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. 18 ............................ 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 Global High Yield Securities
Portfolio, Latin American Equity Portfolio, Small Cap Portfolio, and
Pacific Basin Equity Portfolio.
BT INVESTMENT PORTFOLIOS
GLOBAL HIGH YIELD SECURITIES PORTFOLIO
LATIN AMERICAN EQUITY PORTFOLIO
SMALL CAP PORTFOLIO
PACIFIC BASIN EQUITY PORTFOLIO
PART A
Responses to Items 1 through 3 and 5A have been omitted pursuant to
paragraph 4 of Instruction F of the General Instructions to Form N-1A.
ITEM 4. GENERAL DESCRIPTION OF REGISTRANT.
BT Investment Portfolios (the "Trust") is a no-load, open-end management
investment company which was organized as a trust under the laws of the
State of New York on March 27, 1993. Beneficial interests in the Trust are
divided into separate series, each having a distinct investment objectives
and policies, four of which, Global High Yield Securities Portfolio, Latin
American Equity Portfolio, Small Cap Portfolio and Pacific Basin Equity
Portfolio (each a "Portfolio" and, collectively, the "Portfolios") are
described herein. 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 Securities Act of 1933, as
amended (the "1933 Act"). Investments in the Trust may only be made by
investment companies, insurance company separate accounts, common or
commingled trust funds or similar organizations or entities that are
"accredited investors" within the meaning of Regulation D under the 1933
Act. This Registration Statement does not constitute an offer to sell, or
the solicitation of an offer to buy, any "security" within the meaning of
the 1933 Act.
The investment objective of each Portfolio is as follows:
GLOBAL HIGH YIELD SECURITIES PORTFOLIO
The Portfolio seeks high current income from investment in a non-
diversified portfolio of high yield, non-investment grade debt securities
issued in many of the world's securities markets. Capital appreciation will
be considered when consistent with the primary investment objective of high
current income. The Portfolio intends to invest in Brady bonds and other
sovereign debt and in high risk, lower quality debt securities commonly
referred to as "junk bonds" and regarded as predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation as well as in the debt
securities of issuers located in emerging markets, Brady bonds and other
sovereign debt.
The Portfolio may borrow money for investment purposes and invest up to 10%
of its assets in restricted securities (including 144A securities), which
may involve greater risk and increased Portfolio expenses.
The Global High Yield Securities Portfolio is classified as a "non-
diversified" investment company under the 1940 Act and may invest a greater
portion of its assets in a single issuer than a diversified fund. As a
result, the Portfolio may be more susceptible to any single economic,
political or regulatory occurrence than a diversified fund.
Under normal circumstances, at least 65% of the Portfolio's assets will be
invested in high yield, noninvestment grade debt securities of both
governmental and corporate issuers in both the major industrialized markets
and the so-called "emerging markets." The world's industrialized markets
generally include but are not limited to the following: Australia, Austria,
Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland,
Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Singapore,
Spain, Sweden, Switzerland, the United Kingdom, and the United States; the
world's emerging markets generally include but are not limited to the
following: Argentina, Bolivia, Brazil, Chile, China, Colombia, Costa Rica,
the Czech Republic, Ecuador, Egypt, Greece, Hungary, India, Indonesia,
Israel, the Ivory Coast, Jordan, Malaysia, Mexico, Morocco, Nicaragua,
Nigeria, Pakistan, Peru, the Philippines, Poland, Portugal, Rumania,
Russia, Slovakia, Slovenia, South Africa, South Korea, Sri Lanka, Taiwan,
Thailand, Turkey, Uruguay, Venezuela, Vietnam and Zimbabwe. The Portfolio
may also invest in securities of issuers located in Eastern Europe which
may at any time revert back to communist governments and nationalized
industries. Higher risk is associated with investing in developed countries
such as expropriation and withholding dividends at the source.
Although Bankers Trust Company ("Bankers Trust"), the Trust's investment
adviser (the "Adviser") considers both industrialized and emerging,
eligible for investment pursuant to the Portfolio's objective, the
Portfolio will not be invested in all such markets at all times.
Furthermore, investing in some of these markets may be neither feasible nor
desirable from time to time, due to the lack of adequate custodial
arrangements for the Portfolio's assets, exchange controls and overly
burdensome repatriation, the lack of organized and liquid securities
markets, and unacceptable political risks. Under normal circumstances, the
Portfolio will invest in at least three of the emerging markets listed
above.
The Portfolio generally invests in securities which are rated BBB or lower
by Standard & Poor's Ratings Group ("S&P") or Baa or lower by Moody's
Investors Service, Inc. ("Moody's") or, if unrated, of comparable quality
in the opinion of Bankers Trust. Securities which are rated BBB by S&P or
Baa by Moody's either have speculative characteristics or are speculative.
A description of the rating categories is contained in the Appendix herein.
There is no lower limit with respect to the rating categories for
securities in which the Portfolio may invest.
The Portfolio is not required to dispose of debt securities whose credit
quality declines at some point after the security is purchased; however, no
more than 25% of the Portfolio's assets will be invested at any time in
securities rated less than CCC by S&P or Caa by Moody's or, if unrated, of
comparable quality in the opinion of Bankers Trust. S&P's lowest rating for
bonds is CI, which is reserved for income bonds on which no interest is
being paid, and D which is reserved for debt in default and in respect of
which payment of interest or repayment of principal is in arrears. Moody's
lowest rating is C, which is applied to bonds which have extremely poor
prospects for ever attaining any real investment standing. The Portfolio
may, from time to time, purchase defaulted debt securities if, in the
opinion of Bankers Trust, the issuer may resume interest payments in the
near future. The Portfolio will not invest more than 10% of its total
assets (at the time of purchase) in defaulted debt securities, which may be
illiquid. other than as set forth above, there is no restriction on the
percentage of the Portfolio's assets which may be invested in bonds of a
particular rating.
Lower-rated securities including securities rated from BB to D by S&P or Ba
to C by Moody's or, if unrated, of comparable quality in the opinion of
Bankers Trust, will usually offer higher yields than higher-rated
securities. However, there is more risk associated with these investments.
This is because of the reduced creditworthiness and increased risk of
default that these securities carry. Lower-rated securities generally tend
to reflect short-term corporate and market developments to a greater extent
than higher-rated securities which react primarily to fluctuations in the
general level of interest rates. Short-term corporate and market
developments affecting the prices and liquidity of lower-rated securities
could include adverse news impacting major issues, and underwriters or
dealers in lower-rated or unrated securities. In addition, since there are
fewer investors in lower-rated securities, it may be harder to sell
securities at an optimum time.
An economic downturn may adversely affect the value of some lower-rated
bonds. Such a downturn may especially affect highly leveraged companies or
companies in cyclically sensitive industries, where deterioration in a
company's cash flow may impair its ability to meet its obligation to pay
principal and interest to bondholders in a timely fashion. From time to
time, as a result of changing conditions, issuers of lower-rated bonds may
seek or may be required to restructure the terms and conditions of the
securities they have issued. As a result of these restructurings, holders
of lower-rated securities may receive less principal and interest than
originally expected at the time such bonds were purchased. In the event of
a restructuring, the Portfolio may bear additional legal or administrative
expenses in order to maximize recovery from an issuer. The secondary
trading market for lower-rated bonds is generally less liquid than the
secondary trading market for higher-rated bonds.
ASSET ALLOCATION. The Portfolio invests in debt obligations allocated among
diverse markets and denominated in various currencies, including multi-
currency units such as European Currency Units. The Portfolio may purchase
securities that are issued by the government or a company or financial
institution of one country but denominated in the currency (or muti-
currency unit) of another country.
NON-DIVERSIFIED INVESTMENT COMPANY. The Global High Yield Securities
Portfolio is classified as a "non-diversified" investment company so that
with respect to 50% of the Portfolio's assets it will be able to invest
more than 5% of its assets in obligations of one or more issuers, while
being limited with respect to the other half of its assets to investments
not exceeding 5% of the Portfolio's total assets. (A "diversified" invest
company would be required under the 1940 Act to maintain at least 75% of
its assets in cash (including foreign currency), cash items, U.S.
government securities, and other securities limited per issuer to not more
than 5% of the investment company's total assets.) In order to qualify as a
regulated investment company under the Internal Revenue Code of 1986, as
amended, and regulations promulgated thereunder (the "Code"), the
Portfolio, among other thins, may not invest more than 25% of its asset in
obligations of any one issuer (other than U.S. government securities). As a
"non-diversified" investment company, the Portfolio may invest a greater
proportion of its assets in the securities of a smaller number of issuers
and therefore may be subject to greater market and credit risk than a more
broadly diversified fund.
The Portfolio will not have more than 25% of the current value of its total
assets in any single industry, provided that this restriction shall not
apply to debt securities issued or guaranteed by the U.S. government or its
agencies or instrumentalities.
OTHER INVESTMENTS AND INVESTMENT TECHNIQUES. The Portfolio may also utilize
the following investments and investment techniques and practices: short-
term instruments, floating rate bonds, zero coupon bonds, sovereign and
supranational debt obligations, Brady bonds, loan participations and
assignments, convertible bonds, preferred stock, foreign currency exchange
transactions, options on foreign currencies, options on foreign bond
indices, futures contracts on foreign bond indices, options on futures
contracts, Rule 144A securities, when-issued and delayed delivery
securities, securities lending, repurchase agreements and reverse
repurchase agreements.. See "Additional Information" for further
information.
LATIN AMERICAN EQUITY PORTFOLIO.
The Portfolio seeks long-term capital appreciation from investments
primarily in the equity securities (or other securities with equity
characteristics) of companies domiciled in, or doing business in, Latin
America; the production of any current income is incidental to this
objective.
The Portfolio invests in securities listed on foreign or domestic
securities exchanges and securities traded in foreign or domestic over-the-
counter markets and may invest in restricted or unlisted securities.
It is expected under normal circumstances, that at least 65% of the
Portfolio's total assets will be invested in the equity securities of Latin
American issuers. For the purposes of this Registration Statement, "Latin
America" is defined as Mexico, and all the countries in Central America and
South America, including Argentina, Brazil, Chile Columbia, Peru, and
Venezuela. The Portfolio will invest in Argentina, Brazil, Chile, Colombia,
Peru, Mexico and Venezuela.
As used in this Registration Statement, "securities of Latin American
issuers" is defined as: (i) securities of companies the principal
securities trading market for which is Latin America; (ii) securities,
traded in any market, of companies that derive 50% or more of their total
revenue from either goods or services produced in Latin America or sales
made in Latin America; (iii) securities of companies organized under the
laws of, and with a principal office in, Latin America; and (iv) securities
issued or guaranteed by the government of a country in Latin America, its
agencies or instrumentalities, political subdivisions or the central bank
of such a country. Determinations as to eligibility will be made by Bankers
Trust, under the supervision of the Board of Trustees of the Trust, based
on publicly available information and inquiries made to the issuers.
Bankers Trust intends to consider investment only in those countries in
Latin America in which it believes investing is feasible and does not
involve undue political risk. At the date of this amendment, this list
included Argentina, Brazil, Chile, Columbia, Mexico, Peru and Venezuela.
The list of acceptable countries will be reviewed by Bankers Trust and
approved by the Trust's Board of Trustees on a periodic basis and any
additions or deletions with respect to such list will be made in accordance
with changing economic and political circumstances involving such
countries.
The Portfolio may invest in securities of companies having various levels
of net worth, including small companies whose securities may be more
volatile than securities offered by larger companies with higher levels of
net worth.
In other countries and regions where capital markets are underdeveloped or
not easily accessed and information is difficult to obtain, the Portfolio
may choose to invest only at the market level. Here, to the extent
available and consistent with applicable regulations, the Portfolio may
seek to achieve country exposure through the use of options or futures
based on an established local index or through investment in other
registered investment companies. Investment in other investment companies
is limited in amount by the 1940 Act, will involve the indirect payment of
a portion of the expenses, including advisory fees, of such other
investment companies and may result in a duplication of fees and expenses.
FIXED INCOME INVESTMENTS. For purposes of seeking capital appreciation, the
Portfolio may invest up to 35% of its total assets in debt securities of
Latin American issuers which are rated at least C by S&P or Moody's or, if
unrated, of comparable quality in the opinion of Bankers Trust. As an
operating policy which may be changed by the Board of Trustees, the
Portfolio will not invest more than 10% of its total assets in debt
securities rated BBB or lower by S&P or Baa or lower by Moody's. Securities
which are rated BBB by S&P or Baa by Moody's possess speculative
characteristics. bonds rated C by S&P are of the lowest quality and may be
used when the issuer has filed a bankruptcy petition, but debt payments are
still being paid. Mood's lowest rating is C, which is applied to bonds
which have extremely poor prospects of ever attaining any real investment
standing. Certain debt securities can provide the potential for capital
appreciation based on various factors such as changes in interest rates,
economic and market conditions, improvement in an issuer's ability to repay
principal and pay interest and ratings upgrades. Additionally, convertible
bonds offer the potential for capital appreciation through the conversion
feature, which enables the holder of the bond to benefit from increases in
the market price of the securities into which they are convertible.
OTHER INVESTMENTS AND INVESTMENT TECHNIQUES. The Portfolio may also
utilize the following investments and investment techniques and practices:
Brady bonds, foreign currency exchange transactions, options on foreign
currencies, American Depositary Receipts ("ADRs"), Global Depositary
Receipts("GDRs"), European Depositary Receipts ("EDRs"), options on stocks,
options on foreign stock indices, futures contracts on foreign stock
indices, options on futures contracts, when-issued and delayed delivery
securities, Rule 144A securities, short-term instruments, repurchase
agreements, leverage and securities lending. See "Additional Information"
for further information.
SMALL CAP PORTFOLIO.
The Small Cap Portfolio's investment objective is long-term capital growth;
the production of any current income is secondary to this objective.
The Portfolio seeks to provide long-term capital growth by investing in
equity securities of smaller companies. The Portfolio's policy is to invest
in equity securities of smaller companies that the Adviser, believes are
in an early stage or transitional point in their development and have
demonstrated or have the potential for above average capital growth. The
Adviser will select companies which have the potential to gain market share
in their industry, achieve and maintain high and consistent profitability
or produce increased earnings. The Adviser also seeks companies with strong
company management and superior fundamental strength.
The Adviser employs a flexible investment program in pursuit of the
Portfolio's investment objective. The Adviser takes advantage of its market
access and the research available to it to select investments in promising
growth companies that are involved in new technologies, new products,
foreign markets and special developments, such as research discoveries,
acquisitions, recapitalizations, liquidations, or management changes, and
companies whose stock may be undervalued by the market. These situations
are only illustrative of the types of investment the Portfolio may make.
The Portfolio is free to invest in any common stock which in the Adviser's
judgment provides above average potential for long-term growth of capital
and income.
Under normal market conditions, the Portfolio will invest at least 65% of
the value of its total assets in smaller companies (with market
capitalizations of less than $750 million at the time of purchase that
offer strong potential for capital growth). Small capitalization companies
have the potential to show earnings growth over time that is well above the
growth rate of the overall economy. The Portfolio may also invest in
larger, more established companies that the Adviser believes may offer the
potential for strong capital growth due to their relative market position,
anticipated earnings growth, changes in management or other similar
opportunities. The Portfolio will follow a disciplined selling process to
lessen market risks.
For temporary defensive purposes, when in the opinion of the Adviser market
conditions warrant, the Portfolio may invest all or a portion of its assets
in common stocks or larger, more established companies or in fixed-income
securities or short-term money market securities. To the extent the
Portfolio is engaged in temporary defensive investments, the Portfolio will
not be pursuing its investment objective.
The Portfolio may also invest up to 25% of its assets in similar securities
of foreign issuers. For further information on foreign investments and
related hedging techniques, see "Risk Factors," "Additional Information,"
and Part B to this Registration Statement.
OTHER INVESTMENTS AND INVESTMENT TECHNIQUES. The Portfolio may also utilize
the following investments and investment techniques and practices: short-
term instruments, options on stocks, options on stocks indices, futures
contracts on stock indices, options on futures contracts, foreign currency
exchange transactions, options on foreign currencies, Rule 144A securities,
when-issued and delayed delivery securities, securities lending, foreign
instruments and repurchase agreements. See "Additional Information" for
further information.
PACIFIC BASIN EQUITY PORTFOLIO.
The Portfolio seeks long-term capital appreciation from investment
primarily in the equity securities (or other securities with equity
characteristics) of companies domiciled in, or doing business in the
Pacific Basin region, other than Japan; the production of any current
income is incidental to this objective. Investment in such securities
involves certain considerations which are not normally involved in
investment in securities of U.S. issuers. The Portfolio may invest up to
10% of its assets in restricted securities (including 144A securities)
which may involve greater risk and increased Portfolio expenses.
For purposes of this Registration Statement, `issuers domiciled in, or
doing business in, the Pacific Basin region (other than Japan)''shall
include securities of issuers: (1) which are organized under the laws of
Pacific Basin countries (see below); (2) for which the principal securities
trading market is in a Pacific Basin country; and (3) which derive a
significant proportion (at least 50 percent) of their revenues or profits
from goods produced or sold, investments made, or services performed in the
countries of the Pacific Basin or which have at least 50 percent of their
assets situated in the countries of the Pacific Basin. The production of
any income is incidental to this objective. It is expected under normal
conditions that at least 65% of the Portfolio's assets will be invested in
the equity securities of issuers based in at least three countries in the
Pacific Basin.
For purposes of this Registration Statement, the "Pacific Basin" includes,
but is not limited to, the following countries: Hong Kong, India,
Indonesia, Malaysia, New Zealand, Pakistan, the Philippines, People's
Republic of China (`China''), Singapore, Sri Lanka, South Korea, Thailand,
Taiwan, and Vietnam.
The Portfolio will be managed using a disciplined, value-oriented
investment philosophy that stresses the inherent value of, and the medium
term outlook for, the companies under examination. Experience has proven
that often the real basis of a business is quite different from that
perceived by the market: a misconception that usually results in its shares
trading below its true business or replacement value. The exploitation of
this "perception/reality" gap is a hallmark of the investment style that
has been adopted for the Portfolio, and a potential source of value for its
investors.
"Value" investing means trying to find companies which are mispriced by the
market for reasons of neglect, fashion or misconception. These
opportunities arise out of legislative changes, industrial restructuring
and technology advancements, for example. As a result, the Adviser, and the
sub-investment adviser attach great importance to analyzing trends and
accessing possible breaks with traditional price patterns. At the company
level, the emphasis is placed on assessing the inherent "business" value of
the firm. While this often varies from the stock market's valuation, the
Adviser and the sub-investment adviser believe a company's stock price
tends to gravitate to their "business" value over time.
The Portfolio invests primarily in the equity securities of foreign
issuers, consisting of common stock and other securities with equity
characteristics. These issuers are primarily established companies based in
developed countries outside the United States. However, the Portfolio may
also invest in securities of issuers in underdeveloped countries.
Investments in these countries will be based on an acceptable degree of
risk in anticipation of superior returns. Under normal circumstances, the
Portfolio will invest at least 65% of the value of its total assets in the
equity securities of issuers based in at least three countries in the
Pacific Basin.
The Portfolio will not invest more than 20% of the value of its total
assets in issuers domiciled in China.
For further discussion of the unique risks associated with investing in
foreign securities in both developed and under developed countries, see
"Risk Factors" herein and in Part B.
The Portfolio's investments will generally be diversified among several
geographic regions and countries in the Pacific Basin. Criteria for
determining the appropriate distribution of investment among various
countries and regions include the prospects for relative growth among
foreign countries, expected levels of inflation, government policies
influencing business conditions, the outlook for currency relationships and
the range of alternative opportunities available to international
investors.
In countries and regions where capital markets are underdeveloped or not
easily accessed and information is difficult to obtain, the Portfolio may
choose to invest only at the market level. Here, to the extent available
and consistent with applicable regulations, the Portfolio may seek to
achieve country exposure through the use of options on futures based on an
established local index or through investment in other registered
investment companies. Investment in other investment companies is limited
in amount by the 1940 Act, will involve the indirect payment of a portion
of the expenses, including advisory fees, of such other investment
companies and may result in a duplication of fees and expenses.
The Portfolio invests in securities listed on foreign or domestic
securities exchanges and securities traded in foreign or domestic over-the-
counter markets and may invest in restricted unlisted securities.
The remainder of the Portfolio's assets will be invested in dollar and non-
dollar denominated short-term instruments. These investments are subject to
the conditions described under "Short-Term Investment" below.
OTHER INVESTMENTS AND INVESTMENT TECHNIQUES. The Portfolio may also utilize
the following investments and investment techniques and practices; short-
term instruments, foreign currency exchange transactions, options on
foreign currencies, ADRs, GDRs, EDRs, options on stocks, options on foreign
stock indices, future contracts on foreign stock indices, options on
futures contracts, Rule 144A securities, when-issued and delayed delivery
securities, securities lending and repurchase agreements. See "Additional
Information" for further information.
Investments in the Portfolios are not obligations of, or guaranteed by, the
Adviser with respect to each Portfolio, and are not federally insured by
the Federal Deposit Insurance Corporation, the Federal Reserve Board or any
other agency.
ADDITIONAL INFORMATION ABOUT THE INVESTMENT POLICIES OF EACH PORTFOLIO
APPEARS IN PART B. THERE CAN BE NO ASSURANCE THAT THE INVESTMENT OBJECTIVE
OF THE PORTFOLIOS WILL BE ACHIEVED.
EQUITY SECURITIES. As used herein, "equity securities" are defined as
common stock, preferred stock, trust or limited partnership interests,
rights and warrants, to subscribe to or purchase such securities, sponsored
or unsponsored ADRs, EDRs, GDRs, and convertible securities, consisting of
debt securities or preferred stock that may be converted into common stock
or that carry the right to purchase common stock. Common stocks, the most
familiar type, represent and equity (ownership) interest in a corporation.
Although equity securities have a history of long-term growth in value,
their prices fluctuate based on changes in a company's financial condition
and on overall market and economic conditions. Smaller companies are
especially sensitive to these factors.
DEBT SECURITIES. Bonds and other debt instruments are used by issuers to
borrow money from investor. The issuer pays the investor a fixed or
variable rate of interest, and must repay the amount borrowed at maturity.
Some debt securities, such as zero coupon bonds, do not pay current
interest, but are purchased at a discount from their face values. Debt
securities, loans, and other direct debt have varying degrees of quality
and varying levels of sensitivity to changes in interests rates. Longer-
term bonds are generally more sensitive to interest rate changes than
short-term bonds.
Lower-quality foreign government securities are often considered to be
speculative and involve greater risk of default or price changes, or they
may already be in default. These risks are in addition to the general risks
associated with foreign securities.
SHORT-TERM INSTRUMENTS. The Portfolios intend to stay invested in the
securities described above to the extent practical in light of each
Portfolios objective and long-term investment perspective. However, each
Portfolio's assets may be invested in short-term instruments with remaining
maturities of 397 days or less to meet anticipated redemptions and expenses
for day-to-day operating purposes and when, in Bankers Trust's opinion, it
is advisable to adopt a temporary defensive position because of unusual and
adverse conditions affecting the equity markets.
In addition, when 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 Moody's or AA or higher by S&P
or, if unrated, of comparable quality in the opinion of Bankers Trust;
(iii) commercial paper; (iv) bank obligations, including negotiable
certificates of deposit, time deposits and 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 Moody's or
AA or higher by S&P or outstanding commercial paper or bank obligations
rated Prime-1 by Moody's or A-1 by S&P; or, if no such ratings are
available, the instrument must be of comparable quality in the opinion of
Bankers Trust. These instruments may be denominated in U.S. dollars or in
foreign currencies.
FIXED INCOME INVESTMENTS. For purposes of seeking capital appreciation,
Latin American Equity Portfolio may invest up to 35% of its assets in debt
securities (defined as bonds, notes, debentures, commercial paper,
certificates of deposits, time deposits and banker's acceptances) of Latin
American issuers which are rated at least C by S&P or C by Moody's or, if
unrated, of comparable quality in the opinion of Bankers Trust. See "Risk
Factors." As an operating policy, which may be changed by the Board of
Trustees of the Trust, the Portfolio will not invest more than 10% of its
total assets in debt securities rated BBB or lower by S&P or Baa or lower
by Moody's. Securities which are rated BBB by S&P or Baa by Moody's either
have speculative characteristics or are speculative. Investments in lower-
rated long-term obligations, including securities rated from BB to C by S&P
or Ba to C by Moody's, or if unrated, of comparable quality in the opinion
of Bankers Trust, involve special risks as compared with investments in
higher-rated debt obligations, including greater sensitivity to general
economic downturns and significant increases in interest rates, greater
market price volatility, and less liquid secondary trading markets.
Regardless of rating levels, all debt securities considered for purchase
(whether rated or unrated) will be carefully analyzed by Bankers Trust to
insure, to the extent possible, that the planned investment is sound.
Certain debt securities can provide the potential for capital appreciation
based on various factors such as changes in interest rates, economic and
market conditions, improvement in an issuer's ability to repay principal
and pay interest and ratings upgrades. Additionally, convertible bonds
offer the potential for capital appreciation through the conversion
feature, which enables the holder of the bond to benefit from increases in
the market price of the securities into which they are convertible.
BRADY BONDS. Global High Yield Securities Portfolio and Latin American
Equity Portfolio may also invest in "Brady bonds," which have recently been
issued by the governments of Argentina, Costa Rica, Mexico, Nigeria,
Uruguay, Venezuela, Brazil and the Philippines, as well as other emerging
market countries. Most Brady bonds are currently rated below BBB by S&P or
Baa by Moody's. While Bankers Trust is not aware of the occurrence of any
payment defaults on Brady bonds, investors should recognize that these debt
securities have been issued only recently and, accordingly, do not have a
long payment history. Brady bonds may be collateralized or
uncollateralized, are issued in various currencies (primarily the U.S.
dollar) and are actively traded in the secondary market for Latin American
debt.
