Portfolio
then-outstanding after taking into account any prior withdrawals of any
of the Initial Interests in the Portfolio.
(3) At 4:00 p.m., New York time, on each business day of the Portfolio, the
value of an investor's beneficial interest in the Portfolio is equal to
the product of (i) the aggregate net asset value of the Portfolio
multiplied by (ii) the percentage representing that investor's share of
the aggregate beneficial interests in the Portfolio effective for that
day.
(4) The Portfolio Trust has entered into an Investment Advisory Agreement
with Bankers Trust Company and an Administration and Services Agreement
with Bankers Trust Company under which Bankers Trust Company provides
<PAGE>
B-45
administration, custody and transfer agency services to the Portfolio
Trust.
<PAGE>
B-46
BT INVESTMENT PORTFOLIOS --
SMALL CAP INDEX PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
JANUARY 2, 1996
Assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . $ 10
Deferred organization expenses . . . . . . . . . . . . 9,000
-------
Total assets . . . . . . . . . . . . . . . . . 9,010
Liabilities:
Accrued organization expenses . . . . . . . . . . . . 9,000
------
Net assets . . . . . . . . . . . . . . . . . . $ 10
=======
NOTES:
(1) BT Investment Portfolios, a New York master trust, (the "Portfolio
Trust") was organized on March 27, 1993 and has been inactive since
that date with respect to Small Cap Index Portfolio (the "Portfolio")
except for matters relating to the Portfolio's establishment and
designation as a subtrust or series of the Portfolio Trust, and the
sale of a beneficial interest therein at the purchase price of $10.00
to BT Advisor Funds -- Institutional Small Cap Index Fund (the "Fund")
(the "Initial Interests"). The Portfolio is one of fifteen series of
the Portfolio Trust.
(2) Organization expenses of the Portfolio are being deferred and will be
amortized on a straight-line basis over a period not to exceed five
years from the commencement of investment operations of the Portfolio.
Any amount received by the Portfolio from the Fund as a result of a
redemption by Signature Financial Group, Inc. will be applied so as to
reduce the amount of unamortized organization expenses. The amount paid
by the Portfolio Trust on any withdrawal by the Fund of an Initial
Interest in the Portfolio will be reduced by a portion of any
unamortized organization expenses of the Portfolio, determined by the
proportion of the amount of the Initial Interest withdrawn to the
aggregate amount of the Initial Interests in the Portfolio
then-outstanding after taking into account any prior withdrawals of any
of the Initial Interests in the Portfolio.
(3) At 4:00 p.m., New York time, on each business day of the Portfolio, the
value of an investor's beneficial interest in the Portfolio is equal to
the product of (i) the aggregate net asset value of the Portfolio
multiplied by (ii) the percentage representing that investor's share of
the aggregate beneficial interests in the Portfolio effective for that
day.
(4) The Portfolio Trust has entered into an Investment Advisory Agreement
with Bankers Trust Company and an Administration and Services Agreement
with Bankers Trust Company under which Bankers Trust Company provides
administration, custody and transfer agency services to the Portfolio
Trust.
<PAGE>
B-47
BT INVESTMENT PORTFOLIOS --
EAFE(R) EQUITY INDEX PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
JANUARY 2, 1996
Assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . $ 10
Deferred organization expenses . . . . . . . . . . . . 9,000
-------
Total assets . . . . . . . . . . . . . . . . .
Liabilities:
Accrued organization expenses . . . . . . . . . . . . 9,000
------
Net assets . . . . . . . . . . . . . . . . . . $ 10
=======
NOTES:
(1) BT Investment Portfolios, a New York master trust, (the "Portfolio
Trust") was organized on March 27, 1993 and has been inactive since
that date with respect to EAFE(R) Equity Index Portfolio (the
"Portfolio") except for matters relating to the Portfolio's
establishment and designation as a subtrust or series of the Portfolio
Trust, and the sale of a beneficial interest therein at the purchase
price of $10.00 to BT Advisor Funds -- Institutional EAFE(R) Equity
Index Fund (the "Fund") (the "Initial Interests"). The Portfolio is one
of fifteen series of the Portfolio Trust.
