1940 Act File No. 811-07774
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 15 ........................... X
BT INVESTMENT PORTFOLIOS
(Exact Name of Registrant as Specified in Charter)
Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779
(Address of Principal pursuant Executive Offices)
(412) 288-1900
(Registrant's Telephone Number)
Jay S. Neuman, Esquire Copies to: Burton M. Leibert, Esq.
Investors Tower Willkie Farr & Gallagher
Pittsburgh, Pennsylvania 15222-3779 One Citicorp Center
(Name and Address of Agent for Service) 153 East 53rd Street
New York, New York 10022
Explanatory
This Amendment to the Registrant's Registration Statement on Form N-1A
(the `Registration Statement'') has been filed by the Registrant to
Section 8(b) of the Investment Company Act of 1940. However, beneficial
interests in the series of the Registrant are not being registered under
the Securities Act of 1933 (the `1933 Act''), because such interests will
be issued solely in private placement transactions that do not involve
any `public offering'' within the meaning of Section 4(2) of the 1933
Act. Investments in the Registrant'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.
BT Investment Portfolios is comprised of fifteen portfolios. This
Amendment to the Registration Statement relates only to Liquid Assets
Portfolio, EAFE Equity Index Portfolio, Small Cap Index Portfolio, Equity
500 Equal Weighted Index Portfolio, and U.S. Bond Index Portfolio.
BT INVESTMENT PORTFOLIOS
U.S. BOND INDEX PORTFOLIO
EQUITY 500 EQUAL WEIGHTED INDEX PORTFOLIO
SMALL CAP INDEX PORTFOLIO
EAFE 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 (mutual fund) 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.
Bankers Trust Company (`Bankers Trust'') is the investment adviser
(the `Adviser'') of the Portfolios. Investments in the Portfolios are not
deposits or obligations of, or guaranteed or endorsed by, Bankers Trust
or any other banking or depository institution. Investments are not
Federally guaranteed or insured by the Federal Deposit Insurance
Corporation, the U.S. government, the Federal Reserve Board or any other
agency, and are subject to investment risk including possible loss of
principal.
THE U.S. BOND INDEX PORTFOLIO seeks to replicate as closely as possible
(before deduction of Expenses) the investment performance of the Lehman
Brothers Aggregate Bond Index (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 investment-grade bonds,
international (dollar-denominated) investment grade bonds, and
mortgage-backed securities, with maturities greater than one year.
As of December 31, 1996, the major classes of fixed-income
securities represented the following proportions of the Index's total
market value:
Aggregate
Bond Index
U.S. Treasury and agency securities 51%
Corporate bonds 14%
International (dollar- denominated) bonds 4%
Mortgage-backed securities 30%
Asset Backed Securities 1%
Dollar-weighted average maturity (Years) 8.7 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 51% of the Index's interest rate risk, then
approximately 51% of the Portfolio's interest rate risk will come from
such securities and other investments. Similarly, if corporate
bonds represent 14% of the interest rate risk of the Index, then they
will represent approximately 14% 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 Ratings Group ("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. government.
Such U.S. government agencies may include the 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" herein.
For more information about the historical performance of the Aggregate
Bond Index, see Part B.
THE EQUITY 500 EQUAL WEIGHTED INDEX PORTFOLIO seeks to replicate as
closely as possible (before deduction of Expenses) the total return of
the Standard & Poor's 500 Equal Weighted Index (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. 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 SMALL CAP INDEX PORTFOLIO seeks to replicate as closely as
possible (before deduction of Expenses) the total return of the Russell
2000 Small Stock Index (the `Russell 2000'').
The Russell 2000 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
December 31, 1996, the average stock market capitalization of the
Russell 2000 was $360 million and the weighted average stock market
capitalization of the Russell 2000 was $640 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. 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. 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 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.
For more information on the historical performance of the Russell
2000, see part B.
THE EAFE EQUITY INDEX PORTFOLIO seeks to replicate as closely as
possible (before deduction of Expenses) the total return of the Morgan
Stanley Capital International Europe, Australia, Far East (EAFE) Index
(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 EAFEEquity 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.
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 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 policies of
each Portfolio are contained in Part B.
Each Portfolio may maintain up to 20% 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" herein.
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" herein 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) 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.
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.
N 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 fluctuation during this period and no income
accrues to the Portfolio until settlement takes place. The Portfolio
segregates with the Custodian liquid securities in an amount at least
equal to these commitments.
MORTGAGE-RELATED SECURITIES. As part of its effort to replicate 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" herein.
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 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 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.
Successful use of forward contracts depends on Bankers Trust's skill in
analyzing and predicting relative currency values. Forward contracts
alter the EAFE Equity Index Portfolio's exposure to currency exchange
rate activity and could result in losses to that Portfolio if currencies
do not perform as Bankers Trust anticipates. The Portfolio may also incur
significant costs when converting assets from one currency to
another.
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 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 segregating
with the Portfolio's Custodian liquid securities in an amount at all
times equal to or exceeding the Portfolio's commitment with respect
to these instruments or contracts.
PORTFOLIO TURNOVER. The frequency of Portfolio transactions, the
Portfolios' turnover rate, will vary from year to year depending on
market conditions and the Portfolios' cash flows. Each Portfolio's annual
portfolio turnover rate is not expected to exceed 100%.
For the period from January 24, 1996 (Commencement of Operations) to
December 31, 1996, the portfolio turnover rate for the EAFE Equity Index
Portfolio was 4%. For the period from July 1, 1996, (Commencement of
Operations) to December 31, 1996, the portfolio turnover rate for the
Small Cap Index Portfolio was 16%.
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.
of December 31, 1996, Bankers Trust New York Corporation was the
seventh largest bank holding company in the United States with
total assets of approximately $120 billion. Bankers Trust is a
worldwide merchant bank dedicated to servicing the needs of corporations,
governments, financial institutions and private clients through a
global network of over 120 offices in more than 40 countries.