LEVERAGE. Global High Yield Securities Portfolio and Latin American Equity
Portfolio may each borrow up to one-third of the value of its total assets,
from banks or through the use of reverse repurchase agreements, to increase
its holdings of portfolio securities. Under the 1940 Act, the Portfolio is
required to maintain continuous asset coverage of 300% with respect to such
borrowings and to sell (within three days) sufficient. Portfolio holdings
to restore such coverage if it should decline to less than 300% due to
market fluctuations or otherwise, even if such liquidations of each
Portfolio's holdings may be disadvantageous from an investment standpoint.
Leveraging by means of borrowing may exaggerate the effect of any increase
or decrease in the value of the Portfolio's securities and money borrowed
by the Portfolio will be subject to interest and other costs (which may
include commitment fees and/or the cost of maintaining minimum average
balances) which may or may not exceed the income received from the
securities purchased with borrowed funds.
REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, a
Portfolio agrees to sell portfolio securities to financial institutions
such as banks and broker-dealers and to repurchase them at a mutually
agreed date and price. At the time the Portfolio enters into a reverse
repurchase agreement it will place in a segregated custodial account cash,
U.S. government securities or high grade, liquid 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 the Portfolio may decline below the repurchase price of
those securities. Reverse repurchase agreements are considered to be
borrowings by the Portfolio for purposes of the limitations described in
"Leverage" above.
REPURCHASE AGREEMENTS. Each Portfolio may engage in repurchase agreement
transactions with banks and governmental securities dealers approved by the
Trustees of the Portfolio. Under the terms of a typical repurchase
agreement, a Portfolio would acquire an underlying debt obligation of a
kind in which the Portfolio could invest for a relatively short period
(usually not more than one week) subject to an obligation of the seller to
repurchase, and the Portfolio to resell, the obligation at an agreed price
and time, thereby determining the yield during the Portfolio's holding
period. This arrangement results in a fixed rate of return that is not
subject to market fluctuations during the Portfolio's holding period. The
value of the underlying securities will be at least equal at all time to
the total amount of the repurchase obligations, including interest. The
Portfolio bears a risk of loss in the event that the other party to a
repurchase agreement defaults on its obligations and the Portfolio is
delayed in or prevented from exercising its rights to dispose of the
collateral securities, including the risk of a possible decline in the
value of the underlying securities during the period in which the Portfolio
seeks to assert these rights. Bankers Trust, acting under the supervision
of the Board of Trustees of the Trust reviews the creditworthiness of those
banks and dealers with which the portfolio enters in repurchase agreements
and monitors on an ongoing basis the value of the securities subject to
repurchase agreements to ensure that it is maintained at the required
level. Repurchase agreements are considered collateralized loans under the
1940 Act.
ZERO COUPON SECURITIES. The Global High Yield Securities Portfolio may
purchase zero coupon securities which are the separate income or principal
components of a debt instrument. These include risks that are similar to
those of other debt securities, although they may be more volatile, and
certain zero coupon securities move in the same direction as interest
rates.
FLOATING RATE BONDS. The Global High Yield Securities Portfolio may
purchase floating rate bonds which may have interest rates that move in
tandem with a benchmark, helping to stabilize their prices.
ASSET ALLOCATION. Global High Yield Securities Portfolio invests in debt
obligations allocated among diverse markets and denominated in various
currencies, including multi-currency units such as European Currency Units
("ECUs"). The Portfolio may purchase securities that are issued by the
government or a company or financial institution of one country but
denominated in the currency (or multi-currency unit) of another country.
Bankers Trust will allocate the assets of the Portfolio in securities of
issuers in countries and currency denominations where the combination of
fixed income market returns, the price appreciation potential of fixed
income securities and currency exchange rate movements will present
opportunities primarily for high current income and secondarily for capital
appreciation. In so doing, Bankers Trust intends to take full advantage of
the different yield, risk and return characteristics that investment in the
fixed income markets of different countries can provide. Fundamental
economic strength, credit quality, currency and interest rate trends and
diversification to manage risk will be the principal determinants of the
emphasis given to various country, geographic and industry sectors within
the Portfolio. Securities held by the Portfolio may be invested without
limitation as to maturity and are summarized according to the following
general classifications, emerging market debt securities, Brady bonds, loan
participations and assignments, convertible bonds, preferred stock and
industrialized market debt securities.
EMERGING MARKETS DEBT SECURITIES. Global High Yield Securities Portfolio
invests in emerging market debt securities. In addition to the risks
inherent in investment in debt securities of U.S. issuers, investments in
debt securities denominated in foreign currencies involve certain other
risks. Less public information may be available concerning non-U.S. issuers
as compared to U.S. issuers. Non-U.S. issuers are generally not subject to
accounting, auditing and financial practices comparable to those applicable
to U.S. issuers.
In investing in bonds denominated in non-U.S. currencies, the Portfolio may
be subject to the risk of currency fluctuations. Non-U.S. currencies may be
affected by devaluation, adverse political and economic developments, and
governmental restrictions. The values of foreign investments and the
investment income derived from them may also be affected adversely by
changes in currency exchange control regulations. Although the Portfolio
will invest primarily in securities denominated in U.S. dollars or in
currencies that are fully convertible into U.S. dollars, it is a
possibility that individual securities might suffer loss of value or
liquidity due to foreign government imposition of currency exchange
controls.
Securities denominated in foreign currencies of U.S. or non-U.S. issuers
may be less liquid and their prices more volatile than securities issued by
U.S. issuers and denominated in U.S. dollars. In addition, investing in
non-U.S. securities and securities denominated in non-U.S. currencies often
entails costs not associated with investments in U.S. dollar-denominated
securities of U.S. issuers such as the cost of converting U.S. dollars to
foreign currency, and higher brokerage commissions, custodial expenses and
other fees. Non-U.S. dollar denominated securities may be subject to
withholding or other taxes in the relevant jurisdiction, which may reduce
the yield on the securities to the Portfolio and which may not be
recoverable by the Portfolio or its investors.
SOVEREIGN AND SUPERNATIONAL DEBT SECURITIES. Debt instruments issued or
guaranteed by foreign governments, agencies and supranational organizations
("sovereign debt obligations"), especially sovereign debt obligations of
developing countries, may involve a higher degree of risk, and may be in
default or present the risk of default. The issuers of the obligation or
the governmental authorities that control the repayment of the debt may be
unable or unwilling to repay principal and interest when due, and may
require renegotiation or rescheduling of debt payments. In addition,
prospects for repayment of principal and interest may depend on political
as well as economic factors.
LOAN PARTICIPATIONS AND ASSIGNMENTS. Global High Yield Securities Portfolio
may invest in fixed and floating rate loans ("loans") arranged through
private negotiations between a borrower and one or more institutions
("lenders"). The majority of the Portfolio's investments in loans in
emerging markets is expected to be in the form of participations in loans
("participations") and assignments of portions of loans from third parties
("assignments"). The Portfolio may also invest in loans, participations or
assignments of loans to borrowers located in the industrialized world.
Participations typically will result in the Portfolio having a contractual
relationship only with the lender, not the borrower. The Portfolio will
have the right to receive payments of principal, interest and any fees to
which it is entitled only from the lender selling the participation and
only upon receipt by the lender of the payments from the borrower. In
connection with purchasing participations, the Portfolio generally will
have no right to enforce compliance by the borrower with the terms of the
loan agreement relating to the loan ("loan agreement"), nor any rights of
set-off against the borrower, and the Portfolio may not directly benefit
from any collateral supporting the loan in which it has purchased the
participation. As a result, the Portfolio will assume the credit risk of
both the borrower and the lender that is selling the participation. In the
event of the insolvency of the lender selling the participation, the
Portfolio may be treated as a general creditor of the lender and may not
benefit from any set-off between the lender and the borrower. The Portfolio
will acquire participations only if the lender interpositioned between the
Portfolio and the borrower is determined by Bankers Trust to be
creditworthy. When the Portfolio purchases assignments from lenders, the
Portfolio will acquire direct rights against the borrower on the loan;
however, since assignments are arranged through private negotiations
between the potential assignees and assignors, the rights and obligations
acquired by the Portfolio as the purchaser of an assignment may differ
from, and be more limited than, those held by the assigning lender.
The Portfolio may have difficulty disposing of assignments and
participations. The liquidity of such securities is limited and the
Portfolio anticipates that such securities could only be sold to a limited
number of institutional investors. The lack of a liquid secondary market
could have an adverse impact on the value of such securities and on the
Portfolio's ability to dispose of particular assignments or participations
when necessary to meet the Portfolio's liquidity needs or in response to a
specific economic event, such as a deterioration in the creditworthiness of
the borrower. The lack of a liquid secondary market for assignments and
participations may make it more difficult in valuing the Portfolio and,
therefore, calculating the net asset value of the Portfolio. All
assignments and participations shall be considered to be illiquid
securities by the Portfolio. The investment by the Portfolio in illiquid
securities, including assignments and participations, is limited to a total
of 15% of total assets.
CONVERTIBLE SECURITIES. A convertible security is a fixed income security,
such as 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 derivable
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.
PREFERRED STOCK. The Portfolios may also invest in preferred stock of U.S.
and non-U.S. issuers. Preferred stock has a preference in liquidation (and,
generally dividends) over common stock but is subordinated in liquidation
to debt. As a general rule the market value of preferred stocks with fixed
dividend rates and no conversion rights varies inversely with interest
rates and perceived credit risk, with the price determined by the dividend
rate. Some preferred stocks are convertible into other securities, for
example common stock, at a fixed price and ratio or upon the occurrence of
certain events. The market price of convertible preferred stocks generally
reflects an element of conversion value. Because many preferred stocks lack
a fixed maturity date, these securities generally fluctuate substantially
in value when interest rates change; such fluctuations often exceed those
of long-term bonds of the same issuer. Some preferred stocks pay an
adjustable dividend that may be based on an index, formula, auction
procedure or other dividend rate reset mechanism. In the absence of credit
deterioration, adjustable rate preferred stocks tend to have more stable
market values than fixed rate preferred stocks.
All preferred stocks are also subject to the same types of credit risks of
the issuer as those described above for corporate bonds. In addition,
because preferred stock is junior to debt securities and other obligations
of an issuer, deterioration in the credit rating of the issuer will cause
greater changes in the value of a preferred stock than in more senior debt
security with similar yield characteristics. Preferred stocks may be rated
by S&P and Moody's although there is no minimum rating which a preferred
stock must have (and a preferred stock may not be rated) to be an eligible
investment for the Portfolio. Bankers Trust expects, however, that
generally the preferred stocks in which the Portfolio invests will be rated
at least CCC by S&P or Caa by Moody's or, if unrated, of comparable quality
in the opinion of Bankers Trust Preferred stocks rated CCC by S&P are
regarded as predominantly speculative with respect to the issuer's capacity
to pay preferred stock obligations and represent the highest degree of
speculation among securities rated between BB and CCC; preferred stocks
rated Caa by Moody's are likely to be in arrears on dividend payments.
Moody's rating with respect to preferred stocks does not purport to
indicate the future status of payments of dividends.
INDUSTRIALIZED MARKET DEBT SECURITIES. Under normal market conditions,
Global High Yield Securities Portfolio will invest in certain securities
that are issued by corporate or guaranteed borrowers located in the world's
industrialized markets. These debt securities may pay interest in cash or
in additional securities, at fixed or adjustable rates or may be zero
coupon securities and may be convertible into common stock or other
securities. Bankers Trust selects securities for the Portfolio by
considering, among other factors, price and yield, interest coverage and
financial resources, the liquidity of the secondary trading market in the
security, factors relating to the issuer's industry in general and its
sensitivity to economic conditions, its operating history and quality of
management, and regulatory matters.
The Portfolio will invest in higher-yielding, lower-rated U.S. dollar-
denominated debt securities, which may involve high risk and are
predominantly speculative in character. These securities are commonly known
as "junk bonds." Investments in lower-rated long-term debt obligations,
including securities rated from BB to D by S&P or Ba to C by Moody's or, if
unrated, of comparable quality in the opinion of Bankers Trust involve
special risks as compared with investments in higher-rated debt
obligations, including greater sensitivity to general economic downturns
and significant increases in interest rates, greater market price
volatility, and less liquid secondary trading markets. See "Risk Factors."
The net asset value of the Portfolio can be expected to increase or
decrease depending on real or perceived changes in the credit risks
associated with the Portfolio's investments, changes in interest rates and
other factors generally affecting the credit markers.
Most of the debt securities in which the Portfolio invests are rated, at
the time of investment, at least CCC by S&P or Caa by Moody's or, if
unrated, of comparable quality in the opinion of Bankers Trust. Such
securities are regarded by S&P as predominantly speculative with respect to
the capacity to pay interest and repay principal in accordance with the
terms of the contract. Debt rated Caa by Moody's is regarded as being of
poor standing and may be in default or there may be present elements of
danger with respect to the payment of principal or interest.
Certain of the debt securities in which the Portfolio invests are rated, at
the time of investment, or may be downgraded while held by the Portfolio,
to ratings below CCC by S&P or Caa by Moody's or, if unrated, their credit
quality may be, or may decline to, levels less than the equivalent of such
ratings in the opinion of Bankers Trust. Such debt securities are highly
speculative and may be in default or payment of interest or principal may
be in arrears. The issuers of such securities may be involved in bankruptcy
or reorganization proceedings or may be restructuring outstanding debt.
Default debt securities may never resume interest payments or repay
principal. Investing in bankrupt and troubled companies involves special
risk. The Portfolio will not invest more than 10% of its assets in debt
securities rated below CCC by S&P or Caa by Moody's or, if unrated, of
comparable quality in the opinion of Bankers Trust.
The Portfolio is not required to dispose of debt securities whose credit
quality declines at some point after the security is purchased; however, no
more than 25% of the Portfolio's assets will be invested at any time in
securities rated less than CCC by S&P or Caa by Moody's or, if unrated, of
comparable quality in the opinion of Bankers Trust. S&P's lowest ratings
for bonds are Cl, which is reserved for income bonds on which no interest
is being paid and D, which is reserved for debt in default and in respect
of which payment of interest or repayment of principal is in arrears.
Moody's lowest rating is C, which is applied to bonds which have extremely
poor prospects for ever attaining any real investment standing. Other than
as set forth above, there is no restriction on the percentage of the
Portfolio's assets which may be invested in bonds of a particular rating.
ADDITIONAL INVESTMENT LIMITATIONS. As diversified funds, no more than 5% of
the respective assets of Latin American Equity Portfolio, Small Cap
Portfolio or Pacific Basin Equity Portfolio may be invested in the
securities of one issuer (other than U.S. government securities), except
that up to 25% of a Portfolio's assets may be invested without regard to
this limitation. A 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 each Portfolio which may not be changed without
investor approval. No more than 15% of a Portfolio's net assets maybe
invested in illiquid or not readily marketable securities (including
repurchase agreements and time deposits with remaining maturities of more
than seven calendar days). Also, no more than 10% of a Portfolio's net
assets may be invested in securities restricted as to transfer or re-sale.
Additional investment policies of the Portfolios are contained in Part B.
RISK OF INVESTING IN FOREIGN SECURITIES. 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 the Portfolio's 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.
RISKS OF INVESTING IN EMERGING MARKETS. Because foreign securities
generally are denominated and pay dividends or interest in foreign
currencies, and the Portfolio holds various foreign currencies from time to
time, the value of the net assets of the Portfolio as measured in U.S.
Dollars will be affected favorable 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 authorized to enter in
certain foreign current 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.
The Portfolio will invest in the securities of issuers based in some of the
world's underdeveloped emerging markets, including (in the case of Global
High Yield Securities Portfolio) those in Eastern Europe. Investment in
securities of issuers based in underdeveloped countries entails all of the
risks of investing in securities of foreign issuers outlined in this
section to a heightened degree. These heightened risks include: (i) greater
risks of expropriation, confiscatory taxation, nationalization, and less
social, political and economic stability; (ii) the smaller size of the
market for such securities and a low or nonexistent volume of trading,
resulting in lack of liquidity and in price volatility; (iii) certain
national policies which may restrict the Portfolio's investment
opportunities including restrictions on investing in issuers or industries
deemed sensitive to relevant national interests; and (iv) in the case of
Eastern Europe, the absence of developed capital market and legal
structures governing private or foreign investment and private property and
the possibility that recent favorable economic and political developments
could be slowed or reversed by unanticipated events.
So long as the Communist Party continues to exercise a significant or, in
some countries, dominant role in Eastern European countries, investments in
such countries will involve risks of nationalization, expropriation and
confiscatory taxation. The Communist governments of a number of Eastern
European countries expropriated large amounts of private property in the
past, in many cases without adequate compensation, and there may be no
assurance that such expropriation will not occur in the future. In the
event of such expropriation, the Portfolio could lose a substantial portion
of any investments it has made in the affected countries. Further, no
accounting standards exist in Eastern European countries. Finally, even
though certain Easter European currencies may be convertible into U.S.
dollars, the conversion rates may be artificial to the actual market values
and may be adverse to investors.
In addition to brokerage commissions, custodial services and other costs
relating to investment in emerging markets are generally more expensive
than in the United States. Such markets have been unable to keep pace with
the volume of securities transactions, making it difficult to conduct such
transactions. The inability of a Portfolio to make intended security
purchases due to settlement problems could cause the Portfolio to miss
attractive investment opportunities. Inability to dispose of a security due
to settlement problems could result either in losses to the Portfolio due
to subsequent declines in the value of the security, or if the Portfolio
has entered into a contract to sell the security, could result in possible
liability to the purchaser.
RISK FACTORS-GLOBAL HIGH YIELD SECURITIES PORTFOLIO. Under normal
circumstances, a majority of the Portfolio's assets will be invested in
fixed income securities offering high current income. Such high yield,
fixed income securities are ordinarily in the lower rating categories of
recognized rating agencies or will be non-rated and of equivalent quality
in the opinion of Bankers Trust. They are commonly known as "junk bonds."
The market value for such securities tends to be less sensitive to changes
in prevailing interest rates than higher-rated securities but more
sensitive to individual corporate developments than higher-rated
securities. Such lower-rated securities also tend to be more sensitive to
economic conditions than are higher-rated securities. Accordingly, these
securities are considered predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal in accordance with
the terms of the obligation and will generally involve more credit risk
than securities in the higher-rated categories. Even securities rated BBB
or Baa by S&P and Moody's, respectively, possess some speculative
characteristics. There are risks involved in applying credit ratings as a
method for evaluating high yield obligations in that credit ratings
evaluate the safety of principal and interest payments, not market value
risk. In addition, credit rating agencies may not change credit ratings on
a timely basis to reflect changes in economic or company conditions that
affect a security's market value. The Portfolio will rely on Bankers
Trust's judgment, analysis and experience in evaluating the
creditworthiness of an issuer. In this evaluation, Bankers Trust will take
into consideration, among other things, the issuer's ability to cover
interest and fixed charges, factors relating to the issuer's industry and
its sensitivity to economic conditions and trends, its operating history,
the quality of the issuer's management and regulatory matters.
The Portfolio is authorized to invest in high risk, lower quality debt
securities without limit. Investments in lower-rated long-term.
obligations, including securities rated from BB to D by S&P or Ba to C by
Moody's or, if unrated of comparable quality in the opinion of Bankers
Trust, involve special risks as compared with investments in higher rated
debt obligations, including greater sensitivity to general economic
downturns and significant increases in interest rates, greater market price
volatility, and less liquid secondary trading markets. Regardless of rating
levels, all debt securities considered for purchase (whether rated or
unrated) will be carefully analyzed by Bankers Trust to insure, to the
extent possible, that the planned investment is sound. The Portfolio may,
from time to time, purchase defaulted debt securities if, in the opinion of
Bankers Trust, the issuer may resume interest payments in the near future.
The Portfolio will not invest more than 10% of its total assets (at the
time of purchase) in defaulted debt securities, which may be illiquid.
The risk of loss due to default by the issuer is significantly greater for
the holders of high yield securities because such securities are generally
unsecured and are often subordinated to other obligations of the issuer.
During an economic downturn or a sustained period of rising interest rates,
highly leveraged issuers of high yield securities may experience financial
stress and may not have sufficient revenues to meet their interest payment
obligations. An issuer's ability to service its debt obligations may also
be adversely affected by specific corporate developments, its inability to
meet specific projected business forecasts, or the unavailability or
additional financing.
Factors adversely affecting the market value of high yield and other
securities will adversely affect the Portfolio's net asset value. In
addition, the Portfolio may incur additional expenses to the extent it is
required to seek recovery upon a default in the payment of principal of or
interest on its portfolio holdings.
In addition to brokerage commissions, custodial services and other costs
relating to investment in emerging markets are generally more expensive
than in the United States. Such markets have been unable to keep pace with
the volume of securities transactions, making it difficult to conduct such
transactions. The inability of the Portfolio to make intended security
purchases due to settlement problems could cause the Portfolio to miss
attractive investment opportunities. Inability to dispose of a security due
to settlement problems could result either in losses to the Portfolio due
to subsequent declines in the value of the security or, if the Portfolio
has entered into a contract to sell the security, could result in possible
liability to the purchaser.
PORTFOLIO TURNOVER. The frequency of portfolio transactions -- the
Portfolio's turnover rate -- will vary from year to year depending on
market conditions. The Portfolio's turnover rates for the fiscal years
ended September 30, 1996, and 1995, were 207%, and 169%, respectively.
Because a higher turnover rate increases transaction costs and may increase
taxable capital gains, Bankers Trust carefully weighs the anticipate
benefits of short-term investment against these consequences.
RISK FACTORS-LATIN AMERICAN EQUITY PORTFOLIO. Governments of many Latin
American countries have exercised and continue to exercise substantial
influence over many aspects of the private sector through the ownership or
control of many companies, including some of the largest in those
countries. As a result, government actions in the future could have effect
on economic conditions which may adversely affect prices of certain
portfolio securities. Expropriation, confiscatory taxation,
nationalization, political, economic or social instability or other similar
developments, such a military coups, have occurred in the past and could
also adversely affect the Portfolio's investments in this region.
Certain Latin American countries such as Argentina, Brazil and Mexico are
among the world's largest debtors to commercial banks and foreign
governments. At times, certain Latin American countries have declared
moratoria on the payment of principal and/or interest on outstanding debt.
Investment in sovereign debt can involve a high degree of risk.
In recent years, there have been significant improvements in some Latin
American economies; however, others continue to experience economic
problems, including high inflation rates and high interest rates. The
emergence of Latin American economies and securities markets will require
economic and fiscal discipline, as well as stable political and social
conditions. Recovery may also be influenced by international economic
conditions, particularly those in the United States, by world prices for
oil and other commodities, and international trade agreements such as the
North American Free Trade Agreement. Because Latin American securities
generally are denominated and pay dividends or interest in currencies of
Latin American countries, and the Portfolio holds various foreign
currencies from time to time, 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, the Portfolio is authorized to enter into
certain foreign currency exchange transactions.
ADRs, GDRs and EDRs may not necessarily be denominated in the same currency
as the underlying securities into which they may be converted. Ownership of
unsponsored ADRs, GDRs and EDRs may not entitle the Portfolio to financial
or other reports from the issuer, to which it would be entitled as the
owner of sponsored ADRs, GDRs and EDRs. ADRs, GDRs and EDRs also involve
the risks of other investments in foreign securities, as discussed above.
Because foreign securities generally are denominated and pay dividends or
interest in foreign currencies, and the Portfolio holds various foreign
currencies from time to time, the value of the net assets of the Portfolio
as measured in U.S. dollars will be affected favorable 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
authorized to enter in certain foreign current 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.
In addition to brokerage commissions, custodial services and other costs
relating to investments in emerging markets are generally more expensive
than in the United States. Such markets have been unable to keep pace with
the volume of securities transactions, making it difficult to conduct such
transactions. The inability of the Portfolio to make intended security
purchases due to settlement problems could cause the Portfolio to miss
attractive investment opportunities. Inability to dispose of a security due
to settlement problems could result either in losses to the Portfolio due
to subsequent declines in the value of the security or, if the Portfolio
has entered into a contract to sell the security, could result in possible
liability to the purchaser.
The Portfolio is authorized to invest up to 35% of its total assets in
medium quality or high risk, lower quality debt securities that are rated
between BBB and as low as C by S&P, and between Baa and as low as C by
Moody's or, if unrated, of comparable quality in the opinion of Bankers
Trust. As an operating policy, which may be changed by the Board of
Trustees of the Trust, the Portfolio will not invest more than 10% of its
total assets in debt securities rated BBB or lower by S&P or Baa or lower
by Moody's. The Board may consider a change in this operating policy it in
its judgment, economic conditions change such that a higher level of
investment in high risk lower quality debt securities would be consistent
with the interests of the Portfolio and its investors. High risk lower
quality debt securities, ("junk bonds") are regarded on balance, as
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligation
and may be in default. Unrated debt securities are not necessarily of lower
quality than rated securities but they may not be attractive to as many
buyers. Regardless of rating levels, all debt securities considered for
purchase (whether rated or unrated) will be carefully analyzed by Bankers
Trust to insure, to the extent possible, that the planned investment is
sound. The Portfolio may, from time to time, purchase defaulted debt
securities if, in the opinion of Bankers Trust, the issuer may resume
interest payments in the near future. As an operating policy, the Portfolio
will not invest more than 10% of its total assets (at the time of purchase)
in defaulted debt securities, which may be illiquid.
PORTFOLIO TURNOVER. The frequency of portfolio transactions -- the
Portfolio's turnover rate -- will vary from year to year depending on
market conditions. The Portfolio's turnover rates for the fiscal years
ended September 30, 1996, and 1995 were 171%, and 161%, respectively.
Because a higher turnover rate increases transaction costs and may increase
taxable capital gains, Bankers Trust carefully weighs the anticipate
benefits of short-term investment against these consequences.