(2) Organization expenses of the Portfolio are being deferred and will be
amortized on a straight-line basis over a period not to exceed five
years from the commencement of investment operations of the Portfolio.
Any amount received by the Portfolio from the Fund as a result of a
redemption by Signature Financial Group, Inc. will be applied so as to
reduce the amount of unamortized organization expenses. The amount paid
by the Portfolio Trust on any withdrawal by the Fund of an Initial
Interest in the Portfolio will be reduced by a portion of any
unamortized organization expenses of the Portfolio, determined by the
proportion of the amount of the Initial Interest withdrawn to the
aggregate amount of the Initial Interests in the Portfolio
then-outstanding after taking into account any prior withdrawals of any
of the Initial Interests in the Portfolio.
(3) At 4:00 p.m., New York time, on each business day of the Portfolio, the
value of an investor's beneficial interest in the Portfolio is equal to
the product of (i) the aggregate net asset value of the Portfolio
multiplied by (ii) the percentage representing that investor's share of
the aggregate beneficial interests in the Portfolio effective for that
day.
(4) The Portfolio Trust has entered into an Investment Advisory Agreement
with Bankers Trust Company and an Administration and Services Agreement
with Bankers Trust Company under which Bankers Trust Company provides
<PAGE>
B-48
administration, custody and transfer agency services to the Portfolio
Trust.
<PAGE>
APPENDIX A
Description of Security Ratings
STANDARD & POOR'S
Corporate and Municipal Bonds
AAA -- Debt rated "AAA" has the highest rating assigned by Standard & Poor's to
a debt obligation. Capacity to pay interest and repay principal is extremely
strong.
AA -- Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in a small degree.
A -- Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB -- Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher rated categories.
BB -- Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
Plus(+) or Minus(-) -- The ratings from "AA" to "BB" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Commercial Paper, including Tax Exempt
A -- Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined with
the designations 1, 2, and 3 to indicate the relative degree of safety.
A-1 -- This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus (+) designation.
A-2 -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
A-1
<PAGE>
A-3 -- Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
MOODY'S
Corporate and Municipal Bonds
Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged". Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risk appear somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
Note: Moody's applies numerical modifiers, 1,2, and 3 in each generic rating
classification from Aa through Bb in its corporate bond rating system. The
modifier 1 indicates that the security rates in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category. Those municipal bonds within the Aa, A, Baa, and Ba categories that
Moody's believes possess the strongest credit attributes within those categories
are designated by the symbols Aa1, A1, Baa1, and Ba1.
A-2
<PAGE>
Commercial Paper
Prime-1 -- Issuers rated P-1 (or supporting institutions) have a superior
ability for repayment of short-term debt obligations. Prime-1 repayment ability
will often be evidenced by many of the following characteristics:
- - Leading market positions in well established industries.
- - High rates of return on funds employed.
- - Conservative capitalization structure 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.
Prime-2 -- Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt 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, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Prime-3 -- Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term 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 may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
Not Prime -- Issuers rated "Not Prime" do not fall within any of the Prime
rating categories.
FITCH INVESTORS SERVICE
Corporate 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
A-3
<PAGE>
occur in conditions. Other features may enter in, such as a wide margin of
protection through collateral security or direct lien on specific property as in
the case of high class equipment certificates or bonds that are first mortgages
on valuable real estate. Sinking funds or voluntary reduction of the debt by
call or purchase are often factors, while guarantee or assumption by parties
other than the original debtor may also influence the rating.