Investment management is a core business of Bankers Trust, built on a
tradition of excellence from its roots as a trust bank founded in
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
$227 billion in assets under management globally. Of that total,
approximately $92 billion are in U.S. equity index assets alone. 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 nation'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 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.
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 affiliates of Edgewood Services, Inc. (`Edgewood'') , 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.
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, BT RetirementPlus 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 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.
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" herein.
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 Edgewood 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 Edgewood Services, Inc. The
principal business address of Edgewood is Clearing Operations, P.O. Box
897, Pittsburgh, Pennsylvania 15230-0897.. Edgewood 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.
BT INVESTMENT PORTFOLIOS
U.S. BOND INDEX PORTFOLIO
EQUITY 500 EQUAL WEIGHTED INDEX PORTFOLIO
SMALL CAP INDEX PORTFOLIO
EAFE EQUITY INDEX PORTFOLIO
PART B
ITEM 10. COVER PAGE.
Not applicable.
ITEM 11. TABLE OF CONTENTS. PAGE
General Information and History 1
Investment Objectives and Policies 1
Management of the Fund 21
Control Persons and Principal Holders of Securities 24
Investment Advisory and Other Services 24
Brokerage Allocation and Other Practices 26
Capital Stock and Other Securities . 27
Purchase, Redemption and Pricing of Securities Being Offered 28
Tax Status 30
Underwriters 31
Calculation of Performance Data 31
Financial Statements 31
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
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.
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 the Appendix herein.
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 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.
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 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 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.
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 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 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.
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 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.
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.
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. There can be no assurance
that additional market corrections will not occur. 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.
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 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.
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 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.
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 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 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.
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 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 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.
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 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 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
deposit and variation margin, are not considered a pledge of assets for
purposes of this restriction and except that assets may be pledged to
secure letters of credit solely for the purpose of participating in a
captive insurance company sponsored by the Investment Company
Institute; for additional related restrictions, see clause (i) under
the caption "Additional Restrictions" below (as an operating policy,
the Portfolios may not engage in dollar roll transactions);
(2) underwrite securities issued by other persons except insofar as 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;
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.
ADDITIONAL RESTRICTIONS. In order to comply with certain 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 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 (as an operating policy, each Portfolio
will not invest in another open-end registered investment company);
(vii) invest more than 10% of the Portfolio's total assets (taken at
the greater of cost or market value) in securities that are restricted as
to resale under the 1933 Act (other than Rule 144A Securities deemed
liquid by the Portfolio's Board of Trustees);
(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) no more than 5% of the Portfolio's total assets are invested in
securities issued by issuers which (including predecessors) have been in
operation less than three years;
(x) with respect to 75% of the Portfolio's total assets, purchase
securities of any issuer if such purchase at the time thereof would
cause the Portfolio to hold more than 10% of any class of securities
of such issuer, for which purposes all indebtedness of an issuer
shall be deemed a single class and all preferred stock of an issuer
shall be deemed a single class, except that futures or option
contracts shall not be subject to this restriction;
(xi) with respect to 75% of its assets, invest more than 5% of its
total assets in the securities (excluding U.S. Government securities)
of any one issuer;
(xii) 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;
(xiii) 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;
(xiv) 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 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
(xv) 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.
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 and
officer is Clearing Operations, P.O. Box 897, Pittsburgh, Pennsylvania,
15230-0897.
TRUSTEES
CHARLES P. BIGGAR (birthdate: October 13, 1930) - Trustee; Retired;
Director of Chase/NBW Bank Advisory Board; Director, Batemen, Eichler,
Hill Richards Inc.; formerly Vice President of International Business
Machines and President of the National Services and the Field Engineering
Divisions of IBM. His address is 12 Hitching Post Lane, Chappaqua, New
York 10514.
PHILIP W. COOLIDGE* (birthdate: September 2, 1951) - President and
Trustee; Chairman, Chief Executive Officer and President, SFG (since
December, 1988) and Signature (since April, 1989). His address is 6 St.
James Avenue, Boston, Massachusetts 02116.
S. LELAND DILL (birthdate: March 28, 1930) - Trustee; Retired; Director,
Coutts Group, Coutts (U.S.A.) International; Coutts Trust Ltd.; Director,
Zweig Series Trust; formerly Partner of KPMG Peat Marwick; Director,
Vinters International Company Inc.; General Partner of Pemco (an
investment company registered under the 1940 Act). His address is 5070
North Ocean Drive, Singer Island, Florida 33404.
PHILIP SAUNDERS, JR. (birthdate: October 11, 1935) - Trustee; Principal,
Philip Saunders Associates (Consulting); former Director of Financial
Industry Consulting, Wolf & Company; President, John Hancock Home
Mortgage Corporation; and Senior Vice President of Treasury and Financial
Services, John Hancock Mutual Life Insurance Company, Inc. His address is
445 Glen Road, Weston, Massachusetts 02193.
* Indicates and `interested person'' as defined by the 1940 Act.
OFFICERS
Unless otherwise specified, each officer listed below holds the same
position with each Portfolio.
RONALD M. PETNUCH - (birthdate: February 27, 1960) - President and
Treasurer; Senior Vice President; Federated Services Company ("FSC");
formerly, Director of Proprietary Client Services, Federated
Administrative Services ("FAS"), and Associate Corporate Counsel,
Federated Investors ("FI").
CHARLES L. DAVIS, JR. - (birthdate: March 23, 1960) - Vice President and
Assistant Treasurer; Vice President, FAS.
JAY S. NEUMAN - (birthdate: April 22, 1950) - Secretary; Corporate
Counsel, FI.