RISK FACTORS-SMALL CAP PORTFOLIO. By itself the Portfolio does not
constitute a balanced investment plan; the Portfolio seeks to provide long-
term capital growth, with the production of any current income being
incidental to this objective, by investments primarily in growth-oriented
common stocks of domestic corporations and, to a limited extent, foreign
corporations. The Portfolio is designed for those investors primarily
interested in capital growth from investments in smaller-sized growth
companies. In view of the long-term capital growth objective of the
Portfolio and the smaller size of the companies, the risks of investment in
the Portfolio may be greater than the general equity markets, and changes
in domestic and foreign interest rates may also affect the value of the
Portfolio's investments, and rising interest rates can be expected to
reduce the Portfolio's net asset value. A description of a number of
investments and investment techniques available to the Portfolio, including
foreign investments and the use of options and futures, is found under
"Additional Information" as well as certain risks associated with these
investments and techniques.
In seeking its investment objectives, the Portfolio may invest in
securities of foreign issuers. Foreign securities may involve a higher
degree of risk and may be less liquid or more volatile than domestic
investments. Foreign securities usually are denominated in foreign
currencies, which means their value will be affected by changes in the
strength of foreign currencies relative to the U.S. dollar as well as the
other factors that affect security prices. Foreign companies may not be
subject to accounting standards or governmental supervision comparable to
U.S. companies, and there often is less publicly available information
about their operations. Generally, there is less governmental regulation of
foreign securities markets, and security trading practices abroad may offer
less protection to investors such as the Portfolio. The value of such
investments may be adversely affected by changes in political or social
conditions, diplomatic relations, confiscatory taxation, expropriation,
nationalization, limitation on the removal of funds or assets, or
imposition of (or change in) exchange control or tax regulations in those
foreign countries. Additional risks of foreign securities include
settlement delays and costs, difficulties in obtaining and enforcing
judgments, and taxation of dividends at the source of payment. The
Portfolio will not invest more than 5% of the value of its total assets in
the securities of issuers based in developing countries, including Eastern
Europe.
PORTFOLIO TURNOVER. The Portfolio intends to manage its holdings actively
to pursue its investment objective. Since the Portfolio has a long-term
investment perspective, it does not intend to respond to short-term market
fluctuations or to acquire securities for the purpose of short-term
trading; however, it may take advantage of short-term trading opportunities
that are consistent with its objective. The Portfolio's turnover rates for
the fiscal years ended September 30, 1996, and 1995, were 159%, and 161%,
respectively. Higher portfolio turnover rates result in higher brokerage
costs and in possible adverse tax consequences.
RISK FACTORS-PACIFIC BASIN EQUITY PORTFOLIO. The Portfolio may invest in
the securities of issuers based in underdeveloped countries, including
those in the Pacific Basin. Investment in securities of issuers based in
underdeveloped countries entails all of the risks of investing in
securities of foreign issuers outlined in this section to a heightened
degree.
These heightened risks include: (i) greater risks of expropriation,
confiscatory taxation, nationalization, and less social, political and
economic stability; (ii) the smaller size of the market for such securities
and a low or non-existent volume of trading, resulting in lack of liquidity
and in price volatility; (iii) certain national policies which may restrict
the Portfolio's investment opportunities including restrictions on
investing in issuers or industries deemed sensitive to relevant national
interest; and (iv) in the case of Eastern Europe, the absence of developed
capital market and legal structures governing private of foreign investment
and private property and the possibility that recent favorable economic and
political developments could be slowed or reversed by unanticipated events.
The Portfolio will not invest more than 5% of the value of its total assets
in securities of issuers based in Eastern Europe.
Because foreign securities generally are denominated and pay dividends or
interest in foreign currencies, and the Portfolio holds various foreign
currencies from time to time, 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. Generally, the Portfolio's currency exchange
transactions will be conducted on a spot (i.e., cash) basis at the spot
rate prevailing in the currency exchange market. The cost of the
Portfolio's currency exchange transactions will generally be the difference
between the bid and offer spot rate of the currency being purchased or
sold. In order to protect against uncertainty in the level of future
foreign currency exchange rates, the Portfolio is authorized to enter into
certain foreign currency transactions. See "Additional Information."
In addition, while the volume of the transactions effected of foreign stock
exchanges has increased in recent years, in most cases it remains
appreciably below that of the New York Stock Exchange Inc. (the "NYSE").
Accordingly, 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. Moreover, the settlement periods for foreign securities,
which are often longer than those for securities of U.S. issuers, may
affect portfolio liquidity.
In buying and selling securities on foreign exchanges, the Portfolio
normally pays fixed commissions that are generally higher than the
negotiated commissions charged in the United States. In addition, there is
generally less government supervision and regulation of securities
exchange, brokers and issuers in foreign countries than in the United
States. Bankers Trust intends to manage the Portfolio actively in pursuit
of its investment objective. However, the annual portfolio turnover rate of
the Portfolio is generally not expected to exceed 100%. The Portfolio does
not expect to trade in securities for short-term profits but, when
circumstances warrant, securities may be sold without regard to the length
of time held.
Because foreign securities generally are denominated and pay dividends or
interest in foreign currencies, and the Portfolio holds various foreign
currencies from time to time, 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
authorized to enter into certain foreign currency exchange transactions.
See "Additional Information." 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.
In addition to brokerage commissions, custodial services and other costs
relating to investment in emerging markets are generally more expensive
than in the United States. Such markets have been unable to keep pace with
the volume of securities transactions, making it difficult to conduct such
transactions. The inability of the Portfolio to make intended security
purchases due to settlement problems could cause the Portfolio to miss
attractive investment opportunities. Inability to dispose of a security due
to settlement problems could result either in losses to the Portfolio due
to subsequent declines in the value of the security or, if the Portfolio
has entered into a contract to sell the security, could result in possible
liability to the purchaser.
Futures contracts and related option transactions are discussed under
"Additional Information." Successful use of futures contracts and related
options is 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 foreign
currency on which the futures or options contract is based and movements in
the securities or currency of 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 judgment will be correct. Successful
use of options on securities or stock indices is subject to similar risk
considerations. In addition, by writing covered call options, the Portfolio
gives up the opportunity, which the option is in effect, to profit from any
price increase in the underlying securities above the option exercise
price.
See `FOREIGN SECURITIES: SPECIAL CONSIDERATIONS CONCERNING CHINA AND CHINA
REGION''in Part B for more risk information.
PORTFOLIO TURNOVER. The frequency of portfolio transactions -- the
Portfolio's turnover rate -- will vary from year to year depending on
market conditions. The Portfolio's turnover rates for the fiscal years
ended September 30, 1996, and 1995, were 118%, and 104%, respectively.
Because a higher turnover rate increases transaction costs and may increase
taxable capital gains, Bankers Trust carefully weighs the anticipate
benefits of short-term investment against these consequences.
ITEM 5. MANAGEMENT OF THE FUND
The Board of Trustees of the Portfolios provides broad supervision over the
affairs of the Portfolios. A majority of the Portfolios' Trustees are not
affiliated with the Adviser. As the administrator (the "Administrator"),
Bankers Trust supervises the overall administration of the Portfolios. The
Portfolios' fund accountant, transfer agent and custodian is also Bankers
Trust.
Bankers Trust, a New York banking corporation with principal offices at 280
Park Avenue, New York, New York 10017, is a wholly-owned subsidiary of
Bankers Trust New York Corporation. Bankers Trust conducts a variety of
general banking and trust activities and is a major wholesale supplier of
financial services to the international and domestic institutional markets.
As of June 30, 1996, Bankers Trust New York Corporation was the seventh
largest bank holding company in the United States with total assets of
approximately $115 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 $215 billion in assets under management.
Bankers Trust has more than 50 years of experience managing retirement
assets for the nation's largest corporations and institutions. In the past,
these clients have been serviced through separate account and commingled
fund structures. Bankers Trust's officers have had extensive experience in
managing investment portfolios having objectives similar to that of the
Portfolios. Bankers Trust has been advised by its counsel that, in
counsel's opinion, Bankers Trust currently may perform the services for the
Portfolios described in this Registration Statement without violation of
the Glass-Steagall Act or other applicable banking laws or regulations.
Bankers Trust, subject to the supervision and direction of the Board of
Trustees of the Portfolio, manages the Portfolios in accordance with the
Portfolios' investment objectives and stated investment policies, makes
investment decisions for each Portfolio, places orders to purchase and sell
securities and other financial instruments on behalf of the Portfolios and
employs professional investment managers and securities analysts who
provide research services to the Portfolios. All orders for investment
transactions on behalf of the Portfolios 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
Portfolios only if Bankers Trust believes that the affiliate's charge for
the transaction does not exceed usual and customary levels. The Portfolios
will not invest in obligations for which Bankers Trust or any of its
affiliates is the ultimate obligor or accepting bank. The Portfolios may,
however, invest in the obligations of correspondents and customers of
Bankers Trust.
Under its investment advisory agreement with the Trust, Bankers Trust
receives a fee from the Portfolios computed daily and paid monthly at the
following annual rates: Global High Yield Securities Portfolio -- 0.80% of
the average daily net assets of the Portfolio; Latin American Equity
Portfolio -- 1.00% of the average daily net assets of the Portfolio; Small
Cap Portfolio -- 0.65% of the average daily net assets of the Portfolio;
and Pacific Basin Equity Portfolio -- 0.75% of the average daily net assets
of the Portfolio.
Bankers Trust has entered into a sub-investment advisory agreement (the
"Sub-Advisory Agreement") with BT Fund Managers International Limited ("BT
Fund Managers International") a wholly owned subsidiary of Bankers Trust
Australia Limited ("BTAL") in Sydney. BTAL is a wholly owned subsidiary of
Bankers Trust New York Corporation. Under the Sub-Advisory Agreement,
Bankers Trust may receive investment advice and research services with
respect to companies based in the Pacific Basin and may grant BT Fund
Managers International investment management authority as well as the
authority to buy and sell securities if Bankers Trust believes it would be
beneficial to the Pacific Basin Portfolio. Under the Sub-Advisory
Agreement, BT Fund Managers International receives a fee for providing
investment advice and research services from Bankers Trust computed daily
and paid monthly at the annual rate of 0.60% of the average daily assets of
the Portfolio.
BTAL, which was granted a banking license in 1986, is the parent of Bankers
Trust Australia Group which has offices is Sydney, Melbourne, Perth,
Brisbane, Adelaide, London and Hong Kong. A representative office of
Bankers Trust Company was opened in Australia in 1966 and Australian
merchant banking operations commences in 1969. A related organization,
Bankers Trust New Zealand Limited, was established in 1986. Although BTAL
has not previously served as investment adviser for a registered investment
company, BTAL provides investment services for a range of clients.
David A. Reiss, Managing Director of Bankers Trust and Stephen C.
Freidheim, Managing Director of Bankers Trust are responsible for the day-
to-day management of the Global High Yield Securities Portfolio. Mr. Reiss
has been employed by Bankers Trust since March, 1994 and has managed the
Portfolios assets since March, 1994. From September, 1989 to March, 1994,
Mr. Reiss was a Portfolio Manager at Kidder Peabody Asset Management. Prior
to September, 1989, he was an associate in Mortgage Research at Goldman,
Sachs & Co. Mr. Freidheim has been employed by Bankers Trust since August,
1993 and has managed the Portfolio's assets since December 1993. From July,
1990 to July, 1993 he was a Senior Vice President and Director of Research
and Trading at Nomura Securities International. Mr. Freidheim was also on
the Board of Directors of Nomura Corporate Research and Asset Management.
Prior to July, 1990, he was Director of Research at Kidder, Peabody High
Yield Asset Management.
Effective May 9, 1997 Mr. Reiss took over the day-to-day management of the
Latin American Equity Portfolio.
Mary P. Dugan, CFA, Vice President of Bankers Trust, and Mr. Timothy Woods,
CFA, Vice President of Bankers Trust, share senior portfolio management
responsibilities of the Small Cap Portfolio. Ms. Dugan joined Bankers Trust
in 1994. She has thirteen years of investment analysis experience.
Previously, she worked at Fred Alger Management, Dean Witter, Integrated
Resources and Equitable Investment Management Corporation. Mr. Woods joined
Bankers Trust in 1992. He has twelve years of investment and financial
experience. Previously, he worked at Prudential Securities, Chase Manhattan
Bank and Bank of Boston.
Paul Durham, Vice President of BTAL, is responsible for the day-to-day
management of the Pacific Basin Equity Portfolio. Mr. Durham has been
employed by Bankers Trust since January, 1988 and has managed the
Portfolio's assets since November 1993.
Under an administration and services agreement with the Trust, Bankers
Trust calculates the value of the assets of each Portfolio and generally
assists the Board of Trustees of the Portfolios in all aspects of the
administration and operation of the Portfolios. The administration and
services agreement provides for the Portfolios to pay the Administrator a
fee computed daily and paid monthly at the annual rate of 0.10% of the
average daily net assets of each Portfolio.
Under the administration and services agreement, the Administrator may
delegate one or more of its responsibilities to others at its expense.
Each Portfolio bears its own expenses. Operating expenses for the
Portfolios generally consist of all costs not specifically borne by Bankers
Trust or Edgewood Services, Inc. ("Edgewood"), the Trust's placement agent
and sub-administrator, including investment advisory and administration and
service fees, fees for necessary professional services, amortization of
organizational expenses, the costs associated with regulatory compliance
and maintaining legal existence and investor relations.
ITEM 6. CAPITAL STOCK AND OTHER SECURITIES.
The Trust was 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. Each investor is
entitled to a vote in proportion to the amount of its investment in each
Portfolio. Investments in the Portfolios 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 Portfolios (e.g., investment companies,
insurance company separate accounts and common and commingled trust funds)
will each be liable for all obligations of each Portfolio. However, the
risk of an investor in the Portfolios incurring financial loss on account
of such liability is limited to circumstances in which both inadequate
insurance existed and each Portfolio itself was unable to meet its
obligations.
The Trust reserves the right to create and issue a number of series, in
which case investments in each series would participate equally in earnings
and assets of the particular series. Currently, the Trust has fifteen
series: Asset Management Portfolio II, Asset Management Portfolio III,
Liquid Asses Portfolio, Pacific Basin Equity Portfolio, Latin American
Equity Portfolio, Global High Yield Portfolio, EAFE Equity Index Portfolio,
Small Cap Portfolio, Small Cap Index Portfolio, Equity 500 Equal Weighted
Index Portfolio, U.S. Bond Index Portfolio, International Bond Portfolio,
European Equity Portfolio, BT RetirementPlus Portfolio, and 100% Treasury
Portfolio.
Investments in the Portfolios 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. 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 a Portfolio, investors
would be entitled to share pro rata in the net assets of the Portfolio
available for distribution to investors.
The net asset value of each Portfolio is determined each day on which the
NYSE is open for trading ("Fund 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 as of the close of regular trading on the
NYSE which is currently 4:00 p.m., Eastern time (the "Valuation Time").
Each investor in the Portfolios may add to or reduce its investment in each
Portfolio on each Fund Business Day. At each Valuation Time on each such
business day, the value of each investor's beneficial interest in each
Portfolio will be determined by multiplying the net asset value of a
Portfolio by the percentage, effective for that day, that represents that
investor's share of the aggregate beneficial interests in the Portfolio.
Any additions or withdrawals, which are to be effected on that day, will
then be effected. The investor's percentage of the aggregate beneficial
interests in each 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 each Portfolio as of the Valuation Time, on such day plus or
minus, as the case may be, the amount of any additions to or withdrawals
from the investor's investment in each Portfolio effected on such day, and
(ii) the denominator of which is the aggregate net asset value of each
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 each Portfolio by all investors in each Portfolio.
The percentage so determined will then be applied to determine the value of
the investor's interest in each Portfolio as of the Valuation Time, on the
following business day of each Portfolio.
The net income of each Portfolio shall consist of (i) all income accrued,
less the amortization of any premium, on the assets of each Portfolio, less
(ii) all actual and accrued expenses of each 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 each Portfolio is allocated pro rata among the investors
in each Portfolio. The Net Income is accrued daily and distributed monthly
to the investors in each Portfolio.
Under the anticipated method of operation of the Portfolios, the Portfolios
will not be subject to any income tax. However, each investor in the
Portfolios will be taxable on its share (as determined in accordance with
the governing instruments of the Portfolio) of the Portfolios' ordinary
income and capital gain in determining its income tax liability. The
determination of such share will be made in accordance with the Code.
It is intended that the Portfolios' assets, income and distributions will
be managed in such a way that an investor in the Portfolios will be able to
satisfy the requirements of Subchapter M of the Code, assuming that the
investor invested all of its assets in the Portfolios.
ITEM 7. PURCHASE OF SECURITIES BEING OFFERED
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 1933 Act. See "General Description of
Registrant" above.
An investment in the Portfolios may be made without a sales charge. All
investments are made at the net asset value next determined if an order is
received by the Portfolios by the designated cutoff time for each
accredited investor. The net asset value of each Portfolio is determined on
each Fund Business Day. Each Portfolio's portfolio securities are valued
primarily on the basis of market quotations or, if quotations are not
readily available, by a method which the Board of Trustees believes
accurately reflects fair value.
There is no minimum initial or subsequent investment in the Portfolios.
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 Portfolios at any time or to reject any investment order.
The placement agent for the Portfolios is Edgewood. 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 Portfolios.
ITEM 8. REDEMPTION OR PURCHASE.
An investor in the Portfolios 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 Portfolios by the
designated cutoff time for each accredited investor. The proceeds of a
withdrawal will be paid by the Portfolios in federal funds normally on the
Fund Business Day the withdrawal is effected, but in any event within seven
calendar days following receipt of the request. The Portfolios reserve the
right to pay redemptions in kind. Investments in the Portfolios 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.
ADDITIONAL INFORMATION.
Derivatives. The Portfolios may invest in various instruments that are
commonly known as derivatives. Generally, a derivative is a financial
arrangement, the value of which is based on, or "derived" from, a
traditional security, asset, or market index. Some "derivatives" such as
mortgage-related and other asset-backed securities are in many respects
like any other investment, although they may be more volatile or less
liquid than more traditional debt securities. There are, in fact, many
different types of derivatives and many different ways to use them. There
are a range of risks associated with those uses. Futures and options are
commonly used for traditional hedging purposes to attempt to protect a fund
from exposure to changing interest rates, securities prices, or currency
exchange rates and for cash management purposes as a low cost method of
gaining exposure to a particular securities market without investing
directly in those securities. However, some derivatives are used for
leverage, which tends to magnify the effects of an instrument's price
changes as market conditions change. Leverage involves the use of a small
amount of money to control a large amount of financial assets, and can in
some circumstances, lead to significant losses. The Adviser will use
derivatives only in circumstances where the Adviser believes they offer the
most economic means of improving the risk/reward profile of the Portfolio.
Derivatives will not be used in increase portfolio risk above the level
that could be achieved using only traditional investment securities or to
acquire exposure to changes in the value of assets or indices that by
themselves would not be purchased for the Portfolio. The use of derivatives
for non-hedging purposes may be considered speculative. A description of
the derivatives a Portfolio may use and some of their associated risks
follows.
ADRs, GDRs and EDRs. The Portfolios may invest in securities of foreign
issuers directly or in the form of ADRs, GDRs, EDRs or other similar
securities representing securities of foreign issuers. These securities may
not necessarily be denominated in the same currency as the securities they
represent. Designed for U.S., Global and European securities markets,
respectively, ADRs, GDRs and EDRs are alternatives to the purchase of the
underlying securities in their national markets and currencies. ADRs, GDRs
and EDRs are subject to the same risks as the foreign to which they relate.
When-Issued and Delayed Delivery Securities. The Portfolios 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 Portfolios maintain with
the Custodian a segregated account containing high grade liquid securities
in an amount at least equal to these commitments. When entering into a
when-issued or delayed delivery transaction, the Portfolios will rely on
the other party to consummate the transaction; if the other party fails to
do so, a Portfolio may be disadvantaged.
Rule 144A Securities. The Portfolios may purchase securities in the United
State that are not registered for sale under Federal securities laws but
which can be resold to institutions under the SEC's Rule 144A. Provided
that a dealer or institutional trading market in such securities exists,
these restricted securities are treated as exempt from the Portfolio's 10%
limit on illiquid securities. Under the supervision of the Board of
Trustees, Bankers Trust determines the liquidity of restricted securities
and, through reports from Bankers Trust, the Board will monitor trading
activity in restricted securities. Because Rule 144A is relatively new, it
is not possible to predict how these markets will develop. If institutional
trading in restricted securities were to decline, the liquidity of the
Portfolio could be adversely affected. No more than 10% of a Portfolio's
assets may be invested in securities restricted as to transfer or re-sale,
including Rule 144A securities.
Securities Lending. Each Portfolio is permitted to lend up to 30% of the
total value of its securities. These loans must be secured continuously by
cash or equivalent collateral or by a letter of credit at least equal to
the market value of the securities loaned plus accrued income. By lending
its securities, the Portfolios can increase their income by continuing to
receive income on the loaned securities as well as by the opportunity to
receive interest on the collateral. Any gain or loss in the market price of
the borrowed securities which occurs during the term of the loan inures to
a Portfolio and its investors. In lending securities to brokers, dealers
and other organizations, the Portfolio is subject to risk which, like those
associated with other extensions of credit, include delays in recover and
possible loss of rights in the collateral should the borrower fail
financially.
Foreign Currency Exchange Transactions. Because the Portfolios 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, a 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 the
Portfolio to purchase or sell a specific currency at a future date, which
may be any fixed number of days from the date of the contract. Forward
foreign currency exchange contracts establish an exchange rate at a future
date. These contracts are transferable in the interbank market conducted
directly between currency traders (usually large commercial banks) and
their customers. A forward foreign currency exchange contract generally has
no deposit requirement and is traded at a net price without commission. The
Portfolios maintain with its custodian a segregated account of high grade
liquid assets in an amount at least equal to its obligations under each
forward foreign currency exchange contract. Neither spot transactions nor
forward foreign currency exchange contracts eliminate fluctuations in the
prices of the Portfolio's securities or in foreign exchange rates, or
prevent loss if the prices of these securities should decline.
The Portfolios 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 a Portfolio's best
interest. Although these transactions tend to minimize the risk of loss due
to a decline in the value of the hedged currency, at the same time they
tend to limit any potential gain that might be realized should the value of
the hedged currency increase. The precise matching of the forward contract
amounts and the value of the securities involved will not generally be
possible because the future value of such securities in foreign currencies
will change as a consequence of market movements in the value of such
securities between the date the forward contract is entered into and the
date it matures, The projection of currency market movements is extremely
difficult, and the successful execution of a hedging strategy is highly
uncertain.
Options on Foreign Currencies. The Portfolios may write covered put and
call options and purchase put and call options on foreign currencies for
the purpose of protecting against declines in the dollar value of portfolio
securities and against increases in the dollar cost of securities to be
acquired. The Portfolios may use options on currency to cross-hedge, which
involves writing or purchasing options on one currency to hedge against
changes in exchange rates for a different, but related currency. As with
other types of options, however, the writing of an option on foreign
currency will constitute only a partial hedge up to the amount of the
premium received, and a Portfolio could be required to purchase or sell
foreign currencies at disadvantageous exchange rates, thereby incurring
losses. The purchase of an option on foreign currency may be used to hedge
against fluctuations in exchange rates although, in the event of exchange
rate movements adverse to a Portfolio's position, it may forfeit the entire
amount of the premium plus related transaction costs. In addition, a
Portfolio may purchase call options on currency when the Adviser
anticipates that the currency will appreciate in value.
There is no assurance that a liquid secondary market on an options exchange
will exist for any particular option, or at any particular time. If a
Portfolio is unable to effect a closing purchase transaction with respect
to covered options it has written, the Portfolio will not be able to sell
the underlying currency or dispose of assets held in a segregated account
until the options expire or are exercised. Similarly, if a Portfolio is
unable to effect a closing sale transaction with respect to options it has
purchased, it would have to exercise the options in order to realize any
profit and will incur transaction costs upon the purchase or sale of
underlying currency. The Portfolios pay brokerage commissions or spreads in
connection with its options transactions.
As in the case of forward contracts, certain options on foreign currencies
are traded over-the-counter and involve liquidity and credit risks which
may not be present in the case of exchange-traded currency options. A
Portfolio's ability to terminate over-the-counter options ("OTC Options")
will be more limited than with exchange-traded options. It is also possible
that broker-dealers participating in OTC Options transactions will not
fulfill their obligations. Until such time as the staff of the SEC changes
its position, the Portfolio will treat purchased OTC Options and assets
used to cover written OTC Options as illiquid securities. With respect to
options written with primary dealers in U.S. government securities pursuant
to an agreement requiring a closing purchase transaction at a formula
price, the amount of illiquid securities may be calculated with reference
to the repurchase formula.
Options on Foreign Bond Indices. The Portfolios may purchase and write put
and call options on foreign indices listed on domestic and foreign
Exchanges. A bond index fluctuates with changes in the market values of the
bonds included in the index.
Options on bond indices are generally similar to options on securities
except that the delivery requirements are different. Instead of giving the
right to take or make delivery of securities at a specified price, an
option on a bond index gives the holder the right to receive a cash
"exercise settlement amount" equal to (a) the amount, if any, by which the
fixed exercise price of the option exceeds (in the case of a put) or is
less than (in the case of a call) the closing value of the underlying index
on the date of exercise, multiplied by (b) a fixed "index multiplier."
Receipt of this cash amount will depend upon the closing level of a bond
index upon which the option is based being greater than, in the case of a
call, or less than, in the case of a put, the exercise price of the option.
The amount of cash received will be equal to such difference between the
closing price of the index and the exercise price of the option expressed
in dollars or a foreign currency, as the case may be, times a specified
multiple. The writer of the option is obligated, in return for the premium
received, to make delivery of this amount. The writer may offset its
position in index options prior to expiration by entering into a closing
transaction on an exchange or the option may expire unexercised.