AA -- Securities in this group are of safety virtually beyond question, and as a
class are readily salable while many are highly active. Their merits are not
greatly unlike those of the AAA class, but a security so rated may be of junior
though strong lien - in many cases directly following an AAA security - or the
margin of safety is less strikingly broad. The issue may be the obligation of a
small company, strongly secured but influenced as to ratings by the lesser
financial power of the enterprise and more local type of market.
A -- Securities of this rating are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB -- Securities of this rating are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
Plus(+) or Minus(-) -- Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "AAA" category.
Commercial Paper Ratings
F-1+ -- Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1 -- Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than the strongest
issue.
F-2 -- Good Credit Quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as great
as for issues assigned "F-1+" and F-1" ratings.
F-3 -- Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate, however,
near-term adverse changes could cause these securities to be rated below
investment grade.
A-4
<PAGE>
DUFF & PHELPS RATINGS
Corporate Bond Ratings
AAA -- Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury Funds.
AA+, AA, AA- -- High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic conditions.
A+, A, A- -- Protection factors are average but adequate. However, risk factors
are more variable and greater in periods of economic stress.
BBB+, BBB, BBB- -- Below average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
Commercial Paper Ratings
Duff 1+ -- Highest certainty of timely payment. Short term liquidity, including
internal operating factors and/or access to alternative sources of funds, is
outstanding, and safety is just below risk free U.S. Treasury short term
obligations.
Duff 1 -- Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.
Duff 1- -- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
Duff 2 -- Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
Duff 3 -- Satisfactory liquidity and other protection factors qualify issue as
to investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
A-5
<PAGE>
APPENDIX B
The tables on the following pages shows the performance of the S&P 500, the
Russell 2000, the Aggregate Bond Index and the EAFE Index for the periods
indicated. Stock prices fluctuated widely during the period but were higher at
the end than at the beginning. The results shown should not be considered as a
representation of the income or capital gain or loss which may be generated by
the respective Index in the future. Nor should this be considered as a
representation of the past or future performance of the Fund.
A-6
<PAGE>
STANDARD & POOR'S 500 COMPOSITE STOCK PRICE INDEX*
Total
Year Return
1995 37.49%
1994 1.32%
1993 9.99%
1992 7.67%
1991 30.55%
1990 -3.17%
1989 31.49%
1988 16.81%
1987 5.23%
1986 18.47%
1985 32.16%
1984 6.27%
1983 22.51%
1982 21.41%
1981 -4.91%
1980 32.42%
1979 18.44%
1978 6.56%
1977 -7.18%
1976 23.84%
1975 37.20%
1974 -26.47%
1973 -14.66%
1972 18.98%
1971 14.31%
1970 4.01%
1969 -8.51%
1968 11.06%
1967 23.98%
A-7
<PAGE>
1966 -10.06%
1965 12.45%
1964 16.48%
1963 22.80%
1962 -8.73%
1961 26.89%
1960 0.47%
1959 11.96%
1958 43.36%
1957 -10.78%
1956 6.56%
1955 31.56%
1954 52.62%
1953 -0.99%
1952 18.73%
1951 24.02%
1950 31.71%
1949 18.79%
1948 5.50%
1947 5.71%
1946 -8.07%
1945 36.44%
1944 19.75%
1943 25.90%
1942 20.34%
1941 -11.59%
1940 -9.78%
1939 -0.41%
1938 31.12%
1937 -35.03%
1936 33.92%
1935 47.67%
1934 -1.44%
A-8
<PAGE>
1933 53.99%
1932 -8.19%
1931 -43.34%
1930 -24.90%
1929 -8.42%
1928 43.61%
1927 37.49%
1926 11.62%
*Source: Ibbotson Associates
A-9
<PAGE>
LEHMAN BROTHERS AGGREGATE BOND INDEX*
Total
Year Return
1994 -2.92%
1993 9.75%
1992 7.40%
1991 16.00%
1990 8.96%
1989 14.53%
1988 7.89%
1987 2.76%
1986 15.26%
1985 22.10%
1984 15.15%
1983 8.36%
1982 32.62%
1981 6.25%
1980 2.71%
1979 1.93%
1978 1.39%
1977 3.04%
1976 15.60%
*Source: Lipper Analytical Services, Inc.