Messrs. Coolidge, Petnuch, Davis & Neuman 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 Trusts or the Portfolios. No director, officer or employee
of Edgewood or any of its affiliates will receive any compensation from
the Trusts or the Portfolios for serving as an officer or Trustee of the
Trusts or the Portfolios.
As of December 31, 1996, the Trustees and officers of the Trusts and
the Portfolios owned in the aggregate less than 1% of the shares of any
Fund or Trust (all series taken together).
The following table reflects fees paid to the Trustees for the year
ended December 31, 1996.
TOTAL COMPENSATION
NAME OF PERSON, FROM FUND COMPLEX*
POSITION
Philip W. Coolidge
Trustee $1,250
Charles P. Biggar,
Trustee $28,750
S. Leland Dill,
Trustee $28,750
Philip Saunders, Jr.,
Trustee $28,750
*Aggregated information is furnished for the BT Family of Funds which
consists of the following: BT Investment Funds, BT Institutional Funds,
BT Pyramid Mutual Funds, BT Advisor Funds, BT Investment Portfolios, Cash
Management Portfolio, Treasury Money Portfolio, Tax Free Money Portfolio,
NY Tax Free Money Portfolio, International Equity Portfolio, Utility
Portfolio, Short Intermediate US Government Securities Portfolio,
Intermediate Tax Free Portfolio, Asset Management Portfolio, Equity 500
Index Portfolio, and Capital Appreciation Portfolio.
ITEM 15. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.
As of February 1, 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.
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.
For the period from July 1, 1996, (Commencement of Operations) to
December 31, 1996, Bankers Trust earned $34,759, for investment advisory
services provided to the Small Cap Index Portfolio. During the same
periods, Bankers Trust reimbursed $26,968, to the Portfolio to cover
expenses.
For the period from January 24, 1996 (Commencement of Operations) to
December 31, 1996, Bankers Trust earned $68,584, for investment advisory
services provided the EAFE Equity Index Portfolio. During the same
period, Bankers Trust reimbursed $30,591, to the Portfolio to cover
expenses.
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 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"), FSC performs such sub-administration duties for the Trust
as from time to time may be agreed upon by Bankers Trust and FSC. The
Sub-Administration Agreement provides that FSC will receive such
compensation as from time to time may be agreed upon by FSC and Bankers
Trust. All such compensation will be paid by Bankers Trust.
For the period from January 24, 1996 (Commencement of Operations) to
December 31, 1996, Bankers Trust earned $27,433, as compensation for
administrative and other services provided to the EAFE Equity Index
Portfolio.
For the period from July 10, 1996 (Commencement of Operations) to
December 31, 1996, Bankers Trust earned $11,596, as compensation for
administrative and other services provided to the Small Cap Index
Portfolio.
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.
COUNSEL AND INDEPENDENT ACCOUNTANTS.
Willkie Farr & Gallagher, One Citicorp Center, 153 East 53rd Street, New
York, New York 10022-4669, serves as Counsel to the Portfolios. 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.
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.
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 each 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.
For the period from July 10, 1996 (Commencement of Operations) to
December 31, 1996, the Small Cap Index Portfolio, paid brokerage
commissions in the amount of $55,569.
For the period from January 24, 1996 (Commencement of Operations) to
December 31, 1996, the EAFE Equity Index Portfolio, paid brokerage
commissions in the amount of $66,791.
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
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 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 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 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 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 for the Portfolios for the period ended December
31, 1996, are incorporated herein by reference to the Annual Reports
dated December 31, 1996. A copy of an Annual Report may be obtained
without charge by contacting the Trust.
APPENDIX
Description of Security Ratings
DESCRIPTION OF S&P'S CORPORATE BOND RATINGS:
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-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.
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS:
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.
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.
PART C OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements:
Incorporated by reference to the Annual Report of BT Advisor
Funds dated December 31, 1996, pursuant to Rule 411 under the
Securities Act of 1933. (File Nos.33-62103 and 811-07347)
(b) Exhibits:
(l) Declaration of Trust of the Registrant; (3)
(i) Conformed copy of Amendment No. 7 to Declaration of
Trust of BT Investment Portfolios; (7)
(2) By-Laws of the Registrant; (3)
(3) Not Applicable
(4) Not Applicable
(5) (i) Investment Advisory Agreement between the Registrant
and Bankers Trust Company (`Bankers Trust''); (3)
(ii) Sub-Investment Advisory Agreement between Bankers
Trust and BT Fund Managers International Limited; (2)
(iii) Schedule of fees under Investment Advisory
Agreement; (4)
(6) Not Applicable
(7) Not Applicable
(8) Not Applicable
(9) Administration and Services Agreement between the
Registrant and Bankers Trust; (1)
(i) Conformed Copy of Exclusive Placement Agent
Agreement; +
(ii) Copy of Exhibit A to Exclusive Placement Agent
Agreement; +
(10) Not Applicable
(11) Not Applicable
(12) Not Applicable
(13) (i) Investment Representation letters of
initial investors; (1)
(ii) Investment Representation Letters of Initial
Investors, EAFE(R) Equity Index Portfolio, U.S. Bond
Index Portfolio, Equity 500 Equal Weighted Index
Portfolio, Small Cap Index Portfolio; (4)
(14) Not Applicable
(15) Not Applicable
+ All exhibits have been filed electronically.
(1) Incorporated by reference to the Registrant's registration statement
on Form N-lA ("Registration Statement") as filed with the Commission
on June 7, 1993.
(2) Incorporated by reference to Amendment No. 3 to Registrant's
Registration Statement as filed with the Commission on September 20,
1993.
(3) Incorporated by reference to Amendment No. 9 to Registrant's
Registration Statement as filed with the Commission on August 1,
1995.
(4) Incorporated by reference to Amendment No. 10 to Registrant's
Registration Statement as filed with the Commission on January 1,
1996.
(7) Indorporated by refeerence to Amendment No. 13 to Registrant's
Registraiton Statment as filed with the Commission on January 30,
1997.