To the extent permitted by U.S. federal or state securities laws, the
Portfolios may invest in options on foreign bond indices in lieu of direct
investment in foreign bonds. The Portfolios may also use foreign bond index
options for hedging purposes.
Because the value of a bond option depends upon movements in the level of
the index rather than the price of a particular bond, whether the Portfolio
will realize a gain or loss from the purchase or writing of options on an
index depends upon movements in the level of bond prices in the securities
market generally, rather than movements in the price of a particular
security. Accordingly, successful use by the Portfolios of options on bond
indices will be subject to Bankers Trust's ability to predict correctly
movements in the direction of the corresponding bond market generally. This
requires different skills and techniques than predicting changes in the
price of individual bonds.
Futures Contracts on Foreign Bond Indices. The Portfolios may enter into
contracts providing for the making and acceptance of a cash settlement
based upon changes in the value of an index of foreign bonds ("Futures
Contracts"). This investment technique is designed only to hedge against
anticipated future change in general market prices which otherwise might
either adversely affect the value of securities held by a Portfolio or
adversely affect the prices of securities which are intended to be
purchased at a later date for a Portfolio. A Futures Contract may also be
entered into to close out or offset an existing futures position.
In general, each transaction in Futures Contracts involves the
establishment of a position which will move in a direction opposite to that
of the investment being hedged. If these hedging transactions are
successful, the futures positions taken for a Portfolio will rise in value
by an amount which approximately offsets the decline in value of the
portion of a Portfolio's investments that are being hedged. Should general
market prices move in an unexpected manner, the full anticipated benefits
of Futures Contracts may not be achieved or a loss may be realized.
Although Futures Contracts would be entered into for hedging purposes only,
such transactions do involve certain risks. These risks could include a
lack of correlation between the Futures Contract and the foreign bond
market being hedged, a potential lack of liquidity in the secondary market
and incorrect assessments of market trends which may result in poorer
overall performance than if a Futures Contract had not been entered into.
Brokerage costs will be incurred and "margin" will be required to be posted
and maintained as a good faith deposit against performance of obligations
under Futures Contracts written for a Portfolio. The Portfolios may not
purchase or sell a Futures Contract if immediately thereafter its margin
deposits on its outstanding Futures Contracts would exceed 5% of the market
value of a Portfolio's total assets.
Options on Futures Contracts. The Portfolios may invest in options on such
futures contracts for similar purposes.
A Portfolio will write and purchase put and call options only to the extent
permitted by the policies of state securities authorities in states where
shares of a Portfolio are qualified for offer and sale.
Asset Coverage. To assure that the Portfolios use of futures and related
options, as well as when-issued and delayed delivery securities and foreign
currency exchange transactions, are not used to achieve investment
leverage, the Portfolios will cover such transactions, as required under
the applicable interpretations of the SEC, either by owning the underlying
securities or by establishing a segregated account with the Portfolio's
custodian containing high grade liquid debt securities in an amount at all
times equal to or exceeding the Portfolio's commitment with respect to
these instruments or contracts.
There can be no assurance that the use of these portfolio strategies will
be successful.
APPENDIX
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS:
AAA - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective
elements are likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such issues.
AA - Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high-
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than
in Aaa securities.
A - Bonds rated A possess many favorable investment attributes and are to
be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
BAA - Bonds rated Baa are considered as medium-grade obligations, i.e. they
are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any
great length of time. Such, bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
BA - Bonds rated Ba are judged to have speculative elements. Their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded
during both (good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds rated B generally lack characteristics of a desirable investment.
Assurance of interest and principal payments or of maintenance of other
terms of the contract over any long period of time may be small.
CAA - Bonds rated Caa are of poor standing. Such issues may be in default
or there may be present elements of danger with respect to principal or
interest.
CA - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked short-
comings.
C - Bonds rated C are the lowest-rated class of bonds and issued so rated
can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies numerical modifiers, 1, 2, and 3, in each generic rating
classification from Aa through B in its corporate bond system. The modifier
1 indicates that the security ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic rating
category.
DESCRIPTION OF S&P CORPORATE BOND RATINGS:
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 higher-rated issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to weakened capacity to pay interest
and repay principal for debt in this category than in higher-rated
categories.
BB - Debt rate BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
B - Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is
also used for debt subordinated to senior debt that is assigned an actual
or implied BB- rating.
CCC - Debt rated CCC has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal.
In the event of adverse business, financial, or economic conditions, it is
not likely to have the capacity to pay interest and repay principal.
CC - Debt rated CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating.
C -The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may
be used to cover a situation where a bankruptcy petition has been filed but
debt service payments are continued.
CI - The rating CI is reserved for income bonds on which no interest is
being paid.
D - Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period. The D rating will also
be used upon the filing of a bankruptcy petition if debt service payments
are jeopardized.
DESCRIPTION OF S&P COMMERCIAL PAPER RATINGS:
Commercial paper rated A-1 by S&P indicates that the degree of safety
regarding timely payment is either overwhelming or very strong. Those
issues determined to possess overwhelming safety characteristics are
denoted A-1+.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS:
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Issuers rated Prime-1 (or related supporting institutions) are
considered to have a superior capacity for repayment of short-term
promissory obligations.
DESCRIPTION OF FITCH INVESTORS SERVICES, INC. COMMERCIAL PAPER RATINGS:
F-1+--Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1--Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than the strongest
issue.
DESCRIPTION OF DUFF AND PHELPS' COMMERCIAL PAPER RATINGS:
Duff 1+--Highest certainty of timely payment. Short term liquidity,
including internal operating factors and/or access to alternative sources
of funds, is outstanding, and safety is just below risk free U.S. Treasury
short term obligations.
Duff 1--Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk
factors are minor.
DESCRIPTION OF ICBA'S LONG-TERM RATINGS:
AAA--Obligations for which there is the lowest expectation of investment
risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions
are unlikely to increase investment risk significantly.
AA--Obligations for which there is a very low expectation of investment
risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business economic or financial conditions
may increase investment risk albeit not very significantly.
A--Obligations for which there is a low expectation of investment risk.
Capacity for timely repayment of principal and interest is strong, although
adverse changes in business, economic or financial conditions may lead to
increased investment risk.
BBB--Capacity for timely repayment of principal and interest is adequate,
although adverse changes in business, economic or financial conditions are
more likely to lead to increased investment risk than for obligations in
higher categories.
BB--Obligations for which there is a possibility of investment risk
developing. Capacity for timely repayment of principal and interest exists,
but is susceptible over time to adverse changes in business, economic or
financial conditions.
B--Obligations for which investment risk exists. Timely repayment of
principal and interest is not sufficiently protected against adverse
changes in business, economic or financial conditions.
CCC--Obligations for which there is a current perceived possibility of
default. Timely repayment of principal and interest is dependent on
favorable business, economic or financial conditions.
CC--Obligations which are highly speculative or which have a high risk of
default.
C--Obligations which are currently in default.
Notes: "+" or "-" may be appended to a rating to denote relative status
within major rating categories.
Ratings of BB and below are assigned where it is considered that
speculative characteristics are present.
DESCRIPTION OF ICBA'S SHORT-TERM RATINGS:
A1+--Obligations supported by the highest capacity for timely repayment.
A1--Obligations supported by a strong capacity for timely repayment.
A2--Obligations supported by a satisfactory capacity for timely repayment,
although such capacity may be susceptible to adverse changes in business,
economic or financial conditions.
A3--Obligations supported by an adequate capacity for timely repayment.
Such capacity is more susceptible to adverse changes in business, economic
or financial conditions than for obligations in higher categories.
B--Obligations for which the capacity for timely repayment is susceptible
to adverse changes in business, economic or financial conditions.
C--Obligations for which there is an inadequate capacity to ensure timely
repayment.
D--Obligations which have a high risk of default or which are currently in
default.
DESCRIPTION OF THOMSON BANKWATCH SHORT-TERM RATINGS:
TBW-1--The highest category; indicates a very high likelihood that
principal and interest will be paid on a timely basis.
TBW-2--The second-highest category; while the degree of safety regarding
timely repayment of principal and interest is strong, the relative degree
of safety is not as high as for issues rated "TBW-1".
TBW-3--The lowest investment-grade category; indicates that while the
obligation is more susceptible to adverse developments (both internal and
external) than those with higher ratings, the capacity to service principal
and interest in a timely fashion is considered adequate.
TBW-4--The lowest rating category; this rating is regarded as non-
investment grade and therefore speculative.
DESCRIPTION OF THOMSON BANKWATCH LONG-TERM RATINGS:
AAA--The highest category; indicates that the ability to repay principal
and interest on a timely basis is extremely high.
AA--The second-highest category; indicates a very strong ability to repay
principal and interest on a timely basis, with limited incremental risk
compared to issues rated in the highest category.
A--The third-highest category; indicates the ability to repay principal and
interest is strong. Issues rated "a" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher
ratings.
BBB--The lowest investment-grade category; indicates an acceptable capacity
to repay principal and interest. Issues rated "BBB" are, however, more
vulnerable to adverse developments (both internal and external) than
obligations with higher ratings.
NON-INVESTMENT GRADE (issues regarded as having speculative characteristics
in the likelihood of timely repayment of principal and interest.)
BB--While not investment grade, the "BB" rating suggests that the
likelihood of default is considerably less than for lower-rated issues.
However, there are significant uncertainties that could affect the ability
to adequately service debt obligations.
B--Issues rated "B" show a higher degree of uncertainty and therefore
greater likelihood of default than higher-rated issues. Adverse development
could well negatively affect the payment of interest and principal on a
timely basis.
CCC--Issues rated "CCC" clearly have a high likelihood of default, with
little capacity to address further adverse changes in financial
circumstances.
CC--"CC" is applied to issues that are subordinate to other obligations
rated "CCC" and are afforded less protection in the event of bankruptcy or
reorganization.
D--Default
These long-term debt ratings can also be applied to local currency debt. In
such cases the ratings defined above will be preceded by the designation
"local currency".
RATINGS IN THE LONG-TERM DEBT CATEGORIES MAY INCLUDE A PLUS (+) OR MINUS (-
) DESIGNATION, WHICH INDICATES WHERE WITHIN THE RESPECTIVE CATEGORY THE
ISSUE IS PLACED.
BT INVESTMENT PORTFOLIOS
GLOBAL HIGH YIELD SECURITIES PORTFOLIO
LATIN AMERICAN EQUITY PORTFOLIO
SMALL CAP PORTFOLIO
PACIFIC BASIN EQUITY PORTFOLIO
INTERNATIONAL BOND PORTFOLIO
EUROPEAN EQUITY PORTFOLIO
PART B
ITEM 10. COVER PAGE.
Not applicable.
ITEM 11. TABLE OF CONTENTS.
General Information and History........................1
Investment Objectives and Policies.....................1
Management of the Portfolios...........................18
Control Persons and Principal Holders of Securities ...19
Investment Advisory and Other Services.................20
Brokerage Allocation and Other Practices...............22
Capital Stock and Other Securities.....................23
Purchase, Redemption and Pricing of Securities.........24
Tax Status.............................................24
Underwriters...........................................25
Calculation of Performance Data........................25
Financial Statements...................................25
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 Global High Yield Securities Portfolio, Latin American Equity
Portfolio, Small Cap Portfolio, Pacific Basin Equity Portfolio, European
Equity Portfolio and International Bond Portfolio (each a "Portfolio",
collectively, the "Portfolios"). 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 each
Portfolio may invest, the investment policies and portfolio strategies that
each Portfolio may utilize and certain risks attendant to those
investments, policies and strategies.
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 in part A.
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, each Portfolio may invest
in short-term instruments for a limited time pending availability of such
portfolio securities. Short-term instruments consist of foreign or
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 Standard & Poor's
Rating Group (`S&P'') or Aa or higher by Moody's Investors Services, Inc.
(`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.
LENDING OF PORTFOLIO SECURITIES. Each Portfolio (except for the
Intermediate Tax Free Portfolio) has the authority to lend portfolio
securities to brokers, dealers and other financial organizations. The
Portfolios will not lend securities to Bankers Trust, Edgewood 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. Each Portfolio will adhere to the
following conditions whenever its securities are loaned: (i) the Portfolio
must receive at least 100 percent cash collateral or equivalent securities
from the borrower; (ii) the borrower must increase this collateral whenever
the market value of the securities including accrued interest rises above
the level of the collateral; (iii) the Portfolio must be able to terminate
the loan at any time; (iv) the Portfolio must receive reasonable interest
on the loan, as well as any dividends, interest or other distributions on
the loaned securities, and any increase in market value; (v) the Portfolio
may pay only reasonable custodian fees in connection with the loan; and
(vi) voting rights on the loaned securities may pass to the borrower;
provided, however, that if a material event adversely affecting the
investment occurs, the Board of Trustees must terminate the loan and regain
the right to vote the securities.
LOWER-RATED DEBT SECURITIES (`JUNK BONDS''). The Global High Yield
Securities Portfolio and the Latin American Equity Portfolio may invest in
lower-rated debt securities. While the market for high yield corporate debt
securities has been in existence for many years and has weathered previous
economic downturns, the 1980's brought a dramatic increase in the use of
such securities to fund highly leveraged corporate acquisitions and
restructuring. Past experience may not provide an accurate indication of
future performance of the high yield bond market, especially during periods
of economic recession. In fact, from 1989 to 1991, the percentage of lower-
rated debt securities that defaulted rose significantly above prior levels.
The market for lower-rated debt securities may be thinner and less active
than that for higher rated debt securities, which can adversely affect the
prices at which the former are sold. If market quotations are not
available, lower- rated debt securities will be valued in accordance with
procedures established by the Board of Trustees, including the use of
outside pricing services. Judgment plays a greater role in valuing high
yield corporate debt securities than is the case for securities for which
more external sources for quotations and last sale information is
available. Adverse publicity and changing investor perception may affect
the ability of outside pricing services to value lower- rated debt
securities and Global High Yield Securities Portfolio's ability to dispose
of these securities.
Since the risk of default is higher for lower-rated debt securities, the
investment adviser's research and credit analysis are an especially
important part of managing securities of this type held by the Portfolio.
In considering investments for the Portfolio, Bankers Trust Company
("Bankers Trust"), each Portfolio's investment adviser (the "Adviser") will
attempt to identify those issuers of high yielding debt securities whose
financial conditions are adequate to meet future obligations, have improved
or are expected to improve in the future. Bankers Trust's analysis focuses
on relative values based on such factors as interest on dividend coverage,
asset coverage, earnings prospects and the experience and managerial
strength of the issuer.
Global High Yield Securities Portfolio may choose, at its expense or in
conjunction with others, to pursue litigation or otherwise exercise its
rights as a security holder to seek to protect the interest of security
holders if it determines this to be in the best interest of security
holders.
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 "NASD").
The Adviser will monitor the liquidity of Rule 144A securities in each
Portfolio's portfolio under the supervision of the Board of Trustees. In
reaching liquidity decisions, the Adviser will consider, among other
things, the following factors: (1) the frequency of trades and quotes for
the security; (2) the number of dealers and other potential purchasers
wishing to purchase or sell the security; (3) dealer undertakings to make a
market in the security; and (4) the nature of the security and of the
marketplace trades (e.g., the time needed to dispose of the security, the
method of soliciting offers and the mechanics of the transfer).
FOREIGN SECURITIES: SPECIAL CONSIDERATIONS CONCERNING EASTERN EUROPE.
The Global High Yield Securities Portfolio, European Equity Portfolio and
International Bond Portfolio may invest in foreign securities issued by
Eastern European countries. Investments in companies domiciled in Eastern
European countries may be subject to potentially greater risks than those
of other foreign issuers. These risks include: (i) potentially less social,
political and economic stability; (ii) the small current size of the
markets for such securities and the low volume of trading, which result in
less liquidity and in greater price volatility; (iii) certain national
policies which may restrict the Portfolios' investment opportunities,
including restrictions on investment in issuers or industries deemed
sensitive to national interests; (iv) foreign taxation; (v) the absence of
developed legal structures governing private or foreign investment or
allowing for judicial redress for injury to private property; (vi) the
absence, until recently in certain Eastern European countries, of a capital
market structure or market-oriented economy; and (vii) the possibility that
recent favorable economic developments in Eastern Europe may be slowed or
reversed by unanticipated political or social events in such countries, or
in the Commonwealth of Independent States (formerly the Union of Soviet
Socialist Republics).
The economic situation remains difficult for Eastern European countries in
transition from central planning, following what has already been a sizable
decline in output. The contraction now appears to be bottoming out in parts
of Eastern Europe, where some countries are projected to register positive
growth in 1995. Following three successive years of output declines, there
are preliminary indications of a turnaround in the former Czech and Slovak
Federal Republic, Hungary and Poland; growth in private sector activity and
strong exports now appear to have contained the fall in output. A number of
their governments, including those of Hungary and Poland, are currently
implementing or considering reforms directed at political and economic
liberalization, including efforts to foster multi-party political systems,
decentralize economic planning, and a move toward free-market economies.
But key aspects of the reform and stabilization efforts have not yet been
fully implemented, and there remain risks of policy slippage. At present,
no Eastern European country has a developed stock market, but Poland,
Hungary and the Czech Republic have small securities markets in operation.
In many other countries of the region, output losses have been even larger.
These declines reflect the adjustment difficulties during the early stages
of the transition, high rates of inflation, the compression of imports,
disruption in trade among the countries of the former Soviet Union, and
uncertainties about the reform process itself. Large-scale subsidies are
delaying industrial restructuring and are exacerbating the fiscal
situation. A reversal of these adverse factors is not anticipated in the
near term, and output is expected to decline further in most of these
countries. In the Russian Federation and most other countries of the former
Soviet Union, economic conditions are of particular concern because of
economic instability due to political unrest and armed conflicts in many
regions. Further, no accounting standards exist in Eastern European
countries. Although certain Eastern European currencies may be convertible
into U.S. dollars, the conversion rates may be artificial to the actual
market values and may be adverse to each Fund's shareholders.
BRADY BONDS. The Latin American Equity Portfolio and Global High Yield
Securities Portfolio may invest in "Brady bonds," which have been issued by
the governments of Argentina, Costa Rica, Mexico, Nigeria, Uruguay and
Venezuela. Most Brady bonds are currently rated below BBB by S&P or Baa by
Moody's.
The Brady Plan was conceived by the U.S. Treasury in the 1980's in an
attempt to produce a debt restructuring program which would enable a debt
country to (i) reduce the absolute level of debt of its creditor banks, and
(ii) reschedule its external debt repayments, based upon its ability to
service such debts by persuading its creditor banks to accept a debt write-
off by offering them a selection of options, each of which represented an
attractive substitute for the nonperforming debt. Although it was envisaged
that each debtor country would agree to a unique package of options with
its creditor banks, the plan was that these options would be based upon the
following:(i) a discount bond carrying a market rate of interest (whether
fixed or floating), with principal collateralized by the debtor country
with cash or securities in an amount equal to at least one year of rolling
interest; (ii) a par bond carrying a low rate of interest (whether fixed or
floating), collateralized in the same way as in (i) above; and (iii)
retention of existing debt (thereby avoiding a debt write-off) coupled with
an advance of new money or subscription of new bonds.
The Latin American Equity Portfolio and Global High Yield Securities
Portfolio may invest in either collateralized or uncollateralized Brady
bonds. U.S. dollar-denominated, collateralized Brady bonds, which may be
fixed rate par bonds or floating rate discount bonds, are collateralized in
full as to principal by U.S. Treasury zero coupon bonds having the same
maturity as the bonds. Interest payments on such bonds generally are
collateralized by cash or securities in an amount that in the case of fixed
rate bonds, is equal to at least one year of rolling interest payments or,
in the case of floating rate bonds, initially is equal to at least one
year's rolling interest payments based on the applicable interest rate at
the time and is adjusted at regular intervals thereafter.
FOREIGN SECURITIES: SPECIAL CONSIDERATIONS CONCERNING LATIN AMERICA.
Investing in securities of Latin American issuers may entail risks relating
to the potential political and economic instability of certain Latin
American countries and the risks of expropriation, nationalization,
confiscation or the imposition of restrictions on foreign investment and on
repatriation of capital invested. In the event of expropriation,
nationalization or other confiscation by any country, the Latin American
Equity Fund could lose its entire investment in any such country.
The securities markets of Latin American countries are substantially
smaller, less developed, less liquid and more volatile than the major
securities markets in the U.S. disclosure and regulatory standards are in
many respects less stringent than U.S. standards. Furthermore, there is a
lower level of monitoring and regulation of the markets and the activities
of investors in such markets.
The limited size of many Latin American securities markets and limited
trading volume in the securities of Latin American issuers compared to
volume of trading in the securities of U.S. issuers could cause prices to
be erratic for reasons apart from factors that affect the soundness and
competitiveness of the securities issuers. For example, limited market size
may cause prices to be unduly influenced by traders who control large
positions. Adverse publicity and investors' perceptions, whether or not
based on in-depth fundamental analysis, may decrease the value and
liquidity of portfolio securities.
The economies of Latin American countries may be predominantly based in
only a few industries, may be highly vulnerable to changes in local or
global trade conditions, and may suffer from extreme and volatile debt
burdens or inflation rates; and (v) securities of issuers located in Latin
America may have limited marketability and may be subject to more abrupt or
erratic price movements.
The Latin American Equity Portfolio invests in securities denominated in
currencies of Latin American countries. Accordingly, changes in the value
of these currencies against the U.S. dollar will result in corresponding
changes in the U.S. dollar value of the Portfolio's assets denominated in
those currencies.
Some Latin American countries also may have managed currencies, which are
not free floating against the U.S. dollar. In addition, there is risk that
certain Latin American countries may restrict the free conversion of their
currencies into other currencies. Further, certain Latin American
currencies may not be internationally traded. Certain of these currencies
have experienced a steep devaluation relative to the U.S. dollar.
The economies of individual Latin American countries may differ favorably
or unfavorably from the U.S. economy in such respects as the rate of growth
of gross domestic product, the rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position. Certain Latin
American countries have experienced high levels of inflation which can have
a debilitating effect on an economy. Furthermore, certain Latin American
countries may impose withholding taxes on dividends payable to the
Portfolio at a higher rate than those imposed by other foreign countries.
Certain Latin American countries such as Argentina, Brazil and Mexico are
among the world's largest debtors to commercial banks and foreign
governments. At times, certain Latin American countries have declared
moratoria on the payment of principal and/or interest on outstanding debt.
Investment in sovereign debt can involve a high degree of risk. The
governmental entity that controls the repayment of sovereign debt may not
be able or willing to repay the principal and/or interest when due in
accordance with the terms of such debt. A governmental entity's willingness
or ability to repay principal and interest due in a timely manner may be
affected by, among other factors, its cash flow situation, the extent of
its foreign reserves, the availability of sufficient foreign exchange on
the date a payment is due, the relative size of the debt service burden to
the economy as a whole, the governmental entity's policy towards the
International Monetary Fund, and the political constraints to which a
governmental entity may be subject. governmental entities may also be
dependent on expected disbursements from foreign governments, multilateral
agencies and others abroad to reduce principal and interest arrearage on
their debt. The commitment on the part of these governments, agencies and
others to make such disbursements may be conditioned on a governmental
entity's implementation of economic reforms and/or economic performance and
the timely service of such debtor's obligations. Failure to implement such
reforms, achieve such levels of economic performance or repay principal or
interest when due may result in the cancellation of such third parties'
commitments to lend funds to the governmental entity, which may further
impair such debtor's ability or willingness to service its debts in a
timely manner. Consequently, governmental entities may default on their
sovereign debt.
Holders of sovereign debt, including the Portfolio, may be requested to
participate in the rescheduling of such debt and to extend further loans to
governmental entities. There is no bankruptcy proceeding by which defaulted
sovereign debt may be collected in whole or in part.
Latin America is a region rich in natural resources such as oil, copper,
tin, silver, iron ore, forestry, fishing, livestock and agriculture. The
region has a large population (roughly 300 million) representing a large
domestic market. Economic growth was strong in the 1960's and 1970's, but
slowed dramatically (and in some instances was negative) in the 1980's as a
result of poor economic policies, higher international interest rates, and
the denial of access to new foreign capital. Although a number of Latin
American countries are currently experiencing lower rates of inflation and
higher rates of real growth in Gross Domestic Product (`GDP'') than they
have in the past, other Latin American countries continue to experience
significant problems, including high inflation rates and high interest
rates. Capital flight has proven a persistent problem and external debt has
been forcibly rescheduled. Political turmoil, high inflation, capital
repatriation restrictions and nationalization have further exacerbated
conditions.
Large budget deficits and a high level of state ownership in many
productive and service areas have given way to balanced budgets and
privatization in Mexico, Brazil, Chile and Argentina. Changes in political
leadership have encouraged the implementation of market oriented economic
policies such as balanced budgets. Privatization trade reform and monetary
reform have been among the steps taken to modernize the Latin American
economies and to regenerate growth in the region. However, governments of
many Latin American countries have exercised and continue to exercise
substantial influence over many aspects of the private sector through the
ownership or control of many companies, including some of the largest in
those countries. As a result, government actions in the future could have a
significant effect on economic conditions which may adversely affect prices
of certain portfolio securities. Expropriation, confiscatory taxation,
nationalization, political, economic or social instability or other similar
developments, such as military coups, have occurred in the past and could
also adversely affect the Portfolio's investments in this region.
Changes in political leadership, the implementation of market oriented
economic policies, such as privatization, trade reform and fiscal and
monetary reform are among the recent steps taken to renew economic growth.
External debt is being restructured and flight capital (domestic capital
that has left the home country) has begun to return. Inflation control
efforts have also been implemented. Free Trade Zones are being discussed in
various areas around the region, the most notable being a free trade zone
between Mexico and the U.S. Various trade agreements have also been formed
within the region such as the Andean Pact, Mercosur and the North American
Free Trade Agreement (NAFTA). The largest of these is NAFTA, which was
implemented on January 1, 1994. Latin American equity markets can be
extremely volatile and in the past have shown little correlation with the
U.S. market. Currencies are typically weak, but most are now relatively
free floating, and it is not unusual for the currencies to undergo wide
fluctuations in value over short periods of time due to changes in the
market.