A-10
<PAGE>
RUSSELL 2000 SMALL STOCK INDEX*
Total
Year Return
1995 28.44%
1994 -1.82%
1993 18.91%
1992 18.42%
1991 46.05%
1990 -19.51%
1989 16.24%
1988 24.89%
1987 -8.77%
1986 5.68%
1985 31.05%
1984 -7.19%
1983 29.13%
1982 24.95%
1981 2.03%
1980 35.58%
1979 42.80%
*Source: Frank Russell Company
A-11
<PAGE>
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX*
Total
Year Return
1995 11.21%
1994 10.10%
1993 32.56%
1992 -12.17%
1991 12.13%
1990 -23.45%
1989 10.54%
1988 28.57%
1987 24.63%
1986 69.44%
1985 56.16%
1984 7.38%
1983 23.69%
1982 -1.86%
1981 -2.28%
1980 22.58%
1979 4.75%
1978 32.62%
1977 18.06%
1976 2.54%
1975 35.39%
1974 -23.16%
1973 -14.92%
1972 36.35%
1971 29.59%
1970 -11.66%
*Source: Morgan Stanley Capital International (MSCI) EAFE Index
A-12
<PAGE>
STANDARD & POOR'S 500 EQUAL WEIGHTED WILSHIRE INDEX
Total
Year Return
1972 11.70%
1973 -21.86%
1974 -24.33%
1975 55.30%
1976 36.51%
1977 -1.61%
1978 10.70%
1979 28.87%
1980 30.72%
1981 4.89%
1982 29.41%
1983 31.05%
1984 3.25%
1985 31.14%
1986 17.54%
1987 5.37%
1988 20.72%
1989 25.88%
1990 -11.91%
1991 35.78%
1992 14.88%
1993 14.85%
1994 1.11%
1995 32.30%
*Source: Wilshire Associates
A-13
<PAGE>
BT0300E
BT INVESTMENT PORTFOLIOS
U.S. BOND INDEX PORTFOLIO
EQUITY 500 EQUAL WEIGHTED INDEX PORTFOLIO
SMALL CAP INDEX PORTFOLIO
AND
EAFE(R) EQUITY INDEX PORTFOLIO
PART C
Item 24. Financial Statements and Exhibits.
(a) Financial Statements
The financial statements called for by this Item are included in Part B and
listed in Item 23 hereof.
(b) Exhibits
1. Declaration of Trust of the Registrant.3
2. By-Laws of the Registrant.3
5(A). Investment Advisory Agreement between the Registrant and Bankers
Trust Company ("Bankers Trust").3
5(B). Sub-Investment Advisory Agreement between Bankers Trust and
BT Fund Managers International Limited.2
5(C). Schedule of Fees under Investment Advisory Agreement.4
9. Administration and Services Agreement between the Registrant and
Bankers Trust.1
13. Investment representation letters of initial investors.1, 4
17. Financial Data Schedules.4
1Incorporated by reference to the Registrant's Registration
Statement as filed with the Commission on June 7, 1993.
2Incorporated by reference to Amendment No. 3 to the Registrant's
Registration Statement as filed with the Commission on
September 20, 1993.
3Incorporated by reference to Amendment No. 9 to the Registrant's
Registration Statement as filed with the Commission on
August 1, 1995.
4Filed herewith.
Item 25. Persons Controlled by or under Common Control with Registrant.
Not applicable.
Item 26. Number of Holders of Securities.