(16) Not Applicable
(17) Financial Data Schedules
(i) Asset Management Portfolio II, Asset Management
Portfolio III; (3)
(ii) EAFE(R)Equity Index Portfolio, Small Cap Index
Portfolio; +
(iii) Liquid Assets Portfolio; (6)
(iv) Pacific Basin Equity Portfolio, Latin American Equity
Portfolio, Global High Yield Portfolio, Small Cap
Portfolio; (7)
(18) Not Applicable
(19) Conformed copy of Power of Attorney; +
ITEM 25. Persons Controlled by or Under Common Control with Registrant:
None
ITEM 26. Number of Holders of Securities.
Title of Class Number of Record Holders
as of December 31, 1996
International Bond Portfolio 1
Latin American Equity Portfolio 2
Pacific Basin Equity Portfolio 2
Global High Yield Securities Portfolio 2
Small Cap Portfolio 2
European Equity Portfolio 1
Liquid Assets Portfolio 1
100% Treasury Portfolio 2
Asset Management Portfolio II 1
Asset Management Portfolio III 1
U.S. Bond Index Portfolio 1
Equity 500 Equal Weighted Index Portfolio 1
Small Cap Index Portfolio 1
EAFE(R) Equity Index Portfolio 1
BT RetirementPlus Portfolio 1
ITEM 27. Indemnification; (5)
+ All exhibits have been filed electronically.
(3) Incorporated by reference to Amendment No. 9 to Registrant's
Registration Statement as filed with the Commission on August 1,
1995.
(5) Incorporated by reference ( to Post-Effective Amendment No. 11 to
Registrant's Registration Statement as filed with the Commission on
January 29, 1996.
(6) Incorporated by reference to Amendment No. 12 to Registrant's
Registration Statement as filed with the Commission on April 24,
1996.
(7) Incorporated by reference to Amendment No. 13 to Registrant's
Registration Statement as filed with the Commission on January 30,
1997.
ITEM 28. Business and Other Connections of Investment Adviser:
Bankers Trust serves as investment adviser to each Portfolio. Bankers
Trust, a New York banking corporation, is a wholly owned subsidiary of
Bankers Trust New York Corporation. Bankers Trust conducts a variety of
commercial banking and trust activities and is a major wholesale supplier
of financial services to the international institutional market. To the
knowledge of the Trust, none of the directors or
officers of Bankers Trust, except those set forth below, is or has been
at anytime during the past two fiscal years engaged in any other
business, profession, vocation or employment of a substantial nature,
except that certain directors and officers also hold various positions
with and engage in business for Bankers Trust New York Corporation. Set
forth below are the names and principal businesses of the directors and
officers of Bankers Trust who are or during the past two fiscal years
have been engaged in any other business, profession, vocation or
employment of a substantial nature. These persons may be contacted c/o
Bankers Trust Company, 280 Park Avenue, New York, New York 10017.
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, Dallas, 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, 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 Creed 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., 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 New Corporation Limited.
Donald F. McCullough, Collins & Aikman Corporation, 210 Madison Avenue,
New York, New York 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 (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 -
17W, 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:
Registrant: Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Bankers Trust Company: 280 Park Avenue,
New York, New York 10017.
Investors Fiduciary Trust Company: 127 West 10th Street,
Kansas City, MO 64105.
Edgewood Services, Inc.: Clearing Operations, P.O. Box 897,
Pittsburgh, Pennsylvania 15230-0897.
ITEM 31. Management Services:
Not Applicable
ITEM 32. Undertakings
Not Applicable
SIGNATURES
Pursuant to the requirements of the Investment Company Act of 1940,
the Registrant, BT INVESTMENT PORTFOLIOS, has duly caused this 15th
amendment to its Registration Statement to be signed on its behalf by the
undersigned, thereto duly authorized in the City of Pittsburgh and the
Commonwealth of Pennsylvania, on the 28th day of February, 1997.
BT INVESTMENT PORTFOLIOS
By: /s/ Jay S. Neuman
Jay S. Neuman, Secretary
February 28, 1997
Exhibit 9(i) under Form N1-A
Exhibit 10 under item 601/Reg. S-K
September 30, 1996
Edgewood Services, Inc.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Ladies and Gentlemen:
Re: EXCLUSIVE PLACEMENT AGENT AGREEMENT
This is to confirm that, in consideration of the agreements
hereinafter contained, the undersigned open-end management investment
companies (collectively, the `Trusts'') registered under the Investment
Company Act of 1940, as amended (the `1940 Act''), each organized as a
business trust under the laws of the State of New York, has agreed that
Edgewood Services, Inc., a New York corporation (`ESI''), shall be the
exclusive placement agent (the `Exclusive Placement Agent'') of beneficial
interests (`Trust Interests'') of each series of the Trusts.
1. Services as Exclusive Placement Agent.
1.1 ESI will act as Exclusive Placement Agent of the Trust
Interests. In acting as Exclusive Placement Agent under this Exclusive
Placement Agent Agreement, neither ESI nor its employees or any agents
thereof shall make any offer or sale of Trust Interests in a manner which
would require the Trust Interests to be registered under the Securities Act
of 1933, as amended (the `1933 Act'').
1.2 All activities by ESI and its agents and employees as
Exclusive Placement Agent of Trust Interests shall comply with all
applicable laws, rules and regulations, including, without limitation, all
rules and regulations adopted pursuant to the 1940 Act by the Securities
and Exchange Commission (the `Commission'').
1.3 Nothing herein shall be construed to require a Trust to
accept any offer to purchase any Trust Interests, all of which shall be
subject to approval by the Trust's Board of Trustees.