FOREIGN SECURITIES: SPECIAL CONSIDERATIONS CONCERNING THE PACIFIC BASIN.
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.
Thailand has been transformed into one of the fastest growing stock markets
in the world. On February 23, 1991, the military staged its 17th coup since
the overthrow of the absolute monarchy in 1932. The newly appointed
government quickly focused on the economy and enacted major tax revisions,
slashing personal income tax and reducing taxes on imports. Most
significantly, it pushed through a 7% value added tax. Released from
political consideration by the coup, the Bank of Thailand was finally able
to implement a monetary tightening. As a result, interest rates rose and
GDP declined to 7.7% from 10% the previous year. The government continues
to move ahead with new projects - especially telecommunications, roads and
port facilities - needed to refurbish the country's overtaxed
infrastructure. Nonetheless, political unrest coupled with the shooting of
antigovernment demonstrators in May 1992 has caused many international
businesses to question Thailand's political stability.
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
1980's. 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 long-standing 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.
In terms of GDP, industrial standards and level of education, South Korea
is second only to Japan in Asia. It enjoys the benefits of a diversified
economy with well developed sectors in electronics, automotive, textiles
and shoe manufacturing, steel and shipbuilding among others. The driving
force behind the economy's dynamic growth has been the planned development
of an export-oriented economy in a vigorously entrepreneurial society. Real
GDP grew about 7.5% in 1991. Labor unrest was noticeably calmer,
unemployment averaged a low of 2.3%, and investment was strong. Inflation
rates, however, are beginning to challenge South Korea's strong economic
performance. In addition, the international situation between South and
North Korea continues to improve. Both Koreas joined the United Nations
separately in late 1991, creating another forum for negotiation and joint
cooperation.
Indonesia is a mixed economy with many socialist institutions and central
planning, but has recently placed emphasis on deregulation and private
enterprise. Like Thailand, Indonesia has extensive natural wealth, yet with
a large and rapidly increasingly population, it remains a poor country.
Agriculture, including forestry and fishing, is an important sector,
accounting for 21% of GDP and over 50% of the labor force. Once the world's
largest rice importer, Indonesia is now nearly self-sufficient.
The Malaysian economy continued to perform well, growing at an average
annual rate of 9% from 1987 through 1991. This placed Malaysia as one of
the fastest growing economies in the Asian-Pacific region. Malaysia has
become the world's third-largest producer of semiconductor devices (after
the US and Japan) and the world's largest exporter of semiconductor
devices. More remarkable is the country's ability to achieve rapid economic
growth with relative price stability (2% inflation over the past five
years) as the government followed prudent fiscal/monetary policies.
Malaysia's high export dependence level leaves it vulnerable to a recession
in the OECD countries or a fall in world commodity prices.
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.
FOREIGN SECURITIES: SPECIAL CONSIDERATIONS CONCERNING CHINA AND CHINA
REGION. China's economic reform plan was designed to bring in foreign
investment capital and technological skills. The result has been a move
towards a more mixed economy away from the previous centrally planned
economy. The process of devolving responsibility for all aspects of
enterprise to local management and authorities continues, even though the
system of socialism with Chinese characteristics involves considerable
influence by the central government on production and marketing.
In order to attract foreign investment, China has since 1978 designated
certain areas of the country where overseas investors can receive special
investment incentives and tax concessions. There are five Special Economic
Zones (Shenzhen, Shantou and Zhuhai in Guangdong Province, Xiamen in Fujian
Province and Hainan Island, which itself is a province). Fourteen coastal
cities have been designated as `open cities'' and certain Open Economic
Zones have been established in coastal areas. Shanghai has established the
Pudong New Area. Twenty-seven High and New Technology Industrial
Development Zones have been approved where preferential treatment is given
to enterprises which are confirmed as technology intensive.
China has had for many centuries a well deserved reputation for being
closed to foreigners, with trade with the outside world being carried on
under terms of extreme restriction and under central control. Such
conditions were maintained in the first thirty years of the Communist
regime which began in 1949; however, there have been several stages of
evolution, from the institution of an industrialization program in the
1950s to a modernization policy commencing in 1978 which combined economic
development with the beginnings of opening the country.
The securities markets in the China region are substantially smaller, less
liquid and more volatile than the major securities markets in the United
States. A high proportion of the shares of many Chinese issuers may be held
by a limited number of persons and financial institutions, which may limit
the number of shares available for investment by the Portfolio. Similarly,
volume and liquidity in the bond markets in China are less than in the
United States and, at times, price volatility can be greater than in the
United States. A limited number of issuers in Chinese securities markets
may represent a disproportionately large percentage of market
capitalization and trading value. The limited liquidity of securities
markets in China may also affect the Portfolio's ability to acquire or
dispose of securities at the price and time it wishes to do so.
Accordingly, during periods of rising securities prices in the more
illiquid Chinese securities markets, the Portfolio's ability to participate
fully in such price increases may be limited by its investment policy of
investing not more than 15% of its net assets in illiquid securities.
Conversely, the Portfolio's inability to dispose fully and promptly of
positions in declining markets will cause the Portfolio's net asset value
to decline as the value of the unsold positions is marked to lower prices.
In addition, the Chinese securities markets are susceptible to being
influenced by large investors trading significant blocks of securities.
The Chinese, Hong Kong and Taiwan stock markets are 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.
China governmental actions can have a significant effect on the economic
conditions in China, which could adversely affect the value and liquidity
of the Portfolio's investments. Although the Chinese government has
recently begun to institute economic reform policies, there can be no
assurances that it will continue to pursue such policies or, if it does,
that such policies will succeed.
The securities industry in China is not well developed. China has no
securities laws of nationwide applicability. The municipal securities
regulations adopted by Shanghai and Shenzhen municipalities are very new,
as are their respective securities exchanges and other self-regulatory
organizations. In addition, Chinese stockbrokers and other intermediaries
may not perform as well as their counterparts in the United States and
other more developed securities markets. The prices at which the Portfolio
may acquire investments may be affected by trading by persons with material
non-public information and by securities transactions by brokers in
anticipation of transactions by the Portfolio in particular securities.
China does not have a comprehensive system of laws, although substantial
changes have occurred in this regard in recent years. The corporate form of
organization has only recently been permitted in China and national
regulations governing corporations were introduced only in May, 1992. Prior
to the introduction of such regulations, Shanghai had adopted a set of
corporate regulations applicable to corporations located or listed in
Shanghai, and the relationship between the two sets of regulations is not
clear. Consequently, until a firmer legal basis is provided, even such
fundamental corporate law tenets as the limited liability status of Chinese
issuers and their authority to issue shares remain open to question. Laws
regarding fiduciary duties of officers and directors and the protection of
shareholders are not well developed. China's judiciary is relatively
inexperienced in enforcing the laws that exist, leading to a higher than
usual degree of uncertainty as to the outcome of any litigation. Even where
adequate law exists in China, it may be impossible to obtain swift and
equitable enforcement of such law, or to obtain enforcement of the judgment
by a court of another jurisdiction. The bankruptcy laws pertaining to state
enterprises have rarely been used and are untried in regard to an
enterprise with foreign shareholders, and there can be no assurance that
such shareholders, including the Portfolio, would be able to realize the
value of the assets of the enterprise or receive payment in convertible
currency. As the Chinese legal system develops, the promulgation of new
laws, changes to existing laws and the preemption of local laws by national
laws may adversely affect foreign investors, including the Portfolio. The
uncertainties faced by foreign investors in China are exacerbated by the
fact that many laws, regulations and decrees of China are not publicly
available, but merely circulated internally.
Exports continue to rise strongly, although China remains vulnerable to
United States economic conditions and possible trade sanctions, unless it
liberalizes current import restrictions and improves its human rights
record. However, imports are also expected to rise and may outstrip exports
in terms of growth rates.
There are currently two officially recognized securities exchanges in China
- -- The Shanghai Securities Exchange which opened in December 1990 and The
Shenzhen Stock Exchange which opened in July 1991. Shares traded on these
Exchanges are two types -- `A'' shares which can be traded only by Chinese
investors and `B'' shares which can be traded only by individuals and
corporations not resident in China.
In Shanghai, all `B'' shares are denominated in Chinese renminbi (``RMB''),
but all transactions in `B'' shares must be settled in U.S. dollars, and
all distributions made on `B'' shares are payable in U.S. dollars, the
exchange rate being the weighted average exchange rate for the U.S. dollar
as published by the Shanghai Foreign Exchange Adjustment Centre.
In Shenzhen, the purchase and sale prices for `B'' shares are quoted in
Hong Kong dollars. Dividends and other lawful revenue derived from `B''
shares are calculated in RMB but payable in Hong Kong dollars, the rate of
exchange being the average rate published by Shenzhen Foreign Exchange
Adjustment Centre.
There are no foreign exchange restrictions on the repatriation of gains
made on or income derived from `B'' shares, subject to the payment of
taxes imposed by China thereon.
Company law relating to companies limited by shares and regulations
regarding the issuing of shares by equity joint ventures have not yet been
developed on a national basis. The Shenzhen municipality issued regulations
in 1992 relating to joint stock companies, and the Shanghai municipality
has a draft joint stock company law under review. Regulations governing the
trading of securities on both the Shenzhen and the Shanghai stock exchanges
have been issued by each municipality; there is no national securities
legislation as yet.
Economies of countries in the China region may differ favorably or
unfavorably from the U.S. economy in such respects as rate of growth of
gross domestic product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position. As an export-driven
economy, the economy of China is affected by developments in the economies
of its principal trading partners. Revocation by the United States of
China's `Most Favored Nation'' trading status, which the U.S. President
and Congress reconsider annually, would adversely affect the trade and
economic development of China and Hong Kong. Hong Kong and Taiwan have
limited natural resources, resulting in dependence on foreign sources for
certain raw materials and economic vulnerability to global fluctuations of
price and supply.
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.
FUTURES CONTRACTS. A Portfolio may enter into contracts for the purchase or
sale for future delivery of fixed-income securities, foreign currencies, or
contracts based on financial indices including any index of U.S. government
securities, foreign government securities or corporate debt securities.
U.S. futures contracts have been designed by exchanges which have been
designated "contracts markets" by the Commodity Futures Trading Commission
("CFTC"), and must be executed through a futures commission merchant, or
brokerage firm, which is a member of the relevant contract market. Futures
contracts trade on a number of exchange markets, and, through their
clearing corporations, the exchanges guarantee performance of the contracts
as between the clearing members of the exchange. A 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 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 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 a further 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. Each 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, a Portfolio will have the right to sell such currency for a
fixed amount in dollars and will thereby offset, in whole or in part, the
adverse effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing
the cost of such securities, the Portfolio may purchase call options
thereon. The purchase of such options could offset, at least partially, the
effects of the adverse movements in exchange rates. As in the case of other
types of options, however, the benefit to the Portfolio deriving from
purchases of foreign currency options will be reduced by the amount of the
premium and related transaction costs. In addition, where currency exchange
rates do not move in the direction or to the extent anticipated, the
Portfolio could sustain losses on transactions in foreign currency options
which would require it to forego a portion or all of the benefits of
advantageous changes in such rates.
Each Portfolio may write options on foreign currencies for the same types
of hedging purposes. For example, where a Portfolio anticipates a decline
in the dollar value of foreign currency denominated securities due to
adverse fluctuations in exchange rates it could, instead of purchasing a
put option, write a call option on the relevant currency. If the expected
decline occurs, the options will most likely not be exercised, and the
diminution in value of portfolio securities will be offset by the amount of
the premium received.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, the
Portfolio could write a put option on the relevant currency which, if rates
move in the manner projected, will expire unexercised and allow the
Portfolio to hedge such increased cost up to the amount of the premium. As
in the case of other types of options, however, the writing of a foreign
currency option will constitute only a partial hedge up to the amount of
the premium, and only if rates move in the expected direction. If this does
not occur, the option may be exercised and the Portfolio would be required
to purchase or sell the underlying currency at a loss which may not be
offset by the amount of the premium. Through the writing of options on
foreign currencies, the Portfolio also may be required to forego all or a
portion of the benefits which might otherwise have been obtained from
favorable movements in exchange rates.
Each Portfolio intends to write covered call options on foreign currencies.
A call option written on a foreign currency by a 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.
Each 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 currency option positions entered into on a
national securities exchange are cleared and guaranteed by the Options
Clearing Corporation ("OCC"), thereby reducing the risk of counterparty
default. Further, a liquid secondary market in options traded on a national
securities exchange may be more readily available than in the over-the-
counter market, potentially permitting a Portfolio to liquidate open
positions at a profit prior to exercise or expiration, or to limit losses
in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however,
is subject to the risks of the availability of a liquid secondary market
described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effects of other
political and economic events. In addition, exchange-traded options on
foreign currencies involve certain risks not presented by the over-the-
counter market. For example, exercise and settlement of such options must
be made exclusively through the OCC, which has established banking
relationships in applicable foreign countries for this purpose. As a
result, the OCC may, if it determines that foreign governmental
restrictions or taxes would prevent the orderly settlement of foreign
currency option exercises, or would result in undue burdens on the OCC or
its clearing member, impose special procedures on exercise and settlement,
such as technical changes in the mechanics of delivery of currency, the
fixing of dollar settlement prices or prohibitions on exercise.
As in the case of forward contracts, certain options on foreign currencies
are traded over-the-counter and involve liquidity and credit risks which
may not be present in the case of exchange-traded currency options. A
Portfolio's ability to terminate over-the-counter options will be more
limited than with exchange-traded options. It is also possible that broker-
dealers participating in over-the-counter options transactions will not
fulfill their obligations. Until such time as the staff of the SEC changes
its position, each Portfolio will treat purchased over-the-counter options
and assets used to cover written over-the-counter options as illiquid
securities. With respect to options written with primary dealers in U.S.
government securities pursuant to an agreement requiring a closing purchase
transaction at a formula price, the amount of illiquid securities may be
calculated with reference to the repurchase formula.
In addition, futures contracts, options on futures contracts, forward
contracts and options on foreign currencies may be traded on foreign
exchanges. Such transactions are subject to the risk of governmental
actions affecting trading in or the prices of foreign currencies or
securities. The value of such positions also could be adversely affected
by: (i) other complex foreign political and economic factors; (ii) lesser
availability than in the United States of data on which to make trading
decisions; (iii) delays in the Portfolio's ability to act upon economic
events occurring in foreign markets during nonbusiness hours in the United
States; (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States; and (v)
lesser trading volume.
OPTIONS ON SECURITIES. With the exception of International Bond Portfolio,
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 Board of Trustees.
OPTIONS ON SECURITIES INDICES. In addition to options on securities, each
Portfolio, with the exception of International Bond 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."
The International Bond Portfolio, the European Equity Portfolio and the
Pacific Basin Equity 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 buys
and sells securities denominated in currencies other than the U.S. dollar
and receives interest, dividends and sale proceeds in currencies other than
the U.S. dollar, 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 Moody's and S&P 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 of the Trust. 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 either 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 categories of
Moody's and S&P is set forth below.
INVESTMENT RESTRICTIONS
The investment restrictions below have been adopted by the Trust with
respect to each Portfolio as fundamental policies. Under the Investment
Company Act of 1940, as amended (the "1940 Act"), a "fundamental" policy
may not be changed without the vote of a "majority of the outstanding
voting securities" of a Portfolio, which is defined in the 1940 Act as the
lesser of (a) 67% or more of the securities present at a meeting if the
holders of more than 50% of the outstanding securities are present or
represented by proxy, or (b) more than 50% of the outstanding securities.
The percentage limitations contained in the restrictions listed below apply
at the time of the purchase of the securities.
As a matter of fundamental policy, a Portfolio may not:
1. Borrow money or mortgage or hypothecate assets of the Portfolio,
except that in an amount not to exceed 1/3 of the current value of the
Portfolio's net assets, it may borrow money as a temporary measure for
extraordinary or emergency purposes and enter into reverse repurchase
agreements or dollar roll transactions, and except that it may pledge,
mortgage or hypothecate not more than 1/3 of such assets to secure
such borrowings (it is intended that money would be borrowed only from
banks and only either to accommodate requests for the withdrawal of
beneficial interests while effecting an orderly liquidation of
portfolio securities or to maintain liquidity in the event of an
unanticipated failure to complete a portfolio security transaction or
other similar situations) or reverse repurchase agreements, provided
that collateral arrangements with respect to options and futures,
including deposits of initial deposit and variation margin, are not
considered a pledge of assets for purposes of this restriction and
except that assets may be pledged to secure letters of credit solely
for the purpose of participating in a captive insurance company
sponsored by the Investment Company Institute; for additional related
restrictions, see clause (i) under the caption "Additional
Restrictions" below. (As an operating policy, the Portfolios may not
engage in dollar roll transactions);
2. Underwrite securities issued by other persons except insofar as
the Portfolio may technically be deemed an underwriter under the
Securities Act of 1933, as amended (the "1933 Act"), in selling a
portfolio security;
3. Make loans to other persons except (a) through the lending of the
Portfolio's portfolio securities and provided that any such loans not
exceed 30% of the Portfolio's total assets (taken at market value),
(b) through the use of repurchase agreements or the purchase of short-
term obligations or (c) by purchasing a portion of an issue of debt
securities of types distributed publicly or privately (under current
regulations, the Portfolio's fundamental policy with respect to 20%
risk weighing for financial institutions prevent the (Fund) from
engaging in securities lending);
4. Purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or interests
therein), interests in oil, gas or mineral leases, commodities or
commodity contracts (except futures and option contracts) in the
ordinary course of business (the Portfolio may hold and sell, for its
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 the Portfolio's investment objective, up to 25% of its
total assets may be invested in any one industry;
6. Issue any senior security (as that term is defined in the 1940
Act) if such issuance is specifically prohibited by the 1940 Act or
the rules and regulations promulgated thereunder, provided that
collateral arrangements with respect to options and futures, including
deposits of initial deposit and variation margin, are not considered
to be the issuance of a senior security for purposes of this
restriction.
As an operating policy the Portfolios will not invest in another open-
end registered investment company.
ADDITIONAL RESTRICTIONS. In order to comply with certain statutes and
policies the Portfolios 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 of
another company;
(vi) purchase securities issued by any investment company except by
purchase in the open market where no commission or profit to a sponsor
or dealer results from such purchase other than the customary broker's
commission, or except when such purchase, though not made in the open
market, is part of a plan of merger or consolidation; provided,
however, that securities of any investment company will not be
purchased for the 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 (1) the Portfolio' investment adviser waives the
investment advisory fee with respect to assets invested in other open-
end investment companies and (2) the Portfolio incurs no sales charge
in connection with the investment;
(vii) invest more than 10% of the Portfolio's total assets (taken
at the greater of cost or market value) in securities (excluding Rule
144A securities) that are restricted as to resale under the 1933 Act;
(viii) invest more than 15% of the Portfolio's total assets (taken
at the greater of cost or market value) in (a) securities (including
Rule 144A securities) that are restricted as to resale under the 1933
Act, and (b) securities that are issued by issuers which (including
predecessors) have been in operation less than three years (other than
U.S. government securities), provided, however, that no more than 5%
of the Portfolio's total assets are invested in securities issued by
issuers which (including predecessors) have been in operation less
than three years;
(ix) with the exception of the Global High Yield Securities Portfolio
with respect to 75% of the Portfolio's total assets, purchase
securities of any issuer if such purchase at the time thereof would
cause the Portfolio to hold more than 10% of any class of securities
of such issuer, for which purposes all indebtedness of an issuer shall
be deemed a single class and all preferred stock of an issuer shall be
deemed a single class, except that futures or option contracts shall
not be subject to this restriction;
(x) with the exception of the Global High Yield Securities Portfolio
with respect to 75% of its assets, invest more than 5% of its total
assets in the securities (excluding U.S. government securities) of any
one issuer;
(xi) invest in securities issued by an issuer any of whose officers,
directors, trustees or security holders is an officer or Trustee of
the Portfolio (Trust), or is an officer or director of the Adviser, if
after the purchase of the securities of such issuer for the Portfolio
one or more of such persons owns beneficially more than 1/2 of 1% of
the shares or securities, or both, all taken at market value, of such
issuer, and such persons owning more than 1/2 of 1% of such shares or
securities together own beneficially more than 5% of such shares or
securities, or both, all taken at market value;
(xii) invest in warrants (other than warrants acquired by the
Portfolio as part of a unit or attached to securities at the time of
purchase) if, as a result, the investments (valued at the lower of
cost or market) would exceed 5% of the value of the Portfolio's net
assets or if, as a result, more than 2% of the Portfolio's net assets
would be invested in warrants not listed on a recognized United States
or foreign stock exchange, to the extent permitted by applicable state
securities laws;
(xiii) write puts and calls on securities unless each of the
following conditions are met: (a) the security underlying the put or
call is within the investment policies 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
(xiv) buy and sell puts and calls on securities, stock index
futures or options on stock index futures, or financial futures or
options on financial futures unless such options are written by other
persons and: (a) the options or futures are offered through the
facilities of a national securities association or are listed on a
national securities or commodities exchange, except for put and call
options issued by non-U.S. entities or listed on non-U.S. securities
or commodities exchanges; (b) the aggregate premiums paid on all such
options which are held at any time do not exceed 20% of the
Portfolio's total net assets; and (c) the aggregate margin deposits
required on all such futures or options thereon held at any time do
not exceed 5% of the Portfolio's total assets.
There will be no violation of any investment restriction if that
restriction is complied with at the time the relevant action is taken
notwithstanding a later change in market value of an investment, in net or
total assets, in the securities rating of the investment, or any other
later change.
The Portfolio will comply with the permitted investments and investment
limitations in the securities laws and regulations of all states in which
any registered investment company investing in the Portfolio is registered.
ITEM 14. MANAGEMENT OF THE FUND.
The 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. Unless otherwise indicated below, the address of
each 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.
S. LELAND DILL (Birthdate: March 28, 1930) -- Trustee; Retired; Director,
Coutts Group; Coutts (U.S.A.) International; Coutts Trust Holdings Ltd.;
Director, Zweig Series Trust; formerly Partner of KPMG Peat Marwick;
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.
PHILIP W. COOLIDGE* (Birthdate: September 2, 1951) -- President and
Trustee; Chairman, Chief Executive Officer and President, Signature
Financial Group, Inc. ("SFG") (since December, 1988) and Signature Broker-
Dealer Services, Inc. ("Signature") (since April, 1989). His address is 6
St. James Avenue, Boston, Massachusetts 02116.
OFFICERS
RONALD M. PETNUCH (Birthdate: February 27, 1960) -- President and
Treasurer; Senior Vice President, Federated Services Company (`FSC'');
formerly, Director of Proprietary Client Services, Federated Administrative
Services (`FAS''), and Associate Corporate Counsel, Federated Investors
(`FI'').
CHARLES L. DAVIS, JR. (Birthdate: March 23, 1960)-- Vice President and
Assistant Treasurer; Vice President, FAS.
JAY S. NEUMAN (Birthdate: April 22, 1950) -- Secretary; Corporate Counsel,
FI.
Messrs. Coolidge, Petnuch, Davis, and Neuman also hold similar positions
for other investment companies for which Signature or Edgewood,
respectively, or an affiliate serves as the principal underwriter.
*Indicates an `interested person (as defined by the 1940 Act) of the
Trust.
TRUSTEES COMPENSATION TABLE
.Trustees of the Portfolio received the following remuneration from the
Portfolios for the year ended December 31, 1995:
TRUSTEES COMPENSATION TABLE
Name, Aggregate Total
Position With Compensation Compensation From
Trust/Portfolio From Portfolio Fund Complex*
Philip W. Coolidge none none
Trustee of Trust
and Portfolio
Charles P. Biggar none none
Trustee of Portfolio
S. Leland Dill none none
Trustee of Portfolio
Philip Saunders, Jr. none none
Trustee of the Portfolio
* Aggregated information is furnished for the BT Family of Funds which
consists of the following: BT Investment Funds, BT Institutional Funds, BT
Pyramid Funds, BT Advisor Funds, BT Investment Portfolios, Cash Management
Portfolio, Treasury Money Portfolio, Tax Free Money Portfolio, NY Tax Free
Money Portfolio, International Equity Portfolio, Utility Portfolio, Short
Intermediate US Government Securities Portfolio, Intermediate Tax Free
Portfolio, Asset Management Portfolio, Equity 500 Index Portfolio, and
Capital Appreciation Portfolio.
For the fiscal year ended September 30, 1996, Global High Yield Securities
Portfolio accrued Trustees fees equal to $2,638, Latin American Equity
Portfolio accrued Trustees fees equal to $2,904, Small Cap Portfolio
accrued Trustees fees equal to $2,718 and Pacific Basin Equity Portfolio
accrued Trustees fees equal to $2,654.
As of the fiscal year ended September 30, 1996, European Equity Portfolio
and International Bond Portfolio had not commenced investment operations
and did not accrue Trustees fees.
Bankers Trust reimbursed the Portfolios for a portion of their Trustees
fees for the period above. See "Investment Advisory and Other Services" and
below.
The Portfolios' Declaration of Trust provides that it will indemnify its
Trustees and officers against liabilities and expenses incurred in
connection with litigation in which they may be involved because of their
offices with the Portfolio, unless, as to liability to the Portfolio or the
investors in the Portfolio, it is finally adjudicated that they engaged in
willful misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in their offices, or unless with respect to any other
matter it is finally adjudicated that they did not act in good faith in the
reasonable belief that their actions were in the best interests of the
Portfolios. In the case of settlement, such indemnification will not be
provided unless it has been determined by a court or other body approving
the settlement or other disposition, or by a reasonable determination,
based upon a review of readily available facts, by vote of a majority of
disinterested Trustees or in a written opinion of independent counsel, that
such officers or Trustees have not engaged in willful misfeasance, bad
faith, gross negligence or reckless disregard of their duties.