(1) (2)
Title of Class Number of Record Holders
Series of Beneficial Interests (as of January 12, 1996)
Liquid Assets Portfolio 2
Growth and Income Portfolio 0
100% Treasury Portfolio 0
Asset Management Portfolio II 1
Asset Management Portfolio III 1
Global High Yield Securities Portfolio 1
Latin American Equity Portfolio 1
Small Cap Portfolio 1
European Equity Portfolio 0
Pacific Basin Equity Portfolio 1
International Bond Portfolio 0
U. S. Bond Index Portfolio 1
Equity 500 Equal Weighted Index Portfolio 1
Small Cap Index Portfolio 1
EAFE(R)Equity Index Portfolio 1
Item 27. Indemnification.
Reference is hereby made to Article V of the Registrant's Declaration of Trust,
filed as an Exhibit herewith.
The Trustees and officers of the Registrant and the personnel of the
Registrant's administrator are insured under an errors and omissions liability
insurance policy. The Registrant and its officers are also insured under the
fidelity bond required by Rule 17g-1 under the Investment Company Act of 1940.
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 any time 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, 280 Park Avenue, New York, New York 10015.
Name and Principal
Business Address
Principal Occupation and Other Information
George B. Beitzel
International Business Machines Corporation
Old Orchard Road
Armonk, NY 10504
Retired Senior Vice President and Director, Member of Advisory Board of
International Business Machines Corporation. Director of Bankers Trust and
Bankers Trust New York Corporation. Director of FlightSafety International, Inc.
Director of Phillips Petroleum Company. Director of Roadway Services, Inc.
Director of Rohm and Hass Company.
William R. Howell
J.C. Penney Company, Inc.
P.O. Box 10001
Plano, TX 75301-0001
Chairman of the Board and Chief Executive Officer, J.C. Penney Company, Inc.
Director of Bankers Trust and Bankers Trust New York Corporation. Also a
Director of Exxon Corporation, Halliburton Company and Warner-Lambert
Corporation.
Jon M. Huntsman
Huntsman Chemical Corporation
2000 Eagle Gate Tower
Salt Lake City, UT 84111
Chairman and Chief Executive Officer, Huntsman Chemical Corporation, Director of
Bankers Trust and Bankers Trust New York Corporation. Chairman of Constar
Corporation, Huntsman Corporation, Huntsman Holdings Corporation and Petrostar
Corporation. President of Autostar Corporation, Huntsman Polypropylene
Corporation and Restar Corporation. Director of Razzleberry Foods Corporation
and Thiokol Corporation. General Partner of Huntsman Group Ltd., McLeod Creek
Partnership and Trustar Ltd.
Vernon E. Jordan, Jr.
Akin, Gump, Strauss,
Hauer & Feld, LLP
1333 New Hampshire Ave., N.W.
Washington, DC 20036
Partner, Akin, Gump, Strauss, Hauer & Feld, LLP. Director of Bankers Trust and
Bankers Trust New York Corporation. Also a Director of American Express Company,
Corning Incorporated, Dow Jones, Inc., J.C. Penney Company, Inc., RJR Nabisco
Inc., Revlon Group Incorporated, Ryder System, Inc., Sara Lee Corporation, Union
Carbide Corporation and Xerox Corporation.
Hamish Maxwell
Philip Morris Companies Inc.
120 Park Avenue
New York, NY 10017
Chairman of the Executive Committee, Philip Morris Companies Inc. Director of
Bankers Trust and Bankers Trust New York Corporation. Director of The News
Corporation Limited.
Donald F. McCullough
Collins & Aikman Corporation
210 Madison Avenue
New York, NY 10016
Chairman Emeritus, Collins & Aikman Corporation. Director of Bankers Trust and
Bankers Trust New York Corporation. Director of Massachusetts Mutual Life
Insurance Co. and Melville Corporation.
N.J. Nicholas Jr.
745 Fifth Avenue
New York, NY 10020
Former President, Co-Chief Executive Officer and Director of Time Warner Inc.
Director of Bankers Trust and Bankers Trust New York Corporation. Also a
Director of Xerox Corporation.