1.4 The Trusts shall furnish from time to time for use in
connection with the sale of Trust Interests such information with respect
to the Trust and Trust Interests as ESI may reasonably request. The Trusts
shall also furnish ESI upon request with: (a) unaudited semiannual
statements of the Trust's books and accounts prepared by the Trust, and (b)
from time to time such additional information regarding the Trust's
financial or regulatory condition as ESI may reasonably request.
1.5 Each Trust represents to ESI that all registration
statements filed by the Trust with the Commission under the 1940 Act with
respect to Trust Interests have been prepared in conformity with the
requirements of such statute and the rules and regulations of the
Commission thereunder. As used in this Agreement the term `registration
statement''shall mean any registration statement filed with the
Commission, as modified by any amendments thereto that at any time shall
have been filed with the Commission by or on behalf of a Trust. Each Trust
represents and warrants to ESI that any registration statement will contain
all statements required to be stated therein in conformity with both such
2
statute and the rules and regulations of the Commission; that all
statements of fact contained in any registration statement will be true and
correct in all material respects at the time of filing of such registration
statement or amendment thereto; and that no registration statement will
include an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading to a purchaser of Trust Interests. The Trusts may
but shall not be obligated to propose from time to time such amendment to
any registration statement as in the light of future developments may, in
the opinion of the Trust's counsel, be necessary or advisable. If a Trust
shall not propose such amendment and/or supplement within fifteen days
after receipt by the Trust of a written request from ESI to do so, ESI may,
at its option, terminate this Agreement. The Trusts shall not file any
amendment to any registration statement without giving ESI reasonable
notice thereof in advance; provided, however, that nothing contained in
this Agreement shall in any way limit a Trust's right to file at any time
such amendment to any registration statement as the Trust may deem
advisable, such right being in all respects absolute and unconditional.
1.6 Each Trust severally agrees to indemnify, defend and hold ESI,
its several officers and directors, and any person who controls ESI within
the meaning of Section 15 of the 1933 Act or Section 20 of the Securities
Exchange Act of 1934 (the ``934 Act'') (for purposes of this paragraph
1.6, collectively, the `Covered Persons'') free and harmless from and
against any and all claims, demands, liabilities and expenses (including
the cost of investigating or defending such claims, demands or liabilities
and any counsel fees incurred in connection therewith) which any Covered
Person may incur under the 1933 Act, the 1934 Act, common law, or
otherwise, but only to the extent that such liability or expense incurred
3
by a Covered Person resulting from such claims or demands shall arise out
of or be based on (i) any untrue statement of a material fact contained in
any registration statement, private placement memorandum or other offering
material (``ffering Material'') or (ii) any omission to state a material
fact required to be stated in any Offering Material or necessary to make
the statements in any Offering Material not misleading; provided, however,
that each Trust's agreement to indemnify Covered Persons shall not be
deemed to cover any claims, demands, liabilities or expenses arising out of
any financial and other statements as are furnished in writing to the Trust
by ESI in its capacity as Exclusive Placement Agent for use in the answers
to any items of any registration statement or in any statements made in any
Offering Material, or arising out of or based on any omission or alleged
omission to state a material fact in connection with the giving of such
information required to be stated in such answers or necessary to make the
answers not misleading; and further provided that each Trust's agreement to
indemnify ESI and each Trust's representation and warranties hereinbefore
set forth in paragraph 1.5 shall not be deemed to cover any liability to
the Trust or its investors to which a Covered Person would otherwise be
subject by reason of willful misfeasance, bad faith or gross negligence in
the performance of its duties, or by reason of a Covered Person's reckless
disregard of its obligations and duties under this Agreement. A Trust
shall be notified of any action brought against a Covered Person, such
notification to be given by letter or by telegram addressed to the Trust,
Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA 15222-3779,
Attention: Secretary, with a copy to Burton M. Leibert, Esq., Willkie Farr
& Gallagher, One Citicorp Center, 153 East 53rd Street, New York, NY 10022,
promptly after the summons or other first legal process shall have been
duly and completely served upon such Covered Person. The failure to so
notify a Trust of any such action shall not relieve the Trust (i) from any
4
liability except to the extent the Trust shall have been prejudiced by such
failure, or (ii) from any liability that the Trust may have to the Covered
Person against whom such action is brought by reason of any such untrue or
alleged untrue statement, or omission or alleged omission, otherwise than
on account of the Trust's indemnity agreement contained in this paragraph.
Each Trust will be entitled to assume the defense of any suit brought to
enforce any such claim, demand or liability, but in such case such defense
shall be conducted by counsel of good standing chosen by the Trust and
approved by ESI, which approval shall not be unreasonably withheld. In the
event a Trust elects to assume the defense in any such suit and retain
counsel of good standing approved by ESI, the defendant or defendants in
such suit shall bear the fees and expenses of any additional counsel
retained by any of them; but in case a Trust does not elect to assume the
defense of any such suit, or in case ESI reasonably does not approve of
counsel chosen by the Trust, the Trust will reimburse the Covered Person
named as defendant in such suit, for the fees and expenses of any counsel
retained by ESI or the Covered Persons. Each Trust's indemnification
agreement contained in this paragraph and each Trust's representations and
warranties in this Agreement shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of Covered
Persons, and shall survive the delivery of any Trust Interests. This
agreement of indemnity will inure exclusively to Covered Persons and their
successors. Each Trust agrees to notify ESI promptly of the commencement
of any litigation or proceedings against the Trust or any of its officers
or Trustees in connection with the issue and sale of any Trust Interests.