ITEM 15. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.
As of December 31, 1996, Global High Yield Securities Fund, Latin American
Equity Fund, Small Cap Fund and Pacific Basin Equity Fund (each a "Fund"),
each a series of shares of BT Investment Funds, each owned approximately
100% of the value of the outstanding interests in the Global High Yield
Securities Portfolio, Latin American Equity Portfolio, Small Cap Portfolio
and Pacific Basin Equity Portfolio, respectively. As of the same date,
Global High Yield Securities Fund, a series of shares of The Leadership
Trust, did not own any outstanding interests in Global High Yield
Securities Portfolio. Because each Fund controls the corresponding
Portfolio, it may take actions without the approval of any other investor
in the Portfolios or any other series of the Trust, as the case may be.
Each Fund has informed the Trust that whenever it is requested to vote on
matters pertaining to the fundamental policies of each Portfolio, the Fund
will hold a meeting of shareholders and will cast its votes as instructed
by the Fund's shareholders. It is anticipated that other registered
investment companies investing in the Portfolios will follow the same or a
similar practice.
ITEM 16. INVESTMENT ADVISORY AND OTHER SERVICES.
The Adviser manages the assets of the Portfolios pursuant to an investment
advisory agreement (the "Advisory Agreement"). Subject to such policies as
the Board of Trustees of the Trust may determine, the Adviser makes
investment decisions for each Portfolio. Bankers Trust will: (i) act in
strict conformity with the Trust's Declaration of Trust, the 1940 Act and
the Investment Advisors Act of 1940, as the same may from time to time be
amended; (ii) manage each Portfolio in accordance with each Portfolio's
investment objectives, restrictions and policies as stated herein; (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.
The Adviser furnishes at its own expense all services, facilities and
personnel necessary in connection with managing each Portfolio's
investments and effecting securities transactions for each Portfolio. The
Advisory Agreement will continue in effect if such continuance is
specifically approved at least annually by the Board of Trustees or by a
majority vote of the investors in each Portfolio (with the vote of each
being in proportion to the amount of its investment), and, in either case,
by a majority of the Trust's Trustees who are not parties to the Advisory
Agreement or interested persons of any such party, at a meeting called for
the purpose of voting on the Advisory Agreement.
The Advisory Agreement is terminable with respect to each Portfolio without
penalty on 60 days' written notice by each Portfolio when authorized either
by majority vote of the investors in each Portfolio (with the vote of each
being in proportion to the amount of its investment), or by a vote of a
majority of the Trust's Board of Trustees, or by the Adviser, and will
automatically terminate in the event of its assignment. The Advisory
Agreement provides that neither the Adviser not its personnel shall be
liable for any error of judgment or mistake of law or for any loss arising
out of any investment or for any act or omission in the execution of
security transactions for the Portfolio, except for willful misfeasance,
bad faith or gross negligence or of reckless disregard of its or their
obligations and duties under the Advisory Agreement.
For the fiscal years ended September 30, 1996, 1995, and the period from
October 25, 1993 (commencement of operations) through September 30, 1994,
Bankers Trust earned $151,004, $173,145 and $102,872, respectively, in
compensation for investment advisory services provided to Latin American
Equity Portfolio. During the same periods, Bankers Trust reimbursed
$46,928, $138,351 and $81,307, respectively, to that Portfolio to cover
expenses.
For the fiscal years ended September 30, 1996, 1995, and the period from
November 1, 1993 (commencement of operations) through September 30, 1994,
Bankers Trust earned $211,122, $173,591 and $116,020, respectively, in
compensation for investment advisory services provided to Pacific Basin
Equity Portfolio. During the same periods, Bankers Trust reimbursed
$30,450, $47,338 and $40,461, respectively, to that Portfolio to cover
expenses.
For the fiscal years ended September 30, 1996, 1995, and the period from
December 14, 1993 (commencement of operations) through September 30, 1994,
Bankers Trust earned $156,634, $141,692 and $66,073, respectively, in
compensation for investment advisory services provided to Global High Yield
Securities Portfolio. During the same periods, Bankers Trust reimbursed
$86,070, $78,840 and $48,741, respectively, to that Portfolio to cover
expenses.
For the fiscal years ended September 30, 1996, 1995, and the period from
October 21, 1993 (commencement of operations) through September 30, 1994,
Bankers Trust earned $1,293,449, $389,015 and $69,420, respectively, in
compensation for investment advisory services provided to Small Cap
Portfolio. During the same periods, Bankers Trust reimbursed $331,176,
$111,862 and $41,110, respectively, to that Portfolio to cover expenses.
As of the fiscal year ended September 30, 1996, European Equity Portfolio
and International Bond Portfolio had not commenced investment operations
and did not accrue investment advisory fees.
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 has entered into a sub-investment advisory agreement (the
"Sub-Advisory Agreement") with BT Fund Managers International Limited ("BT
Fund Managers International") a wholly owned subsidiary of Bankers Trust
Australia Limited ("BTAL") in Sydney. BTAL is a wholly owned subsidiary of
Bankers Trust New York Corporation. Under the Sub-Advisory Agreement,
Bankers Trust may receive investment advice and research services with
respect to companies based in the Pacific Basin and may grant BT Fund
Managers International investment management authority as well as the
authority to buy and sell securities if Bankers Trust believes it would be
beneficial to Pacific Basin Equity Portfolio.
BTAL, which was granted a banking license in 1986, is the parent of Bankers
Trust Australia Group which has offices is Sydney, Melbourne, Perth,
Brisbane, Adelaide, London and Hong Kong. A representative office of
Bankers Trust Company was opened in Australia in 1966 and Australian
merchant banking operations commences in 1969. A related organization,
Bankers Trust New Zealand Limited, was established in 1986. Although BTAL
has not previously served as investment adviser for a registered investment
company, BTAL provides investment services for a range of clients.
Pursuant to an administration and services agreement (the "Administration
Agreement"), Bankers Trust provides administration services to the Trust.
Under the Administration Agreement, Bankers Trust is obligated on a
continuous basis to provide such administrative services as the Board of
Trustees reasonably deems necessary for the proper administration of the
Trust. Bankers Trust will generally assist in all aspects of the Trust's
operations; supply and maintain the Trust with office facilities,
statistical and research data, data processing services, clerical,
accounting, bookkeeping and recordkeeping services (including without
limitation the maintenance of such books and records as are required under
the 1940 Act and the rules thereunder, except as maintained by other agents
of the Trust), 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 Securities and Exchange Commission (the
"SEC"); supply supporting documentation for meetings of the Board of
Trustees; provide monitoring reports and assistance regarding compliance
with the Trust's Declaration of Trust, By-Laws, investment objectives and
policies and with federal and state securities laws; arrange for
appropriate insurance coverage; calculate the net asset value, net income
and realized capital gains or losses of the Portfolios; and negotiate
arrangements with, and supervise and coordinate the activities of, agents
and others retained by the Trust to supply services to the Trust and/or the
investors in the Portfolios.
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.
Bankers Trust also provides fund accounting, transfer agency and custodian
services to the Trust and the Portfolios, pursuant to the Administration
Agreement.
For the fiscal years ended September 30, 1996, 1995, and the period from
October 25, 1993 (commencement of operations) through September 30, 1994,
Bankers Trust received $30,201, $34,629 and $20,574, respectively, in
compensation for administrative and other services provided to Latin
American Equity Portfolio.
For the fiscal years ended September 30, 1996, 1995, and the fiscal from
November 1, 1993 (commencement of operations) through September 30, 1994,
Bankers Trust received $70,374, $57,864 and $38,673, respectively, in
compensation for administrative and other services provided to Pacific
Basin Equity Portfolio.
For the fiscal years ended September 30, 1996, 1995, and the period from
December 14, 1993 (commencement of operations) through September 30, 1994,
Bankers Trust received $39,158, $35,423 and $16,518, respectively, in
compensation for administrative and other services provided to Global High
Yield Securities Portfolio.
For the fiscal years ended September 30, 1996, 1995, and the fiscal period
from October 21, 1993 (commencement of operations) through September 30,
1994, Bankers Trust received $198,992, $59,848 and $10,680, respectively,
in compensation for administrative and other services provided to Small Cap
Portfolio.
As of the fiscal year ended September 30, 1996, European Equity Portfolio
and International Bond Portfolio had not commenced investment operations
and did not accrue administrative fees.
Bankers Trust reimbursed each Portfolio for a portion of its administrative
and services fees for the period above. See "Investment Advisory and Other
Services" above.
Coopers & Lybrand L.L.P. are the independent certified public 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 the Portfolios 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 Portfolios 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, when placing portfolio transactions for the
Portfolios with a broker to pay a brokerage commission (to the extent
applicable) in excess of that which another broker might have charged for
effecting the same transaction on account of the receipt of research,
market or statistical information. The term "research, market or
statistical information" includes advice as to the value of securities; the
advisability of investing in, purchasing or selling securities; the
availability of securities or purchasers or sellers of securities; and
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and the performance of
accounts.
Consistent with the policy stated above, the Rules of Fair Practice of the
NASD and such other policies as the Trust's Trustees may determine, the
Adviser may consider sales of securities of other investment company
clients of Bankers Trust as a factor in the selection of broker-dealers to
execute portfolio transactions. Bankers Trust will make such allocations if
commissions are comparable to those charged by nonaffiliated, qualified
broker-dealers for similar services.
Higher commissions may be paid to firms that provide research services to
the extent permitted by law. Bankers Trust may use this research
information in managing the Portfolios' assets, as well as the assets of
other clients.
Except for implementing the policies stated above, there is no intention to
place portfolio transactions with particular brokers or dealers or groups
thereof. In effecting transactions in over-the-counter securities, orders
are placed with the principal market-makers for the security being traded
unless, after exercising care, it appears that more favorable results are
available otherwise.
Although certain research, market and statistical information from brokers
and dealers can be useful to the Portfolios 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 the
Portfolios as well as for one or more of the Adviser's other clients.
Investment decisions for the Portfolios and for the Adviser's other clients
are made with a view to achieving their respective investment objectives.
It may develop that a particular security is bought or sold for only one
client even though it might be held by, or bought or sold for, other
clients. Likewise, a particular security may be bought for one or more
clients when one or more clients are selling that same security. Some
simultaneous transactions are inevitable when several clients receive
investment advice from the same investment adviser, particularly when the
same security is suitable for the investment objectives of more than one
client. When two or more clients are simultaneously engaged in the purchase
or sale of the same security, the securities are allocated among clients in
a manner believed to be equitable to each. It is recognized that in some
cases this system could have a detrimental effect on the price or volume of
the security as far as the Portfolios are concerned. However, it is
believed that the ability of the Portfolio to participate in volume
transactions will produce better executions for the Portfolios.
For the fiscal years ended September 30, 1996, 1995, and the period from
October 25, 1993 (commencement of operations) through September 30, 1994,
Latin American Equity Portfolio paid brokerage commissions in the amount of
$164,049, $202,130 and $139,363, respectively.
For the fiscal years ended September 30, 1996, 1995, and the period from
December 14, 1993 (commencement of operations) through September 30, 1994,
Global High Yield Securities Portfolio paid brokerage commissions in the
amount of $0, $5,655 and $0, respectively.
For the fiscal years ended September 30, 1996, 1995, and the period from
November 1, 1993 (commencement of operations) through September 30, 1994,
Pacific Basin Equity Portfolio paid brokerage commissions in the amount of
$323,958, $192,123 and $139,363, respectively.
For the fiscal years ended September 30, 1996, 1995, and the period from
October 21, 1993 (commencement of operations) through September 30, 1994,
Small Cap Portfolio paid brokerage commissions in the amount of $238,160,
$70,603 and $20,835, respectively.
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 Portfolios. No series
of the Trust has any preference over any other series. Investors in the
Portfolios are entitled to participate pro rata in distributions of taxable
income, loss, gain and credit of the Portfolios. Upon liquidation or
dissolution of the Portfolios, investors are entitled to share pro rata in
the net assets of the Portfolios available for distribution to investors.
Investments in the Portfolios have no preference, preemptive, conversion or
similar rights and are fully paid and nonassessable, except as set forth
below. Investments in the Portfolios may not be transferred.
Each investor in the Portfolios is entitled to a vote in proportion to the
amount of its investment. The Portfolios 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 Portfolios, 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 Portfolios
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 each 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 Portfolios' investors (with the vote of
each being in proportion to its percentage of the beneficial interests in a
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 each Portfolio) will be sufficient. A 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 Portfolios 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 the
Portfolios or any other series of the Trust are not binding upon the
Trustees individually but only upon the property of the Portfolios 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 willful 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.
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," "Purchase of Securities Being Offered" and "Redemption or
Repurchase" in Part A.
Each Portfolio determines its net asset value as of 4:00 p.m., Eastern
time, on each day on which the NYSE is open for trading ("Fund Business
Day"), by dividing the value of each 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 each Portfolio at the time the determination is made. (As of
the date of this Registration Statement, the NYSE is both open every
weekday except for: (a) the following holidays: New Year's Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor 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.
Equity and debt securities (other than short-term debt obligations maturing
in 60 days or less), including listed securities and securities for which
price quotations are available, will normally be valued on the basis of
market valuations furnished by a pricing service. Short-term debt
obligations and money market securities maturing in 60 days or less are
valued at amortized cost, which approximates market. Other assets are
valued at fair value using methods determined in good faith by the Board of
Trustees.
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 Portfolios will not be subject to any
income tax. However each investor in the Portfolios will be taxable on its
share (as determined in accordance with the governing instruments of the
Trust) of a 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,
each Portfolio will not be subject to federal income tax, the Trust will
file appropriate income tax returns with respect to each Portfolio.
It is intended that the assets, income and distributions of the Portfolios
will be managed in such a way that an investor in each Portfolio will be
able to satisfy the requirements of Subchapter M of the Code, assuming that
the investor invested all of its assets in that 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 Portfolios. 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 Portfolios.
FOREIGN SECURITIES. Tax conventions between certain countries and the
United States may reduce or eliminate such taxes. It is impossible to
determine the effective rate of foreign tax in advance since the amount of
each Portfolio's assets to be invested in various countries will vary.
If each Portfolio is liable for foreign taxes, and if more than 50% of the
value of each Portfolio's total assets at the close of its taxable year
consists of stocks or securities of foreign corporations, it may make an
election pursuant to which certain foreign taxes paid by it would be
treated as having been paid directly by its investors. Pursuant to such
election, the amount of foreign taxes paid will be included in the income
of each Portfolio's investors, and such investors (except tax-exempt
investors) may, subject to certain limitations, claim either a credit or
deduction for the taxes. Each such investor will be notified after the
close of each Portfolio's taxable year whether the foreign taxes paid will
"pass through" for that year and, if so, such notification will designate
(a) the investor's portion of the foreign taxes paid to each such country
and (b) the portion which represents income derived from sources within
each such country.
The amount of foreign taxes for which an investor may claim a credit in any
year will generally be subject to a separate limitation for "passive
income," which includes, among other items of income, dividends, interest
and certain foreign currency gains. Because capital gains realized by each
Portfolio on the sale of foreign securities will be treated as U.S.-source
income, the available credit of foreign taxes paid with respect to such
gains may be restricted by this limitation.
ITEM 21. UNDERWRITERS.
The placement agent for the Trust is Edgewood, which receives no additional
compensation for serving in this capacity. Investment companies, insurance
company separate accounts, common and commingled trust funds and similar
organizations and entities may continuously invest in each Portfolio.
ITEM 22. CALCULATION OF FUND PERFORMANCE DATA.
Not applicable.
ITEM 23. FINANCIAL STATEMENTS.
The financial statements for each Portfolio for the fiscal year ended
September 30, 1996, are incorporated herein by reference to the BT
Investment Funds' combined Annual Report dated September 30, 1996 (File No.
811-04760).
PART C OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements:
Incorporated by reference to the Annual Report of BT Investment
Funds dated September 30, 1996, pursuant to Rule 411 under the
Securities Act of 1933. (File Nos. 33-07404 and 811-04760)
(b) Exhibits:
(l) Declaration of Trust of the Registrant; 3
(i) Fist Amendment to Declaration of Trust; *
(ii) Second Amendment to Declaration of Trust; *
(iii) Third Amendment to Declaration of Trust; *
(iv) Fourth Amendment to Declaration of Trust; *
(v) Fifth Amendment to Declaration of Trust; *
(vi) Sixth Amendment to Declaration of Trust; *
(vii) Conformed copy of Amendment No. 7 to Declaration of
Trust of BT Investment Portfolios; 7
(viii)Conformed copy of Amendment No. 8 to Declaration of
Trust of BT Investment Portfolios; 10
(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) Conformed copy of Custodian Agreement between Bankers Trust
Company nad BT Investment Portfolios; +
(9) Administration and Services Agreement between the
Registrant and Bankers Trust; 1
(i) Conformed Copy of Exclusive Placement Agent
Agreement; 8
(ii) Copy of Exhibit A to Exclusive Placement Agent
Agreement; 8
* Previously filed.
+ 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. Incorporated by reference to Amendment No. 13 to Registrant's
Registration Statement as filed with the Commission on January 30,
1997.
8. Incorporated by reference to Amendment No. 15 to Registrant's
Registration Statement as filed with the Commission on February 28,
1997.
10. Incorporated by reference to Amendment No. 17 to Registrant's
Registration Statement as filed with the Commission on April 16, 1997.
(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
(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; 8
(iii) Liquid Assets Portfolio; 9
(iv) Pacific Basin Equity Portfolio, Latin American Equity
Portfolio, Global High Yield Portfolio, Small Cap
Portfolio; 7
(v) BT PreservationPlus Portfolio; Not Applicable
(18) Not Applicable
(19) Conformed copy of Power of Attorney; 8
ITEM 25. Persons Controlled by or Under Common Control with Registrant:
None
+ 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.
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. Incorporated by reference to Amendment No. 13 to Registrant's
Registration Statement as filed with the Commission on January 30,
1997.
8. Incorporated by reference to Amendment No. 15 to Registrant's
Registration Statement as filed with the Commission on February 28,
1997.
9. Incorporated by reference to Amendment No. 15 to Registrant's
Registration Statement as filed with the Commission on March 19, 1997.
ITEM 26. Number of Holders of Securities.
Title of Class Number of Record Holders
as of May 1, 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 Preservation Plus Portfolio 1
ITEM 27. Indemnification; 5
ITEM 28. Business and Other Connections of Investment Adviser:
Bankers Trust serves as investment adviser to each Portfolio. Bankers
Trust, a New York banking corporation, is a wholly owned subsidiary of
Bankers Trust New York Corporation. Bankers Trust conducts a variety of
commercial banking and trust activities and is a major wholesale supplier
of financial services to the international institutional market. To the
knowledge of the Trust, none of the directors or
officers of Bankers Trust, except those set forth below, is or has been at
anytime during the past two fiscal years engaged in any other business,
profession, vocation or employment of a substantial nature, except that
certain directors and officers also hold various positions with and engage
in business for Bankers Trust New York Corporation. Set forth below are the
names and principal businesses of the directors and officers of Bankers
Trust who are or during the past two fiscal years have been engaged in any
other business, profession, vocation or employment of a substantial nature.
These persons may be contacted c/o Bankers Trust Company, 130 Liberty
Street, New York, New York 10006.
George B. Beitzel, International Business Machines Corporation, Old Orchard
Road, Armonk, NY 10504. Director, Bankers Trust Company; Retired senior
vice president and Director, International Business machines Corporation;
Director, Computer Task Group; Director, Phillips Petroleum Company;
Director, Caliber Systems, Inc. (formerly, Roadway Services Inc.);
Director, Rohm and Haas Company; Director, TIG Holdings; Chairman emeritus
of Amherst College; and Chairman of the Colonial Willimsburg Foundation.
Richard H. Daniel, Bankers Trust Company, 130 Liberty Street, New York, New
York 10006. Vice chairman and chief financial officer, Bankers Trust
Company and Bankers Trust New York Corporation; Beneficial owner, general
partner, Daniel Brothers, Daniel Lingo & Assoc., Daniel Pelt & Assoc.;
Beneficial owner, Rhea C. Daniel Trust.
5. Incorporated by reference ( to Post-Effective Amendment No. 11 to
Registrant's Registration Statement as filed with the Commission on
January 29, 1996.
Philip A. Griffiths, Bankers Trust Company, 130 Liberty Street, New York,
New York 10006. Director, Institute for Advanced Study; Director, Bankers
Trust Company; Chairman, Committee on Science, Engineering and Public
Policy of the National Academies of Sciences and Engineering & the
Institute of Medicine; and Chairman and member, Nominations Committee and
Committee on Science and Engineering Indicators, National Science Board;
Trustee, North Carolina School of Science and Mathematics and the Woodward
Academy.
William R. Howell, J.C. Penney Company, Inc., P.O. Box 10001, Plano, TX
75301-0001. Chairman Emeritus, J.C. Penney Company, Inc.; Director, Bankers
Trust Company; Director, Exxon Corporation; Director, Halliburton Company;
Director, Warner-Lambert Corporation; Director, The Williams Companies,
Inc.; and Director, National Retail Federation.
Vernon E. Jordan, Jr., Akin, Gump, Strauss, Hauer & Feld, LLP, 1333 New
Hampshire Ave., N.W., Washington, DC 20036. Senior Partner, Akin, Gump,
Strauss, Hauer & Feld, LLP; Director, Bankers Trust Company; Director,
American Express Company; Director, Dow-Jones, Inc.; Director, J.C. Penney
Company, Inc.; Director, Revlon Group Incorporated; Director, Ryder System,
Inc.; Director, Sara Lee Corporation; Director, Union Carbide Corporation;
Director, Xerox Corporation; Trustee, Brookings Institution; Trustee, The
Ford Foundation; and Trustee, Howard University.
David Marshall, 130 Liberty Street, New York, New York 10006. Chief
Information Officer and Executive Vice President, Bankers Trust New York
Corporation; Senior Managing Director, Bankers Trust Company.
Hamish Maxwell, Philip Morris Companies Inc., 120 Park Avenue, New York, NY
10006. Retired Chairman and Chief Executive Officer, Philip Morris
Companies Inc.; Director, Bankers Trust Company; Director, The News
Corporation Limited; Director, Sola International Inc.; and Chairman, WWP
Group pic.
Frank N. Newman, Bankers Trust Company, 130 Liberty Street, New York, New
York 10006. Chairman of the Board, Chief Executive Officer and President,
Bankers Trust New York Corporation and Bankers Trust Company; Director,
Bankers Trust Company; Director, Dow-Jones, Inc.; and Director, Carnegie
Hall.
N.J. Nicholas Jr., 745 Fifth Avenue, New York, NY 10020. Director, Bankers
Trust Company; Director, Boston Scientific Corporation; and Director, Xerox
Corporation.
Russell E. Palmer, The Palmer Group, 3600 Market Street, Suite 530,
Philadelphia, PA 19104. Chairman and Chief Executive Officer of The Palmer
Group; Director, Bankers Trust Company; Director, Allied-Signal Inc.;
Director, Federal Home Loan Mortgage Corporation; Director, GTE
Corporation; Director, The May Department Stores Company; Director,
Safeguard Scientifics, Inc.; and Trustee, University of Pennsylvania.
Donald L. Staheli, Bankers Trust Company, 130 Liberty Street, New York, New
York 10006. Chairman of the Board and Chief Executive Officer, Continental
Grain Company; Director, Bankers Trust Company; Director, ContiFinancial
Corporation; Director, Prudential Life Insurance Company of America;
Director, Fresenius Medical Care, A.g.; Director, America-China Society;
Director, National Committee on United States-China Relations; Director,
New York City Partnership; Chairman, U.S.-China Business Council; Chairman,
Council on Foreign Relations; Chairman, National Advisor Council of Brigham
Young University's Marriott School of Management; Vice Chairman, The Points
of Light Foundation; and Trustee, American Graduate School of International
Management.
Patricia Carry Stewart, c/o Office of the Secretary, 130 Liberty Street,
New York, NY 10006. Director, Bankers Trust Company; Director, CVS
Corporation; Director, Community Foundation for Palm Beach and Martin
Counties; Trustee Emerita, Cornell University.
George J. Vojta, Bankers Trust Company, 130 Liberty Street, New York, NY
10006. Vice Chairman, Bankers Trust New York Corporation and Bankers Trust
Company; Director, bankers Trust Company; Director; Alicorp S.A.; Director;
Northwest Airlines; Director, Private Export Funding Corp.; Director, New
York State Banking Board; Director, St. Lukes-Roosevelt Hospital Center;
Partner, New York City Partnership; and Chairman, Wharton Financial
Services Center.
Paul A. Volcker, Bankers Trust Company, 130 Liberty Street, New York, New
York 10006. Director, Bankers Trust Company; Director, American Stock
Exchange; Director, Nestle S.A.; Director, Prudential Insurance Company;
Director, UAL Corporation; Chairman, Group of 30; North American Chairman,
Trilateral Commission; Co-Chairman, Bretton Woods Committee; Co-Chairman,
U.S./Hong Kong Economic Cooperation Committee; Director, American Council
on Germany; Director, Aspen Institute; Director, Council on Foreign
Relations; Director, The Japan Society; and Trustee, The American Assembly.
Melvin A. Yellin, Bankers Trust Company, 130 Liberty Street, New York, New
York 10006. Senior Managing Director and General Counsel of Bankers Trust
New York Corporation and Bankers Trust Company; Director, 1136 Tenants
Corporation; and Director, ABA Securities Association.
ITEM 29. Principal Underwriters
a) Edgewood Service, Inc., the placement agent for shares of the
Registrant, also acts as principal underwriter for the following open-end
investment companies: BT Investment Funds, BT Advisor Funds, BT Pyramid
Mutual Funds, BT Institutional Funds, Excelsior Institutional Trust
(formerly, UST Master Funds, Inc.), Excelsior Tax-Exempt Funds, Inc.