Russell E. Palmer
The Palmer Group
3600 Market Street, Suite 530
Philadelphia, PA 19104
Chairman and Chief Executive Officer of The Palmer Group. Director of Bankers
Trust and Bankers Trust New York Corporation. Also Director of Allied-Signal
Inc., Contel Cellular, Inc., Federal Home Loan Mortgage Corporation, GTE
Corporation, Goodyear Tire & Rubber Company, Imasco Limited, May Department
Stores Company and Safeguard Scientifics, Inc. Member, Radnor Venture Partners
Advisory Board.
Didier Pineau-Valencienne
Schneider S.A.
4 Rue de Longchamp
75116 Paris, France
Chairman and Chief Executive Officer, Schneider S.A. Director and member of the
European Advisory Board of Bankers Trust and Director of Bankers Trust New York
Corporation. Director of AXA (France) and Equitable Life Assurance Society of
America, Arbed (Luxembourg), Banque Paribas (France), Ciments Francais (France),
Cofibel (Belgique), Compagnie Industrielle de Paris (France), SIAPAP, Schneider
USA, Sema Group PLC (Great Britain), Spie-Batignolles, Tractebel (Belgique) and
Whirlpool. Chairman and Chief Executive Officer of Societe Parisienne
d'Entreprises et de Participations.
Charles S. Sanford, Jr.
Bankers Trust Company
280 Park Avenue
New York, NY 10017
Chairman of the Board of Bankers Trust and Bankers Trust New York Corporation.
Also a Director of Mobil Corporation and J.C. Penney Company, Inc.
Eugene B. Shanks, Jr.
Bankers Trust Company
280 Park Avenue
New York, NY 10017
President of Bankers Trust and Bankers Trust New York Corporation.
Patricia Carry Stewart
c/o Office of the Secretary
280 Park Avenue
New York, NY 10017
Former Vice President, The Edna McConnell Clark Foundation. Director of Bankers
Trust and Bankers Trust New York Corporation. Director, Borden Inc., Continental
Corp. and Melville Corporation.
George J. Vojta
Bankers Trust Company
280 Park Avenue
New York, NY 10017
Vice Chairman of the Board of Bankers Trust and Bankers Trust New York
Corporation. Director of Northwest Airlines and Private Export Funding Corp.
Item 29. Principal Underwriters.
Not applicable.
Item 30. Location of Accounts and Records.
The accounts and records of the Registrant are located, in whole or in part, at
the office of the Registrant and the following locations:
Name Address
Signature Broker-Dealer 6 St. James Avenue
Services, Inc. Boston, MA 02116
(placement agent)
Bankers Trust Company 280 Park Avenue
(investment adviser, administrator, New York, NY 10017
custodian, transfer agent)
Investors Fiduciary Trust Company 127 West 10th Street
Kansas City, MO 64105
BT Fund Managers International Ltd. Commonwealth Park Building, Level 23
(investment sub-advisor for 367 Collins Street
Pacific Basin Equity Portfolio) Melbourne, Victoria
Australia 32000
Item 31. Management Services.
Not applicable.
Item 32. Undertakings.
Not applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Investment Company Act of
1940, as amended, the Registrant has duly caused this Registration Statement on
Form N-1A to be signed on its behalf by the undersigned, thereto duly
authorized, in the City of Boston and Commonwealth of Massachusetts on the 12th
day of January, 1996.
BT INVESTMENT PORTFOLIOS
By: /S/ THOMAS M. LENZ
Thomas M. Lenz
Secretary
<PAGE>
BT INVESTMENT PORTFOLIOS
U.S. BOND INDEX PORTFOLIO
EQUITY 500 EQUAL WEIGHTED INDEX PORTFOLIO
SMALL CAP INDEX PORTFOLIO
AND
EAFE(R) EQUITY INDEX PORTFOLIO
EXHIBIT INDEX
TO
REGISTRATION STATEMENT ON
FORM N-1A
Exhibit
No.