1.7 ESI agrees to indemnify, defend and hold each Trust, its
several officers and trustees, and any person who controls a Trust within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act
5
(for purposes of this paragraph 1.7, collectively, the `Covered Persons'')
free and harmless from and against any and all claims, demands, liabilities
and expenses (including the costs of investigating or defending such
claims, demands, liabilities and any counsel fees incurred in connection
therewith) that Covered Persons may incur under the 1933 Act, the 1934 Act,
common law, or otherwise, but only to the extent that such liability or
expense incurred by a Covered Person resulting from such claims or demands
shall arise out of or be based on (i) any untrue statement of a material
fact contained in information furnished in writing by ESI in its capacity
as Exclusive Placement Agent to the Trusts for use in the answers to any of
the items of any registration statement or in any statements in any other
Offering Material, or (ii) any omission to state a material fact in
connection with such information furnished in writing by ESI to a Trust
required to be stated in such answers or necessary to make such information
not misleading. ESI shall be notified of any action brought against a
Covered Person, such notification to be given by letter or telegram
addressed to ESI at Federated Investors Tower, 1001 Liberty Avenue,
Pittsburgh, PA 15222-3779, Attention: Secretary, promptly after the
summons or other first legal process shall have been duly and completely
served upon such Covered Person. The failure to so notify ESI of any such
action shall not relieve ESI (i) from any liability except to the extent a
Trust shall have been prejudiced by such failure, or (ii) from any
liability that ESI may have to the Covered Person against whom such action
is brought by reason of any such untrue or alleged untrue statement, or
omission or alleged omission, otherwise than on account of ESI's indemnity
agreement contained in this paragraph. ESI will be entitled to assume the
defense of any suit brought to enforce any such claim, demand or liability,
but in such case such defense shall be conducted by counsel of good
standing chosen by ESI and approved by the Trust, which approval shall not
6
be unreasonably withheld. In the event that ESI elects to assume the
defense in any such suit and retain counsel of good standing approved by a
Trust, the defendant or defendants in such suit shall bear the fees and
expenses of any additional counsel retained by any of them; but in case ESI
does not elect to assume the defense of any such suit, or in case a Trust
reasonably does not approve of counsel chosen by ESI, ESI will reimburse
the Covered Person named as defendant in such suit, for the fees and
expenses of any counsel retained by the Trust or the Covered Persons.
ESI's indemnification agreement contained in this paragraph and ESI's
representations and warranties in this Agreement shall remain operative and
in full force and effect regardless of any investigation made by or on
behalf of Covered Persons, and shall survive the delivery of any Trust
Interests. This agreement of indemnity will inure exclusively to Covered
Persons and their successors. ESI agrees to notify each Trust promptly of
the commencement of any litigation or proceedings against ESI or any of its
officers or directors in connection with the issue and sale of any Trust
Interests.
1.8 No Trust Interests shall be offered by either ESI or the
Trusts under any of the provisions of this Agreement and no orders for the
purchase or sale of Trust Interests hereunder shall be accepted by the
Trusts if and so long as the effectiveness of the registration statement or
any necessary amendments thereto shall be suspended under any of the
provisions of the 1940 Act; provided, however, that nothing contained in
this paragraph shall in any way restrict or have an application to or
bearing on a Trust's obligation to redeem Trust Interests from any investor
in accordance with the provisions of the Trust's registration statement or
Declaration of Trust, as amended from time to time. Each Trust shall
7
notify ESI promptly of the suspension of its registration statement or any
necessary amendments thereto, such notification to be given by letter or
telegram addressed to ESI at Federated Investors Tower, 1001 Liberty
Avenue, Pittsburgh, PA 15222-3779, Attention: Secretary.
1.9 Each Trust agree to advise ESI as soon as reasonably
practical by a notice in writing delivered to ESI or its counsel:
(a) of any request by the Commission for amendments to the
registration statement then in effect or for additional information;
(b) in the event of the issuance by the Commission of any stop
order suspending the effectiveness of the registration statement then in
effect or the initiation by service of process on a Trust of any proceeding
for that purpose;
(c) of the happening of any event that makes untrue any
statements of a material fact made in the registration statement then in
effect or that requires the making of a change in such registration
statement in order to make the statements therein not misleading; and
(d) of all action of the Commission with respect to any
amendment to any registration statement that may from time to time be filed
with the Commission.
For purposes of this paragraph 1.9, informal requests by or acts
of the Staff of the Commission shall not be deemed actions of or requests
by the Commission.
8
1.10 ESI agrees on behalf of itself and its employees to treat
confidentially and as proprietary information of the Trusts all records and
other information not otherwise publicly available relative to the Trusts
and their respective prior, present or potential investors and not to use
such records and information for any purpose other than performance of its
responsibilities and duties hereunder, except after prior notification to
and approval in writing by a Trust, which approval shall not be
unreasonably withheld and may not be withheld where ESI may be exposed to
civil or criminal contempt proceedings for failure to comply, when
requested to divulge such information by duly constituted authorities, or
when so requested by a Trust.
1.11 In addition to ESI's duties as Exclusive Placement Agent,
the Trusts understand that ESI may, in its discretion, perform additional
functions in connection with transactions in Trust Interests.
The processing of Trust Interest transactions may include, but is
not limited to, compilation of all transactions from ESI's various offices;
creation of a transaction tape and timely delivery of it to the Trusts'
transfer agent for processing; reconciliation of all transactions delivered
to the Trusts' transfer agent; and the recording and reporting of these
transactions executed by the Trusts' transfer agent in customer statements;
rendering of periodic customer statements; and the reporting of IRS Form
1099 information at year end if required.
ESI may also provide other investor services, such as
communicating with Trust investors and other functions in administering
customer accounts for Trust investors.
9
ESI understands that these services may result in cost savings to
the Trusts or to the Trusts' investment manager and neither the Trusts nor
the Trusts' investment manager will compensate ESI for all or a portion of
the costs incurred in performing functions in connection with transactions
in Trust Interests. Nothing herein is intended, nor shall be construed, as
requiring ESI to perform any of the foregoing functions.