(formerly, UST Master Tax-Exempt Funds, Inc.), Excelsior Intitutional
Trust, FTI Funds, FundManager Portfolios, Marketvest Funds, Marketvest
Funds, inc. and Old Westbury Funds, Inc.
b)
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Distributor With Registrant
Lawrence Caracciolo Director, President, --
Federated Investors Tower Edgewood Services, Inc.
Pittsburgh, PA 15222-3779
Arthur L. Cherry Director, --
Federated Investors Tower Edgewood Services, Inc.
Pittsburgh, PA 15222-3779
J. Christopher Donahue Director, --
Federated Investors Tower Edgewood Services, Inc.
Pittsburgh, PA 15222-3779
Ronald M. Petnuch Vice President, President and Treasurer
Federated Investors Tower Edgewood Services, Inc.
Pittsburgh, PA 15222-3779
Thomas P. Schmitt Vice President, --
Federated Investors Tower Edgewood Services, Inc.
Pittsburgh, PA 15222-3779
Ernest L. Linane Assistant Vice President, --
Federated Investors Tower Edgewood Services, Inc.
Pittsburgh, PA 15222-3779
S. Elliott Cohan Secretary, Assistant Secretary
Federated Investors Tower Edgewood Services, Inc.
Pittsburgh, PA 15222-3779
Thomas J. Ward Assistant Secretary, --
Federated Investors Tower Edgewood Services, Inc.
Pittsburgh, PA 15222-3779
Kenneth W. Pegher, Jr. Treasurer, --
Federated Investors Tower Edgewood Services, Inc.
Pittsburgh, PA 15222-3779
(c) None
ITEM 30. Location of Accounts and Records:
Registrant: Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Bankers Trust Company: 130 Liberty Street,
(Investment Adviser, Custodian New York, New York 10006.
and Administrator)
Investors Fiduciary Trust Company: 127 West 10th Street,
(Transfer Agent and Dividend Kansas City, MO 64105.
Distribution Agent)
Edgewood Services, Inc.: Clearing Operations, P.O. Box 897,
(Placement Agent Pittsburgh, Pennsylvania 15230-0897.
and Sub-Administrator)
ITEM 31. Management Services:
Not Applicable
ITEM 32. Undertakings
Not Applicable
SIGNATURES
Pursuant to the requirements of the Investment Company Act of 1940,
the Registrant, BT INVESTMENT PORTFOLIOS, has duly caused this 18th
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 19th day of May, 1997.
BT INVESTMENT PORTFOLIOS
By: /s/ Jay S. Neuman
Jay S. Neuman, Secretary
May 19, 1997
EXHIBIT 8 UNDER FORM N-1A
EXHIBIT 10 UNDER ITEM 601/REG. S-K
BANKERS TRUST COMPANY
One Bankers Trust Plaza, New York, New York 10006
Mailing Address:
P.O. Box 318, Church Street Station
New York, New York 10008
Mutual Fund/Business Trust/Series
CUSTODIAN AGREEMENT
AGREEMENT dated as of July 1, 1996 between BANKERS TRUST COMPANY
(the `Custodian'') and BT INVESTMENT PORTFOLIOS (the ``Customer'').
WHEREAS, the Customer may be organized with one or more series of
shares, each of which shall represent an interest in a separate portfolio
of Securities and Cash (each as hereinafter defined)(all such existing and
additional series now or hereafter listed on Exhibit A being hereafter
referred to individually as a `Portfolio'' and collectively, as the
`Portfolios''); and
WHEREAS, the Customer desires to appoint the Custodian as custodian on
behalf of the Portfolios under the terms and conditions set forth in this
Agreement, and the Custodian has agreed to so act as custodian.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements herein contained, the parties hereto agree as follows:
1. Employment of Custodian. The Customer hereby employs the
Custodian as custodian of all assets of each Portfolio which are delivered
to and accepted by the Custodian or any Subcustodian (as that term is
defined in Section 4) (the `Property'') pursuant to the terms and
conditions set forth herein. Without limitation, such Property shall
include stocks and other equity interests of every type, evidences of
indebtedness, other instruments representing same or rights or obligations
to receive, purchase, deliver or sell same and other non-cash investment
property of a Portfolio which is acceptable for deposit (`Securities'')
and cash from any source and in any currency (`Cash''). The Custodian
shall not be responsible for any property of a Portfolio held or received
by the Customer or others and not delivered to the Custodian or any
Subcustodian.
2. Maintenance of Securities and Cash at Custodian and Subcustodian
Locations. Pursuant to Instructions, the Customer shall direct the
Custodian to (a) settle Securities transactions and maintain cash in the
country or other jurisdiction in which the principal trading market for
such Securities is located, where such Securities are to be presented for
payment or where such Securities are acquired and (b) maintain cash and
cash equivalents in such countries in amounts reasonably necessary to
effect the Customer's transactions in such Securities. Instructions to
settle Securities transactions in any country shall be deemed to authorize
the holding of such Securities and Cash in that country.
3. Custody Account. The Custodian agrees to establish and maintain
one or more custody accounts on its books in the name of a Portfolio (each,
an `Account'') for any and all Property from time to time received and
accepted by the Custodian or any Subcustodian for the Account of such
Portfolio. Upon delivery by the Customer to the Custodian of any Property
belonging to a Portfolio, the Customer shall, by Instructions (as
hereinafter defined in Section 14), specifically indicate which Portfolio
such Property belongs or if such Property belongs to more than one
Portfolio shall allocate such Property to the appropriate Portfolio. The
Custodian shall allocate such Property to the Accounts in accordance with
the Instructions; provided that the Custodian shall have the right, in its
sole discretion, to refuse to accept any Property that is not in proper
form for deposit for any reason. The Customer on behalf of each Portfolio,
acknowledges its responsibility as a principal for all of its obligations
to the Custodian arising under or in connection with this Agreement,
warrants its authority to deposit in the appropriate Account any Property
received therefor by the Custodian or a Subcustodian and to give, and
authorize others to give, instructions relative thereto. The Custodian may
deliver securities of the same class in place of those deposited in the
Account.
The Custodian shall hold, keep safe and protect as custodian for the
Account, on behalf of the Customer, all Property in such Account. All
transactions, including, but not limited to, foreign exchange transactions,
involving the Property shall be executed or settled solely in accordance
with Instructions (which shall specifically reference the Account for which
such transaction is being settled), except that until the Custodian
receives Instructions to the contrary, the Custodian will:
(a) collect all interest and dividends and all other income and
payments, whether paid in cash or in kind, on the Property, as
the same become payable and credit the same to the appropriate
Account;
(b) present for payment all Securities held in an Account which are
called, redeemed or retired or otherwise become payable and all
coupons and other income items which call for payment upon
presentation to the extent that the Custodian or Subcustodian is
actually aware of such opportunities and hold the cash received
in such Account pursuant to this Agreement;
(c) (i) exchange Securities where the exchange is purely ministerial
(including, without limitation, the exchange of temporary
securities for those in definitive form and the exchange of
warrants, or other documents of entitlement to securities, for
the Securities themselves) and (ii) when notification of a tender
or exchange offer (other than ministerial exchanges described in
(i) above) is received for an Account, endeavor to receive
Instructions, provided that if such Instructions are not received
in time for the Custodian to take timely action, no action shall
be taken with respect thereto;
(d) whenever notification of a rights entitlement or a fractional
interest resulting from a rights issue, stock dividend or stock
split is received for an Account and such rights entitlement or
fractional interest bears an expiration date, if after
endeavoring to obtain Instructions such Instructions are not
received in time for the Custodian to take timely action or if
actual notice of such actions was received too late to seek
Instructions, sell in the discretion of the Custodian (which sale
the Customer hereby authorizes the Custodian to make) such rights
entitlement or fractional interest and credit the Account with
the net proceeds of such sale;
(e) execute in the Customer's name for an Account, whenever the
Custodian deems it appropriate, such ownership and other
certificates as may be required to obtain the payment of income
from the Property in such Account;
(f) pay for each Account, any and all taxes and levies in the nature
of taxes imposed on interest, dividends or other similar income
on the Property in such Account by any governmental authority.
In the event there is insufficient Cash available in such Account
to pay such taxes and levies, the Custodian shall notify the
Customer of the amount of the shortfall and the Customer, at its
option, may deposit additional Cash in such Account or take steps
to have sufficient Cash available. The Customer agrees, when
and if requested by the Custodian and required in connection with
the payment of any such taxes to cooperate with the Custodian in
furnishing information, executing documents or otherwise; and
(g) appoint brokers and agents for any of the ministerial
transactions involving the Securities described in (a) - (f),
including, without limitation, affiliates of the Custodian or any
Subcustodian.
4. Subcustodians and Securities Systems. The Customer authorizes and
instructs the Custodian to hold the Property in each Account in custody
accounts which have been established by the Custodian with (a) one of its
U.S. branches or another U.S. bank or trust company or branch thereof
located in the U.S. which is itself qualified under the Investment Company
Act of 1940, as amended (`1940 Act''), to act as custodian (individually,
a `U.S. Subcustodian''), or a U.S. securities depository or clearing agent
or system in which the Custodian or a U.S. Subcustodian participates
(individually, a `U.S. Securities System'') or (b) one of its non-U.S.
branches or majority-owned non-U.S. subsidiaries, a non-U.S. branch or
majority-owned subsidiary of a U.S. bank or a non-U.S. bank or trust
company, acting as custodian (individually, a `non-U.S. Subcustodian'';
U.S. Subcustodians and non-U.S. Subcustodians, collectively,
`Subcustodians''), or a non-U.S. depository or clearing agency or system
in which the Custodian or any Subcustodian participates (individually, a
`non-U.S. Securities System''; U.S. Securities System and non-U.S.
Securities System, collectively, `Securities System''), provided that in
each case in which a U.S. Subcustodian or U.S. Securities System is
employed, each such Sub-Custodian or Securities System shall have been
approved by Instructions; provided further that in each case in which a
non-U.S. Subcustodian or non-U.S. Securities System is employed, (a) such
Subcustodian or Securities System either is (i) a `qualified U.S. bank''
as defined by Rule 17f-5 under the 1940 Act (`Rule 17f-5'') or (ii) an
`eligible foreign custodian'' within the meaning of rule 17f-5 or such
Subcustodian or Securities System is the subject of an order granted by
the U.S. Securities and Exchange Commission (`SEC'') exempting such agent
or the subcustody arrangements thereto from all or part of the provisions
of Rule 17f-5 and (b) the agreement between the Custodian and such non-
U.S. Subcustodian has been approved by Instructions; it being understood
that the Custodian shall have no liability or responsibility for
determining whether the approval by the Customer of any Subcustodian or
Securities System has been proper under the 1940 Act or any rule or
regulations thereunder.
Upon receipt of Instructions, the Custodian agrees to cease the
employment of any Subcustodian or Securities System with respect to the
Customer, and if desirable and practicable, appoint a replacement
subcustodian or securities system in accordance with the provisions of this
Section. In addition, the Custodian may, at any time in its discretion,
upon written notification to the Customer, terminate the employment of any
Subcustodian or Securities System.
Upon request of the Customer, the Custodian shall deliver to the
Customer annually a certificate stating: (a) the identity of each non-
U.S. Subcustodian and non-U.S. Securities System then acting on behalf
of the Custodian and the name and address of the governmental agency or
other regulatory authority that supervises or regulates such non-U.S.
Subcustodian and non-U.S. Securities System; (b) the countries in which
each non-U.S. Subcustodian or non-U.S. Securities System is located; and
(c) so long as Rule 17f-5 requires the Customer's Board of Trustees to
directly approve its foreign custody arrangements, such other information
relating to such non-U.S. Subcustodians and non-U.S. Securities Systems as
may reasonably be requested by the Customer to ensure compliance with Rule
17f-5. So long as Rule 17f-5 requires the Customer's Board of Trustees to
directly approve its foreign custody arrangements, the Custodian also shall
furnish annually to the Customer information concerning such non-U.S.
Subcustodians and non-U.S. Securities Systems similar in kind and scope as
that furnished to the Customer in connection with the initial approval of
this Agreement. Custodian agrees to promptly notify the Customer, if in
the normal course of its custodian activities, the Custodian has reason to
believe that any non-U.S. Subcustodian or non-U.S. Securities System has
ceased to be a qualified U.S. bank or an eligible foreign custodian each
within the meaning of Rule 17f-5 or has ceased to be subject to an
exemptive order from the SEC.
5. Use of Subcustodian. With respect to Property in an Account
which is maintained by the Custodian in the custody of a Subcustodian
employed pursuant to Section 4:
(a) The Custodian will identify on its books as belonging to the
Customer on behalf of a Portfolio, any Property held by such
Subcustodian.
(b) Any Property in the Account held by a Subcustodian will be
subject only to the instructions of the Custodian or its agents.
(c) Property deposited with a Subcustodian will be maintained in an
account holding only assets for customers of the Custodian.
(d) Any agreement the Custodian shall enter into with a non-U.S.
Subcustodian with respect to the holding of Property shall
require that (i) the Account will be adequately indemnified or
its losses adequately insured; (ii) the Securities are not
subject to any right, charge, security interest, lien or claim
of any kind in favor of such Subcustodian or its creditors
except a claim for payment in accordance with such agreement
for their safe custody or administration and expenses related
thereto, (iii) beneficial ownership of such Securities be freely
transferable without the payment of money or value other than for
safe custody or administration and expenses related thereto, (iv)
adequate records will be maintained identifying the Property held
pursuant to such Agreement as belonging to the Custodian, on
behalf of its customers and (v) to the extent permitted by
applicable law, officers of or auditors employed by, or other
representatives of or designated by, the Custodian, including
the independent public accountants of or designated by, the
Customer be given access to the books and records of such
Subcustodian relating to its actions under its agreement
pertaining to any Property by it thereunder or confirmation of or
pertinent information contained in such books and records be
furnished to such persons designated by the Custodian.
6. Use of Securities System. With respect to Property in the
Account(s) which are maintained by the Custodian or any Subcustodian in
the custody of a Securities System employed pursuant to Section 4:
(a) The Custodian shall, and the Subcustodian will be required by its
agreement with the Custodian to, identify on its books such
Property as being held for the account of the Custodian or
Subcustodian for its customers.
(b) Any Property held in a Securities System for the account of
the Custodian or a Subcustodian will be subject only to the
instructions of the Custodian or such Subcustodian, as the
case may be.
(c) Property deposited with a Securities System will be maintained in
an account holding only assets for customers of the Custodian
or Subcustodian, as the case may be, unless precluded by
applicable law, rule, or regulation.
(d) The Custodian shall provide the Customer with any report obtained
by the Custodian on the Securities System's accounting system,
internal accounting control and procedures for safeguarding
securities deposited in the Securities System.
7. Agents. The Custodian may at any time or times in its sole
discretion appoint (or remove) any other U. S. bank or trust company which
is itself qualified under the 1940 Act to act as custodian, as its agent to
carry out such of the provisions of this Agreement as the Custodian may
from time to time direct; provided, however, that the appointment of any
agent shall not relieve the Custodian of its responsibilities or
liabilities hereunder.
8. Records, Ownership of Property, Statements, Opinions of
Independent Certified Public Accountants.
(a) The ownership of the Property whether Securities, Cash and/or
other property, and whether held by the Custodian or a Subcustodian or in a
Securities System as authorized herein, shall be clearly recorded on the
Custodian's books as belonging to the appropriate Account and not for the
Custodian's own interest. The Custodian shall keep accurate and detailed
accounts of all investments, receipts, disbursements and other transactions
for each Account. All accounts, books and records of the Custodian
relating thereto shall be open to inspection and audit at all reasonable
times during normal business hours by any person designated by the
Customer. All such accounts shall be maintained and preserved in the form
reasonably requested by the Customer. The Custodian will supply to the
Customer from time to time, as mutually agreed upon, a statement in respect
to any Property in an Account held by the Custodian or by a Subcustodian.
In the absence of the filing in writing with the Custodian by the Customer
of exceptions or objections to any such statement within sixty (60) days of
the mailing thereof, the Customer shall be deemed to have approved such
statement and in such case or upon written approval of the Customer of any
such statement, such statement shall be presumed to be for all purposes
correct with respect to all information set forth therein.
(b) The Custodian shall take all reasonable action as the Customer
may request to obtain from year to year favorable opinions from the
Customer's independent certified public accountants with respect to the
Custodian's activities hereunder in connection with the preparation of the
Customer's Form N-1A and the Customer's Form N-SAR or other periodic
reports to the SEC and with respect to any other requirements of the SEC.
(c) At the request of the Customer, the Custodian shall deliver to
the Customer a written report prepared by the Custodian's independent
certified public accountants with respect to the services provided by the
Custodian under this Agreement, including, without limitation, the
Custodian's accounting system, internal accounting control and procedures
for safeguarding Cash and Securities, including Cash and Securities
deposited and/or maintained in a securities system or with a Subcustodian.
Such report shall be of sufficient scope and in sufficient detail as may
reasonably be required by the Customer and as may reasonably be obtained by
the Custodian.
(d) The Customer may elect to participate in any of the electronic
on-line service and communications systems offered by the Custodian which
can provide the Customer, on a daily basis, with the ability to view on-
line or to print on hard copy various reports of Account activity and of
Securities and/or Cash being held in any Account. To the extent that such
service shall include market values in Securities in an Account, the
Customer hereby acknowledges that the Custodian now obtains and may in the
future obtain information on such values from outside sources that the
Custodian considers to be reliable and the Customer agrees that the
Custodian (i) does not verify or represent or warrant either the
reliability of such service nor the accuracy or completeness of any such
information furnished or obtained by or through such service and (ii) shall
be without liability in selecting and utilizing such service or furnishing
any information derived therefrom.
9. Holding of Securities, Nominees, etc. Securities in the Account
which are held by the Custodian or any Subcustodian may be held by such
entity in the name of the Customer, on behalf of a Portfolio, in the
Custodian's or Subcustodian's name, in the name of the Custodian's or
Subcustodian's nominee, or in bearer form. Securities that are held by a
Subcustodian or which are eligible for deposit in a Securities System as
provided above may be maintained in the Subcustodian or the Securities
System in an account for the Customer's or Subcustodian's customers, unless
prohibited by law, rule, or regulation. The Custodian or Subcustodian, as
the case may be, may combine certificates representing Securities held in
an Account with certificates of the same issue held by it as fiduciary or
as a custodian. In the event that any Securities in the name of the
Custodian or its nominee or held by a Subcustodian and registered in the
name of such Subcustodian or its nominee are called for partial redemption
by the issuer of such Security, the Custodian may, subject to the rules or
regulations pertaining to allocation of any Securities System in which such
Securities have been deposited, allot, or cause to be allotted, the called
portion of the respective beneficial holders of such class of security in
any manner the Custodian deems to be fair and equitable.
10. Proxies, etc. With respect to any proxies, notices, reports or
other communications relative to any of the Securities in any Account, the
Custodian shall perform such services and only such services relative
thereto as are (i) set forth in Section 3 of this Agreement, (ii) described
in Exhibit B attached hereto (as such service therein described may be in
effect from time to time) (the `Proxy Service'') and (iii) as may
otherwise be agreed upon between the Custodian and the Customer. The
liability and responsibility of the Custodian in connection with the Proxy
Service referred to in (ii) of the immediately preceding sentence and in
connection with any additional services which the Custodian and the
Customer may agree upon as provided in (iii) of the immediately preceding
sentence shall be as set forth in the description of the Proxy Service and
may be agreed upon by the Custodian and the Customer in connection with the
furnishing of any such additional service and shall not be affected by any
other term of this Agreement. Neither the Custodian nor its nominees or
agents shall vote upon or in respect of any of the Securities in an
Account, execute any form of proxy to vote thereon, or give any consent or
take any action (except as provided in Section 3) with respect thereto
except upon the receipt of Instructions relative thereto.
11. Segregated Account. To assist the Customer in complying with the
requirements of the 1940 Act and the rules and regulations thereunder, the
Custodian shall, upon receipt of Instructions, establish and maintain a
segregated account or accounts on its books for and on behalf of a
Portfolio.
12. Settlement Procedures. Securities will be transferred, exchanged
or delivered by the Custodian or a Subcustodian upon receipt by the
Custodian of Instructions which include all information required by the
Custodian. Settlement and payment for Securities received for an Account
and delivery of Securities out of such Account may be effected in
accordance with the customary or established securities trading or
securities processing practices and procedures in the jurisdiction or
market in which the transaction occurs, including, without limitation,
delivering Securities to the purchaser thereof or to a dealer therefor (or
an agent for such purchaser or dealer) against a receipt with the
expectation of receiving later payment for such Securities from such
purchaser or dealer, as such practices and procedures may be modified or
supplemented in accordance with the standard operating procedures of the
Custodian in effect from time to time for that jurisdiction or market.
Provided that the Custodian effects transactions in accordance with the
customary or established securities trading or securities processing
practice or procedures in the applicable jurisdiction or market, it shall
not be responsible for any loss arising therefrom. Subject to the exercise
of reasonable care, the Custodian may elect to effect transactions
otherwise in a jurisdiction or market.
Notwithstanding that the Custodian may settle purchases and sales
against, or credit income to, an Account, on a contractual basis, as
outlined in the Investment Manager User Guide provided to the Customer by
the Custodian, the Custodian may, at its sole option, reverse such credits
or debits to the appropriate Account in the event that the transaction does
not settle, or the income is not received in a timely manner, and the
Customer agrees to hold the Custodian harmless from any losses which may
result therefrom.
Except as otherwise may be agreed upon by the parties hereto, the
Custodian shall not be required to comply with Instructions to settle the
purchase of any Securities for an Account unless there is sufficient Cash
in such Account at the time or to settle the sale of any Securities in such
Account unless such Securities are in deliverable form. Notwithstanding
the foregoing, if the purchase price of such securities exceeds the amount
of Cash in an Account at the time of settlement of such purchase, the
Custodian may, in its sole discretion, but in no way shall have any
obligation to, permit an overdraft in such Account in the amount of the
difference solely for the purpose of facilitating the settlement of such
purchase of securities for prompt delivery to such Account. The Customer
agrees to immediately repay the amount of any such overdraft in the
ordinary course of business and further agrees to indemnify and hold the
Custodian harmless from and against any and all losses, costs, including,
without limitation the cost of funds, and expenses incurred in connection
with such overdraft. The Customer agrees that it will not use the Account
to facilitate the purchase of securities without sufficient funds in the
Account (which funds shall not include the proceeds of the sale of the
purchased securities).
13. Permitted Transactions. The Customer agrees that it will cause
transactions to be made pursuant to this Agreement only upon Instructions
in accordance Section 14 and only for the purposes listed below.
(a) In connection with the purchase or sale of Securities at prices
as confirmed by Instructions.
(b) When Securities are called, redeemed or retired, or otherwise
become payable.
(c) In exchange for or upon conversion into other securities alone or
other securities and cash pursuant to any plan or merger, consolidation,
reorganization, recapitalization or readjustment.
(d) Upon conversion of Securities pursuant to their terms into other
securities.
(e) Upon exercise of subscription, purchase or other similar rights
represented by Securities.
(f) For the payment of interest, taxes, management or supervisory
fees, distributions or operating expenses.
(g) In connection with any borrowings by the Customer requiring a
pledge of Securities, but only against receipt of amounts borrowed.
(h) In connection with any loans, but only against receipt of
collateral as specified in Instructions which shall reflect any
restrictions applicable to the Customer.
(i) For the purpose of redeeming shares of the capital stock of the
Customer against delivery of the shares to be redeemed to the Custodian, a
Subcustodian or the Customer's transfer agent.
(j) For the purpose of redeeming in kind shares of the Customer
against delivery of the shares to be redeemed to the Custodian, a
Subcustodian or the Customer's transfer agent.
(k) For delivery in accordance with the provisions of any agreement
among the Customer, on behalf of a Portfolio, the Custodian and a broker-
dealer registered under the Securities Exchange Act of 1934 and a member of
the National Association of Securities Dealers, Inc., relating to
compliance with the rules of The Options Clearing Corporation, the
Commodities Futures Trading Commission and of any registered national
securities exchange, or of any similar organization or organizations,
regarding escrow or other arrangements in connection with transactions by
the Customer.
(l) For release of Securities to designated brokers under covered
call options, provided, however, that such Securities shall be released
only upon payment to the Custodian of monies for the premium due and a
receipt for the Securities which are to be held in escrow. Upon exercise
of the option, or at expiration, the Custodian will receive the Securities
previously deposited from broker. The Custodian will act strictly in
accordance with Instructions in the delivery of Securities to be held in
escrow and will have no responsibility or liability for any such Securities
which are not returned promptly when due other than to make proper request
for such return.
(m) For spot or forward foreign exchange transactions to facilitate
security trading or receipt of income from Securities related transactions.
(n) Upon the termination of this Agreement as set forth in Section
20.
(o) For other proper purposes.
The Customer agrees that the Custodian shall have no obligation to
verify the purpose for which a transaction is being effected.
14. Instructions. The term `Instructions'' means instructions from
the Customer in respect of any of the Custodian's duties hereunder which
have been received by the Custodian at its address set forth in Section 21
below (i) in writing (including, without limitation, facsimile
transmission) or by tested telex signed or given by such one or more person
or persons as the Customer shall have from time to time authorized in
writing to give the particular class of Instructions in question and whose
name and (if applicable) signature and office address have been filed with
the Custodian, or (ii) which have been transmitted electronically through
an electronic on-line service and communications system offered by the
Custodian or other electronic instruction system acceptable to the
Custodian, or (iii) a telephonic or oral communication by one or more
persons as the Customer shall have from time to time authorized to give the
particular class of Instructions in question and whose name has been filed
with the Custodian; or (iv) upon receipt of such other form of instructions
as the Customer may from time to time authorize in writing and which the
Custodian has agreed in writing to accept. Instructions in the form of
oral communications shall be confirmed by the Customer by tested telex or
writing in the manner set forth in clause (i) above, but the lack of such
confirmation shall in no way affect any action taken by the Custodian in
reasonable reliance upon such oral instructions prior to the Custodian's
receipt of such confirmation. Instructions may relate to specific
transactions or to types or classes of transactions, and may be in the form
of standing instructions.