5(C). Schedule of Fees under Investment Advisory Agreement
13. Investment representation letters of initial investors
17. Financial Data Schedules
BT INVESTMENT PORTFOLIOS
SCHEDULE OF FEES UNDER INVESTMENT ADVISORY AGREEMENT
Fee
Latin American Equity Portfolio................................... 1.00%
Small Cap Portfolio............................................... 0.65%
Pacific Basin Equity Portfolio.................................... 0.75%
Asset Management Portfolio II..................................... 0.65%
Asset Management Portfolio III.................................... 0.65%
Liquid Assets Portfolio........................................... 0.15%
Global High Yield Securities Portfolio............................ 0.80%
Equity 500 Equal Weighted Index Portfolio ........................ 0.25%
Small Cap Index Portfolio ........................................ 0.15%
U.S. Bond Index Portfolio ........................................ 0.15%
EAFE Equity Index Portfolio ...................................... 0.25%
BT Advisor Funds
6 St. James Avenue
Boston, Massachusetts 02116
January 11, 1996
BT Investment Portfolios
6 St. James Avenue
Boston, Massachusetts 02116
Ladies and Gentlemen:
With respect to our purchase from you of a beneficial interest (the
"Initial Shares") of each of the following series (each a "Portfolio") of BT
Investment Portfolios (the "Portfolio Trust"):
EAFE(R) Equity Index Portfolio
U.S. Bond Index Portfolio
Equity 500 Equal Weighted Index Portfolio
Small Cap Index Portfolio
We hereby advise you that we are purchasing this amount (the "Initial
Interest Amount") of the Initial Interest in each Portfolio with no intention to
dispose of it through withdrawal from the Portfolio Trust.
The amount paid by a Portfolio on any withdrawal by us, or any other
then-current holder of that Portfolio's Initial Interest Amount, will be reduced
by a portion of any unamortized organization expenses of the Portfolio, such
portion to be determined by the proportion amount of Initial Interest Smountin
the Portfolio redeemed to the amount of the Initial Interest Amount in the
Portfolio then outstanding after taking into account any prior withdrawal of the
Initial Interest Amount in the Portfolio.
Very truly yours,
SIGNATURE FINANCIAL GROUP, INC.
By /s/Linwood C. Downs
Name: Linwood C. Downs
Title: Treasurer
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This schedule contains summary financial information extracted from the U.S.
Bond Index Portfolio Statement of Assets and Liabilities dated January 2, 1996
and is qualified in its entirety by reference to such Statement of Assets and
Liabilities.
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<PER-SHARE-NAV-END> 10.00
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the Small
Cap Index Portfolio Statement of Assets and Liabilities dated January 2, 1996
and is qualified in its entirety by reference to such Statement of Assets and
Liabilities.
</LEGEND>
<CIK> 0000906619
<NAME> BT INVESTMENT PORTFOLIOS
<SERIES>
<NAME> SMALL CAP INDEX PORTFOLIO
<NUMBER> 9
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> JAN-02-1996
<PERIOD-START> JAN-02-1996
<PERIOD-END> JAN-02-1996
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 9,010
<TOTAL-ASSETS> 9,010
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 9,000
<TOTAL-LIABILITIES> 9,000
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 10
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 10
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.00
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information ectracted from EAFE
Equity Index Portfolio Statement of Assets and Liabilities dated January 2,
1996 and is qualified in its entirety by referecne to such Statement of Assets
and Liabilities.
</LEGEND>
<CIK> 0000906619
<NAME> BT INVESTMENT PORTFOLIOS
<SERIES>
<NAME> EAFE EQUITY INDEX PORTFOLIO
<NUMBER> 12
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> JAN-02-1996
<PERIOD-START> JAN-02-1996
<PERIOD-END> JAN-02-1996
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 9,010
<TOTAL-ASSETS> 9,010
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 9,000
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 10
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 10
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.00
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