1.12 Except as set forth in paragraph 1.6 of this Agreement, the
Trusts shall not be liable to ESI or any Covered Persons as defined in
paragraph 1.6 for any error of judgment or mistake of law or for any loss
suffered by ESI in connection with the matters to which this Agreement
relates, except a loss resulting from the willful misfeasance, bad faith or
gross negligence on the part of a Trust in the performance of its duties or
from reckless disregard by a Trust of its obligations and duties under this
Agreement.
1.13 Except as set forth in paragraph 1.7 of this Agreement, ESI
shall not be liable to any Trust or any Covered Persons as defined in
paragraph 1.7 for any error of judgment or mistake of law or for any loss
suffered by a Trust in connection with the matters to which this Agreement
relates, except a loss resulting from the willful misfeasance, bad faith or
gross negligence on the part of ESI in the performance of its duties or
from reckless disregard by ESI of its obligations and duties under this
Agreement.
2. Term.
This Agreement shall become effective on the date first written
above and, unless sooner terminated as provided herein, shall continue
10
until one year from the date first written above, and thereafter shall
continue automatically for successive annual periods, provided such
continuance is specifically approved at least annually with respect to each
Trust by (i) each Trust's Board of Trustees or (ii) by a vote of a majority
(as defined in the 1940 Act) of each Trust's outstanding voting securities,
provided that in either event the continuance is also approved by the
majority of the Trust's Trustees who are not interested persons (as defined
in the 1940 Act) of the Trust and who have no direct or indirect financial
interest in this Agreement, by vote cast in person at a meeting called for
the purpose of voting on such approval. This Agreement is terminable
without penalty, on not less than 60 days' notice, by a Board, by a vote of
a majority (as defined in the 1940 Act) of a Trust's outstanding voting
securities, or by ESI. This Agreement will also terminate automatically in
the event of its assignment (as defined in the 1940 Act and the rules
thereunder).
3. Representations and Warranties.
ESI and each Trust each hereby represents and warrants to the
other that it has all requisite authority to enter into, execute, deliver
and perform its obligations under this Agreement and that, with respect to
it, this Agreement is legal, valid and binding, and enforceable in
accordance with its terms.
4. Concerning Applicable Provisions of Law, etc.
This Agreement shall be subject to all applicable provisions of
law, including the applicable provisions of the 1940 Act and to the extent
11
that any provisions herein contained conflict with any such applicable
provisions of law, the latter shall control.
The laws of the State of New York shall, except to the extent
that any applicable provisions of Federal law shall be controlling, govern
the construction, validity and effect of this Agreement, without reference
to principles of conflicts of law.
The undersigned officer of each Trust has executed this Agreement
not individually, but as President under each Trust's Declaration of Trust,
as amended. Pursuant to the Declaration of Trust, the obligations of this
Agreement are not binding upon any of the Trustees or investors of the
Trust individually, but bind only the trust estate.
If the contract set forth herein is acceptable to you, please so
indicate by executing the enclosed copy of this Agreement and returning the
same to the undersigned, whereupon this Agreement shall constitute a
binding contract between the parties hereto effective at the closing of
business on the date hereof.
Very truly yours,
Charles L. Davis, Jr.
By:/s/ Charles L. Davis, Jr.
12
Vice President, on behalf of the Trusts listed
on Exhibit A, attached hereto:
Accepted:
EDGEWOOD SERVICES, INC..
By:/s/ R. Jeffrey Niss
EXHIBIT A
TO
EXCLUSIVE PLACEMENT AGENT AGREEMENT
Pursuant to the Exclusive Placement Agreement, ESI shall be Exclusive
Placement Agent with respect to the following Trusts, effective as of the
date indicated below:
Name of Trust Date
BT Investment Portfolios:
Liquid Assets Portfolio September 30, 1996
Asset Management Portfolio II September 30, 1996
Asset Management Portfolio III September 30, 1996
Global High Yield Securities PortfolioSeptember 30, 1996
Latin American Equity Portfolio September 30, 1996
Small Cap Portfolio September 30, 1996
13
Pacific Basin Equity Portfolio September 30, 1996
European Equity Portfolio September 30, 1996
International Bond Portfolio September 30, 1996
100% Treasury Portfolio September 30, 1996
Growth and Income Portfolio September 30, 1996
U.S. Bond Index Portfolio September 30, 1996
Equity 500 Equal Weighted Index Portfolio September 30, 1996
Small Cap Index Portfolio September 30, 1996
EAFE Equity Index Portfolio September 30, 1996
Cash Management Portfolio September 30, 1996
Treasury Money Portfolio September 30, 1996
Tax Free Money Portfolio September 30, 1996
International Equity Portfolio September 30, 1996
Utility Portfolio September 30, 1996
Equity 500 Index Portfolio September 30, 1996
Short/Intermediate U.S. Government Securities PortfolioSeptember 30, 1996
Asset Management Portfolio September 30, 1996
Capital Appreciation Portfolio September 30, 1996
Intermediate Tax Free Portfolio September 30, 1996
093096
093096
Exhibit 9(ii) under Form N1-A
Exhibit 10 under item 601/Reg. S-K
EXHIBIT A
TO
EXCLUSIVE PLACEMENT AGENT AGREEMENT
AS LAST AMENDED: DECEMBER 11, 1996
Pursuant to the Exclusive Placement Agreement, ESI shall be Exclusive
Placement Agent with respect to the following Trusts, effective as of the date
indicated below:
Name of Trust Date
BT Investment Portfolios:
Liquid Assets Portfolio September 30, 1996
Asset Management Portfolio II September 30, 1996
Asset Management Portfolio III September 30, 1996
Global High Yield Securities PortfolioSeptember 30, 1996
Latin American Equity Portfolio September 30, 1996
Small Cap Portfolio September 30, 1996
Pacific Basin Equity Portfolio September 30, 1996
European Equity Portfolio September 30, 1996
International Bond Portfolio September 30, 1996