The Custodian shall have the right to assume in the absence of notice
to the contrary from the Customer that any person whose name is on file
with the Custodian pursuant to this Section has been authorized by the
Customer to give the Instructions in question and that such authorization
has not been revoked. The Custodian may act upon and conclusively rely on,
without any liability to the Customer or any other person or entity for any
losses resulting therefrom, any Instructions reasonably believed by it to
be furnished by the proper person or persons as provided above.
15. Standard of Care. The Custodian shall be responsible for the
performance of only such duties as are set forth herein or contained in
Instructions given to the Custodian which are not contrary to the
provisions of this Agreement. The Custodian will use reasonable care with
respect to the safekeeping of Property in each Account and, except as
otherwise expressly provided herein, in carrying out its obligations under
this Agreement. So long as and to the extent that it has exercised
reasonable care, the Custodian shall not be responsible for the title,
validity or genuineness of any Property or other property or evidence of
title thereto received by it or delivered by it pursuant to this Agreement
and shall be held harmless in acting upon, and may conclusively rely on,
without liability for any loss resulting therefrom, any notice, request,
consent, certificate or other instrument reasonably believed by it to be
genuine and to be signed or furnished by the proper party or parties,
including, without limitation, Instructions, and shall be indemnified by
the Customer for any losses, damages, costs and expenses (including,
without limitation, the fees and expenses of counsel) incurred by the
Custodian and arising out of action taken or omitted with reasonable care
by the Custodian hereunder or under any Instructions. The Custodian shall
be liable to the Customer for any act or omission to act of any
Subcustodian to the same extent as if the Custodian committed such act
itself. Where, under applicable law, regulation, or practice (in order to
facilitate the settlement of transactions related thereto), or where the
Customer otherwise elects, Securities are held in a Securities System in a
particular market, the Custodian shall only be responsible or liable for
losses arising from employment of such Securities System caused by the
Custodian's own failure to exercise reasonable care. Where the Custodian
otherwise elects to employ a Securities System for holding Securities in a
particular market, the Custodian shall be liable to the Customer for any
act or omission of any Securities System to the same extent as if the
Custodian committed such act itself. In the event of any loss to the
Customer by reason of the failure of the Custodian or a Subcustodian to
utilize reasonable care, the Custodian shall be liable to the Customer to
the extent of the Customer's actual damages at the time such loss was
discovered without reference to any special conditions or circumstances.
In no event shall the Custodian be liable for any consequential or special
damages. The Custodian shall be entitled to rely, and may act, on advice
of counsel (who may be counsel for the Customer) on all matters and shall
be without liability for any action reasonably taken or omitted pursuant to
such advice.
In the event the Customer subscribes to an electronic on-line service
and communications system offered by the Custodian, the Customer shall be
fully responsible for the security of the Customer's connecting terminal,
access thereto and the proper and authorized use thereof and the initiation
and application of continuing effective safeguards with respect thereto and
agree to defend and indemnify the Custodian and hold the Custodian harmless
from and against any and all losses, damages, costs and expenses (including
the fees and expenses of counsel) incurred by the Custodian as a result of
any improper or unauthorized use of such terminal by the Customer or by any
others.
All collections of funds or other property paid or distributed in
respect of Securities in an Account, including funds involved in third-
party foreign exchange transactions, shall be made at the risk of the
Customer.
Subject to the exercise of reasonable care, the Custodian shall have
no liability for any loss occasioned by delay in the actual receipt of
notice by the Custodian or by a Subcustodian of any payment, redemption or
other transaction regarding Securities in each Account in respect of which
the Custodian has agreed to take action as provided in Section 3 hereof.
The Custodian shall not be liable for any loss resulting from, or caused
by, or resulting from acts of governmental authorities (whether de jure or
de facto), including, without limitation, nationalization, expropriation,
and the imposition of currency restrictions; devaluations of or
fluctuations in the value of currencies; changes in laws and regulations
applicable to the banking or securities industry; market conditions that
prevent the orderly execution of securities transactions or affect the
value of Property; acts of war, terrorism, insurrection or revolution;
strikes or work stoppages; the inability of a local clearing and settlement
system to settle transactions for reasons beyond the control of the
Custodian; hurricane, cyclone, earthquake, volcanic eruption, nuclear
fusion, fission or radioactivity, or other acts of God.
The Custodian shall have no liability in respect of any loss, damage
or expense suffered by the Customer, insofar as such loss, damage or
expense arises from the performance of the Custodian's duties hereunder by
reason of the Custodian's reliance upon records that were maintained for
the Customer by entities other than the Custodian prior to the Custodian's
employment under this Agreement.
The provisions of this Section shall survive termination of this
Agreement.
16. Investment Limitations and Legal or Contractual Restrictions or
Regulations. The Custodian shall not be liable to the Customer and the
Customer agrees to indemnify the Custodian and its nominees, for any loss,
damage or expense suffered or incurred by the Custodian or its nominees
arising out of any violation of any investment restriction or other
restriction or limitation applicable to the Customer or Portfolio pursuant
to any contract or any law or regulation. The provisions of this Section
shall survive termination of this Agreement.
17. Fees and Expenses. The Customer agrees to pay to the Custodian
such compensation for its services pursuant to this Agreement as may be
mutually agreed upon in writing from time to time and the Custodian's
reasonable out-of-pocket or incidental expenses in connection with the
performance of this Agreement, including (but without limitation) legal
fees as described herein and/or deemed necessary in the judgment of the
Custodian to keep safe or protect the Property in the Account. The initial
fee schedule is attached hereto as Exhibit C. The Customer hereby agrees
to hold the Custodian harmless from any liability or loss resulting from
any taxes or other governmental charges, and any expense related thereto,
which may be imposed, or assessed with respect to any Property in the
Account and also agrees to hold the Custodian, its Subcustodians, and their
respective nominees harmless from any liability as a record holder of
Property in the Account. The Custodian is authorized to charge the
applicable Account for such items and the Custodian shall have a lien on
the Property in the applicable Account for any amount payable to the
Custodian under this Agreement, including but not limited to amounts
payable pursuant to the last paragraph of Section 12 and pursuant to
indemnities granted by the Customer under this Agreement. The provisions
of this Section shall survive the termination of this Agreement.
18. Tax Reclaims. With respect to withholding taxes deducted and
which may be deducted from any income received from any Property in an
Account, the Custodian shall perform such services with respect thereto as
are described in Exhibit D attached hereto and shall in connection
therewith be subject to the standard of care set forth in such Exhibit D.
Such standard of care shall not be affected by any other term of this
Agreement.
19. Amendment, Modifications, etc. No provision of this Agreement
may be amended, modified or waived except in a writing signed by the
parties hereto. No waiver of any provision hereto shall be deemed a
continuing waiver unless it is so designated. No failure or delay on the
part of either party in exercising any power or right under this Agreement
operates as a waiver, nor does any single or partial exercise of any power
or right preclude any other or further exercise thereof or the exercise of
any other power or right.
20. Termination. (a) Terminaton of Entire Agreement. This
Agreement may be terminated by the Customer or the Custodian by ninety (90)
days' written notice to the other; provided that notice by the Customer
shall specify the names of the persons to whom the Customer shall deliver
the Securities in each Account and to whom the Cash in such Account shall
be paid. If notice of termination is given by the Custodian, the Customer
shall, within ninety (90) days following the giving of such notice, deliver
to the Custodian a written notice specifying the names of the persons to
whom the Custodian shall deliver the Securities in each Account and to whom
the Cash in such Account shall be paid. In either case, the Custodian
shall deliver such Securities and Cash to the persons so specified, after
deducting therefrom any amounts which the Custodian determines to be owed
to it under Sections 12, 17, and 23. In addition, the Custodian may in its
discretion withhold from such delivery such Cash and Securities as may be
necessary to settle transactions pending at the time of such delivery. The
Customer grants to the Custodian a lien and right of setoff against the
Account and all Property held therein from time to time in the full amount
of the foregoing obligations. If within ninety (90) days following the
giving of a notice of termination by the Custodian, the Custodian does not
receive from the Customer a written notice specifying the names of the
persons to whom the Custodian shall deliver the Securities in each Account
and to whom the Cash in such Account shall be paid, the Custodian, at its
election, may deliver such Securities and pay such Cash to a bank or trust
company doing business in the State of New York to be held and disposed of
pursuant to the provisions of this Agreement, or may continue to hold such
Securities and Cash until a written notice as aforesaid is delivered to the
Custodian, provided that the Custodian's obligations shall be limited to
safekeeping.
(b) Termination as to One or More Portfolios. This Agreement may be
terminated by the Customer or the Custodian as to one or more Portfolios
(but less than all of the Portfolios) by delivery of an amended Exhibit A
deleting such Portfolios, in which case termination as to such deleted
Portfolios shall take effect ninety (90) days after the date of such
delivery, or such earlier time as mutually agreed. The execution and
delivery of an amended Exhibit A which deletes one or more Portfolios shall
constitute a termination of this Agreement only with respect to such
deleted Portfolio(s), shall be governed by the preceding provisions of
Section 20 as to the identification of a successor custodian and the
delivery of Cash and Securities of the Portfolio(s) so deleted to such
successor custodian, and shall not affect the obligations of the Custodian
and the Customer hereunder with respect to the other Portfolios set forth
in Exhibit A, as amended from time to time.
21. Notices. Except as otherwise provided in this Agreement, all
requests, demands or other communications between the parties or notices in
connection herewith (a) shall be in writing, hand delivered to sent by
telex, cable, facsimile or other means of electronic communication agreed
upon by the parties hereto addressed, if to the Customer, to:
BT Investment Portfolios
c/o Bankers Trust Company
4 Albany Street, 2nd Floor
New York, NY 10006
Attention: William O'Dell
Phone: (212) 250-2838
Fax: (212) 250-4462
if to the Custodian, to:
Bankers Trust Company
16 Wall Street, 4th Floor
New York, NY 10005
Attention: Vince Fiordimondo
Phone: (212) 618-3602
Fax: (212) 618-3823
or in either case to such other address as shall have been furnished to the
receiving party pursuant to the provisions hereof and (b) shall be deemed
effective when received, or, in the case of a telex, when sent to the
proper number and acknowledged by a proper answerback.
22. Several Obligations of the Portfolios. The respect to any
obligations of the Customer on behalf of each Portfolio and each of its
related Accounts arising out of this Agreement, the Custodian shall look
for payment or satisfaction of any obligation solely to the assets and
property of the Portfolio and such Accounts to which such obligation
relates as though the Customer had separately contracted with the Custodian
by separate written instrument with respect to each Portfolio and its
related Accounts. No Portfolio shall be liable for the obligations or
liabilities of any other Portfolio. No shareholder, trustee, director,
officer, employee or agent of any Portfolio shall be subject to claims
against or obligations of any other Portfolio to any extent whatsoever, but
the Portfolio only shall be liable.
23. Security for Payment. To secure payment of all obligations due
hereunder, the Customer hereby grants to Custodian a continuing security
interest in and right of setoff against the Account and all Property held
therein from time to time in the full amount of such obligations; provided
that, if there is more than one Account and the obligations secured
pursuant to this Section can be allocated to a specific Account or the
Portfolio related to such Account, such security interest and right of
setoff will be limited to Property held for that Account only and its
related Portfolio. Should the Customer fail to pay promptly any amounts
owed hereunder, Custodian shall be entitled to use available Cash in the
Account or such applicable Account, as the case may be, and to dispose of
Securities in the applicable Account as is necessary. In any such case and
without limiting the foregoing, Custodian shall be entitled to take such
other action(s) or exercise such other options, powers and rights as
Custodian now or hereafter has as a secured creditor under the New York
Uniform Commercial Code or any other applicable law.
24. Representations and Warranties.
(a) The Customer hereby represents and warrants to the Custodian
that:
(i) the employment of the Custodian and the terms of this
Agreement do not violate any obligation by which the Customer is bound,
whether arising by contract, operation of law or otherwise;
(ii) this Agreement has been duly authorized by appropriate
action and when executed and delivered will be binding upon the Customer
and each Portfolio in accordance with its terms; and
(iii) the Customer will deliver to the Custodian such
evidence of such authorization as the Custodian may reasonably require,
whether by way of a certified resolution or otherwise.
(b) The Custodian hereby represents and warrants to the Customer
that:
(i) its employment as Custodian and the terms of this Agreement
do not violate any obligation by which the Custodian is bound, whether
arising by contract, operation of law or otherwise;
(ii) this Agreement has been duly authorized by appropriate
action and when executed and delivered will be binding upon the Custodian
in accordance with its terms;
(iii) the Custodian will deliver to the Customer such
evidence of such authorization as the Customer may reasonably require,
whether by way of a certified resolution or otherwise; and
(iv) Custodian is qualified as a custodian under Section 26(a) of
the 1940 Act and warrants that it will remain so qualified or upon ceasing
to be so qualified shall promptly notify the Customer in writing.
25. Governing Law and Successors and Assigns. This Agreement shall
be governed by the law of the State of New York and shall not be assignable
by either party, but shall bind the successors in interest of the Customer
and the Custodian.
26. Publicity. Customer shall furnish to Custodian at its office
referred to in Section 21 above, prior to any distribution thereof, copies
of any material prepared for distribution to any persons who are not
parties hereto that refer in any way to the Custodian, provided that the
Customer may refer in its prospectus and other documents to the Custodian
in the manner set forth in Exhibit E attached to this contract. Customer
shall not distribute or permit the distribution of such materials if
Custodian reasonably objects in writing within ten (10) business days of
receipt thereof (or such other time as may be mutually agreed) after
receipt thereof. The provisions of this Section shall survive the
termination of this Agreement.
27. Representative Capacity and Binding Obligation. A copy of the
Declaration of Trust of the Customer is on file with The Secretary of the
Commonwealth of Massachusetts, and notice is hereby given that this
Agreement is not executed on behalf of the Trustees of the Customer as
individuals, and the obligations of this Agreement are not binding upon any
of the Trustees, officers or shareholders of the Customer individually but
are biding only upon the assets and property of the Portfolios.
The Custodian agrees that no shareholder, trustee or officer of the
Customer may be held personally liable or responsible for any obligations
of the Customer arising out of this Agreement.
28. Affiliation Between Custodian and Adviser and Customer. It is
understood that the trustees, officers, employees, agents and shareholders
of the Customer, and the officers, directors, employees, agents and
shareholders of Bankers Trust Company (`Adviser''), the investment adviser
to a corresponding series listed on Appendix A hereto as `Investment
Portfolio''in which the applicable Portfolio invests all of its net
investable assets, are or may be interested in Custodian as directors,
officers, employees, agents, stockholders, or otherwise, and that the
directors, officers, employees, agents or stockholders of Custodian may be
interested in the Customer as trustees, officers, employees, agents,
shareholders, or otherwise, or in Adviser as officers, directors,
employees, agents, shareholders or otherwise.
(i) No trustee, officer, employee or agent of the Customer, and no
officer, director, employee or agent of the Adviser acting pursuant to
any provision of the Investment Advisory Agreement (the `Advisory
Agreement') between the Customer and Adviser, shall have physical
access to the assets of the Customer held by Custodian or be
authorized or permitted to withdraw any investments of the Customer,
nor shall Custodian deliver any assets of the Customer to any such
person. No officer, director, employee or agent of Custodian who
holds any similar position with the Customer or who performs duties
under the Advisory Agreement shall have access to the assets of the
Trust.
(ii) Subject to Section 14 hereof, nothing in this Section 28 shall
prohibit any officer, employee or agent of the Customer, or any
officer, employee or agent of the Adviser, from giving Instructions to
Custodian as long as no such Instruction results in delivery or of
access to assets of the Customer prohibited by subclause (i) of this
Section 28.
29. Submission to Jurisdiction. Any suit, action or proceeding
arising out of this Agreement may be instituted in any State or Federal
court sitting in the City of New York, State of New York, United States of
America, and the Customer irrevocably submits to the non-exclusive
jurisdiction of any such court in any such suit, action or proceeding and
waives, to the fullest extent permitted by law, any objection which it may
now or hereafter have to the laying of venue of any such suit, action or
proceeding brought in such a court and any claim that such suit, action or
proceeding was brought in an inconvenient forum.
30. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original. This Agreement
shall become effective when one or more counterparts have been signed and
delivered by each of the parties hereto.
31. Confidentiality. The parties hereto agree that each shall treat
confidentially the terms and conditions of this Agreement and all
information provided by each party to the other regarding its business and
operations. All confidential information provided by a party hereto shall
be used by any other party hereto solely for the purpose of rendering
services pursuant to this Agreement and, except as may be required in
carrying out this Agreement, shall not be disclosed to any third party
without the prior consent of such providing party. The foregoing shall not
be applicable to any information that is publicly available when provided
or thereafter becomes publicly available other than through a breach of
this Agreement, or that is required or requested to be disclosed by any
bank or other regulatory examiner of the Custodian, Customer, or any
Subcustodian, any auditor of the parties hereto, by judicial or
administrative process or otherwise by applicable law or regulation.
32. Severability. If any provision of this Agreement is determined
to be invalid or unenforceable, such determination shall not affect the
validity or enforceability of any other provision of this Agreement.
33. Headings. The heading of the paragraphs hereof are included for
convenience of reference only and do not form a part of this Agreement.
BT INVESTMENT PORTFOLIOS
By: /s/ Thomas M. Lenz
Name: Thomas M. Lenz
Title: Secretary
BANKERS TRUST COMPANY
By: /s/ John P. Zori
Name: John P. Zori
Title: Vice President
EXHIBIT A
To Custodian Agreement dated as of July 1, 1996 between Bankers Trust
Company and BT Investment Portfolios.
LIST OF PORTFOLIOS
The following is a list of Portfolios referred to in the first WHEREAS
clause of the above-referred to Custodian Agreement. Terms used herein as
defined terms unless otherwise defined shall have the meanings ascribed to
them in the above-referred to Custodian Agreement.
Liquid Assets Portfolio
Asset Management Portfolio II
Asset Management Portfolio III
Small Cap Portfolio
Latin American Equity Portfolio
Pacific Basin Equity Portfolio
Global High Yield Securities Portfolio
European Equity Portfolio
International Bond Portfolio
Equity 500 Equal Weighted Index Portfolio
U.S. Bond Index Portfolio
Small Cap Index Portfolio
EAFE Equity Index Portfolio
Dated as of: July 1, 1996 BT INVESTMENT PORTFOLIOS
By: /s/ Thomas M. Lenz
Name: Thomas M. Lenz
Title: Secretary
BANKERS TRUST COMPANY
By: /s/ John P. Zori
Name: John P. Zori
Title: Vice President
EXHIBIT B
To Custodian Agreement dated as of July 1, 1996 between Bankers Trust
Company and BT Investment Portfolios
PROXY SERVICE
The following is a description of the Proxy Service referred to in
Section 10 of the above referred to Custodian Agreement. Terms used herein
as defined terms shall have the meanings ascribed to them therein unless
otherwise defined below.
The Custodian provides a service, described below, for the
transmission of corporate communications in connection with shareholder
meetings relating to Securities held in Argentina, Australia, Austria,
Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Indonesia,
Ireland, Italy, Japan, Korea, Malaysia, Mexico, Netherlands, New Zealand,
Pakistan, Poland, Singapore, South Africa, Spain, Sri Lanka, Sweden, United
Kingdom, United States, and Venezuela. For the United States and Canada,
the term `corporate communications'' means the proxy statements or meeting
agenda, proxy cards, annual reports and any other meeting materials
received by the Custodian. For countries other than the United States and
Canada, the term `corporate communications'' means the meeting agenda only
and does not include any meeting circulars, proxy statements or any other
corporate communications furnished by the issuer in connection with such
meeting. Non-meeting related corporate communications are not included in
the transmission service to be provided by the Custodian except upon
request as provided below.
The Custodian's process for transmitting and translating meeting
agendas will be as follows:
1) If the meeting agenda is not provided by the issuer in the
English language, and if the language of such agenda is in the
official language of the country in which the related security is
held, the Custodian will as soon as practicable after receipt of
the original meeting agenda by a Subcustodian provide an English
translation prepared by that Subcustodian.
2) If an English translation of the meeting agenda is furnished, the
local language agenda will not be furnished unless requested.
Translations will be free translations and neither the Custodian nor
any Subcustodian will be liable or held responsible for the accuracy
thereof or any direct or indirect consequences arising therefrom, including
without limitation arising out of any action taken or omitted to be taken
based thereon.
If requested, the Custodian will, on a reasonable efforts basis,
endeavor to obtain any additional corporate communication such as annual or
interim reports, proxy statements, meeting circulars, or local language
agenda, and provide them in the form obtained.
Timing in the voting process is important and, in that regard, upon
receipt by the Custodian of notice from a Subcustodian, the Custodian will
provide a notice to the Customer indicating the deadline for receipt of its
instructions to enable the voting process to take place effectively and
efficiently. As voting procedures will vary from market to market,
attention to any required procedures will be very important. Upon timely
receipt of voting instructions, the Custodian will promptly forward such
instructions to the applicable Subcustodian. If voting instructions are
not timely received, the Custodian shall have no liability or obligation to
take any action.
For Securities held in markets other than those set forth in the first
paragraph, the Custodian will not furnish the material described above or
seek voting instructions. However, if requested to exercise voting rights
at a specific meeting, the Custodian will endeavor to do so on a reasonable
efforts basis without any assurance that such rights will be so exercised
at such meeting.
If the Custodian or any Subcustodian incurs extraordinary expenses in
exercising voting rights related to any Securities pursuant to appropriate
instructions or directions (e.g., by way of illustration only and not by
way of limitation, physical presence is required at a meeting and/or travel
expenses are incurred), such expenses will be reimbursed out of the Account
containing such Securities unless other arrangements have been made for
such reimbursement.
It is the intent of the Custodian to expand the Proxy Service to
include jurisdictions which are not currently included as set forth in the
second paragraph hereof. The Custodian will notify the Customer as to the
inclusion of additional countries or deletion of existing countries after
their inclusion or deletion and this Exhibit B will be deemed to be
automatically amended to include or delete such countries as the case may
be.
Dated as of: July 1, 1996 BT INVESTMENT PORTFOLIOS
By: /s/ Thomas M. Lenz
Name: Thomas M. Lenz
Title: Secretary
BANKERS TRUST COMPANY
By: /s/ John P. Zori
Name: John P. Zori
Title: Vice President
EXHIBIT C
To Custodian Agreement dated as of July 1, 1996 between Bankers Trust
Company and BT Investment Portfolios.
CUSTODY FEE SCHEDULE
This Exhibit C shall be amended upon delivery by the Custodian of a new
Exhibit C to the Customer and acceptance thereof by the Customer and shall
be effective as of the date of acceptance by the Customer or a date agreed
upon between the Custodian and the Customer.
EXHIBIT D
To Custodian Agreement dated as of July 1, 1996 between Bankers Trust
Company and BT Investment Portfolios.
TAX RECLAIMS
Pursuant to Section 18 of the above referred to Custodian Agreement,
the Custodian shall perform the following services with respect to
withholding taxes imposed or which may be imposed on income from Property
in the Account. Terms used herein as defined terms shall unless otherwise
defined have the meanings ascribed to them in the above referred to
Custodian Agreement.
When withholding tax has been deducted with respect to income from any
Property in an Account, the Customer will actively pursue on a reasonable
efforts basis the reclaim process, provided that the Custodian shall not be
required to institute any legal or administrative proceeding against any
Subcustodian or other person. The Custodian will provide fully detailed
advices/vouchers to support reclaims submitted to the local authorities by
the Custodian or its designee. In all cases of withholding, the Custodian
will provide full details to the Customer. If exemption from withholding
at the source can be obtained in the future, the Custodian will notify the
Customer and advise what documentation, if any, is required to obtain the
exemption. Upon receipt of such documentation from the Customer, the
Custodian will file for exemption on the Customer's behalf and notify the
Customer when it has been obtained.
In connection with providing the foregoing service, the Custodian
shall be entitled to apply categorical treatment of the Customer according
to the Customer's nationality, the particulars of its organization and
other relevant details that shall be supplied by the Customer. It shall be
the duty of the Customer to inform the Customer of any change in the
organization, domicile or other relevant fact concerning tax treatment of
the Customer and further to inform the Custodian if the customer is or
becomes the beneficiary of any special ruling or treatment not applicable
to the general nationality and category or entity of which the Customer is
a part under general laws and treaty provisions. The Custodian may rely on
any such information provided by the Customer.
In connection with providing the foregoing service, the Custodian may
also rely on professional tax services published by a major international
accounting firm and/or advice received from a Subcustodian in the
jurisdictions in question. In addition, the Custodian may seek the advice
of counsel or other professional tax advisers in such jurisdictions. The
Custodian is entitled to rely, and may act, on information set forth in
such services and on advice received from a Subcustodian, counsel or other
professional tax advisers and shall be without liability to the Customer
for any action reasonably taken or omitted pursuant to information
contained in such services or such advice.
Dated as of: July 1, 1996BT INVESTMENT PORTFOLIOS
By: /s/ Thomas M. Lenz
Name: Thomas M. Lenz
Title: Secretary
BANKERS TRUST COMPANY
By: /s/ John P. Zori
Name: John P. Zori
Title: Vice President
EXHIBIT E
To Custodian Agreement dated as of July 1, 1996 between Bankers Trust
Company and BT Investment Portfolios.
APPROVED REFERENCE TO CUSTODIAN
`Bankers Trust acts as Custodian of the assets of the Trust and the
Portfolio..."