100% Treasury Portfolio September 30, 1996
Growth and Income Portfolio September 30, 1996
U.S. Bond Index Portfolio September 30, 1996
Equity 500 Equal Weighted Index Portfolio September 30, 1996
Small Cap Index Portfolio September 30, 1996
EAFE Equity Index Portfolio September 30, 1996
BT RetirementPlus Portfolio December 11, 1996
Cash Management Portfolio September 30, 1996
Treasury Money Portfolio September 30, 1996
Tax Free Money Portfolio September 30, 1996
International Equity Portfolio September 30, 1996
Utility Portfolio September 30, 1996
Equity 500 Index Portfolio September 30, 1996
Short/Intermediate U.S. Government Securities PortfolioSeptember 30, 1996
Asset Management Portfolio September 30, 1996
Capital Appreciation Portfolio September 30, 1996
Intermediate Tax Free Portfolio September 30, 1996
121196
Exhibit 19 under Form N1-A
Exhibit 99 under item 601/Reg. S-K
POWER OF ATTORNEY
The undersigned Trustees and officers, as indicated respectively
below, of BT Investment Funds, BT Institutional Funds, BT Pyramid Mutual
Funds, The Leadership Trust, and BT Advisor Funds (each, a `Trust'') and,
Cash Management Portfolio, Treasury Money Portfolio, Tax Free Money
Portfolio, NY Tax Free Money Portfolio, International Equity Portfolio,
Utility Portfolio, Short/Intermediate U.S. Government Securities Portfolio,
Equity 500 Index Portfolio, Asset Management Portfolio, Capital
Appreciation Portfolio, Intermediate Tax Free Portfolio, and BT Investment
Portfolios (each, a `Portfolio Trust'') each hereby constitutes and
appoints the Secretary and each Assistant Secretary of each Trust and each
Portfolio Trust and the Deputy General Counsel of Federated Investors, each
of them with full powers of substitution, as his true and lawful attorney-
in-fact and agent to execute in his name and on his behalf in any and all
capacities the Registration Statements on Form N-1A, and any and all
amendments thereto, and all other documents, filed by a Trust or a
Portfolio Trust with the Securities and Exchange Commission (the `SEC'')
under the Investment Company Act of 1940, as amended, and (as applicable)
the Securities Act of 1933, as amended, and any and all instruments which
such attorneys and agents, or any of them, deem necessary or advisable to
enable the Trust or Portfolio Trust to comply with such Acts, the rules,
regulations and requirements of the SEC, and the securities or Blue Sky
laws of any state or other jurisdiction, and to file the same, with all
exhibits thereto and other documents in connection therewith, with the SEC
and such other jurisdictions, and the undersigned each hereby ratifies and
confirms as his own act and deed any and all acts that such attorneys and
agents, or any of them, shall do or cause to be done by virtue hereof. Any
one of such attorneys and agents has, and may exercise, all of the powers
hereby conferred. The undersigned each hereby revokes any Powers of
Attorney previously granted with respect to any Trust or Portfolio Trust
concerning the filings and actions described herein.
IN WITNESS WHEREOF, each of the undersigned has hereunto set his hand
as of the 30th day of September, 1996.
SIGNATURES TITLE
/s/ Ronald M. Petnuch President and Treasurer (Chief Executive
Officer,
Ronald M. Petnuch Principal Financial and Accounting Officer)
of each Trust and Portfolio Trust
/s/ Philip W. Coolidge Trustee of each Trust and
Philip W. Coolidge Portfolio Trust
/s/ Charles P. Biggar Trustee of each Portfolio Trust
Charles P. Biggar and BT Institutional Funds
SIGNATURES TITLE
/s/ S. Leland Dill Trustee of each Portfolio Trust
S. Leland Dill and BT Investment Funds
2
/s/ Philip Saunders, Jr. Trustee of each Portfolio Trust
Philip Saunders, Jr. and BT Investment Funds
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<LEGEND>
This schedule contains Summary Financial Information extracted from the BT
Equity 500 Index Portfolio Annual Report dated December 31, 1996, and is
qualified in its entirety by reference to such Annual Report.
</LEGEND>
<CIK> 0081106698
<NAME> EQUITY 500 INDEX PORTFOLIO
<CAPTION>
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
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<INVESTMENTS-AT-COST> 1362122722
<INVESTMENTS-AT-VALUE> 1841485110
<RECEIVABLES> 93368955
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<TOTAL-ASSETS> 1936718373
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<DISTRIBUTIONS-OF-INCOME> 0
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<NET-CHANGE-IN-ASSETS> 844487540
<ACCUMULATED-NII-PRIOR> 0
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<OVERDISTRIB-NII-PRIOR> 0
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<GROSS-EXPENSE> 2310533
<AVERAGE-NET-ASSETS> 1505962783
<PER-SHARE-NAV-BEGIN> 0
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<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 10
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contain Summary Financial Information extracted from the BT
Investment Portfolios Annual Report dated December 31, 1996, and is
qualified in its entirety by reference to such Annual Report.
</LEGEND>
<CIK> 0008117774
<NAME> BT INVESTMENT PORTFOLIOS
<SERIES>
<NUMBER> 9
<NAME> SMALL CAP INDEX PORTFOLIO
<CAPTION>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-31-1996
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<INVESTMENTS-AT-VALUE> 82013724
<RECEIVABLES> 109051
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<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 82123240
<PAYABLE-FOR-SECURITIES> 0
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<OTHER-ITEMS-LIABILITIES> 38899
<TOTAL-LIABILITIES> 38899
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<EXPENSES-NET> 46360
<NET-INVESTMENT-INCOME> 392448
<REALIZED-GAINS-CURRENT> 76920
<APPREC-INCREASE-CURRENT> 3223254
<NET-CHANGE-FROM-OPS> 3692622
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<DISTRIBUTIONS-OF-GAINS> 0
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<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 82084331
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
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<GROSS-EXPENSE> 73328
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