1933 Act File No. 33-62103
1940 Act File No. 811-7347
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No. ....................
Post-Effective Amendment No. 7 ...................... X
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 10 ..................................... X
BT ADVISOR FUNDS
(Exact Name of Registrant as Specified in Charter)
5800 Corporate Drive, Pittsburgh, Pennsylvania 15237-7010
(Address of Principal Executive Offices)
(412) 288-1900
(Registrant's Telephone Number)
Jay S. Neuman, Esquire Copies to: Burton M. Leibert, Esq.
Federated Investors Tower Willkie Farr & Gallagher
Pittsburgh, Pennsylvania 15222-3779 One Citicorp Center
(Name and Address of Agent for Service) 153 East 53rd Street
New York, New York 10022
It is proposed that this filing will become effective
(check appropriate box)
[X] immediately upon filing pursuant to paragraph (b) [ ] on pursuant to
paragraph (b) [ ] 60 days after filing pursuant to paragraph (a)(1) [ ] on
(date) pursuant to paragraph (a)(1) [ ] 75 days after filing pursuant to
paragraph (a)(2) [ ] on (date) pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
BT Investment Portfolios has also executed this Registration Statement.
<PAGE>
CROSS-REFERENCE SHEET
This Amendment to the Registration Statement of BT ADVISOR FUNDS, is
comprised of three Funds: (1) U.S. Bond Index Fund, (2) Small Cap Index Fund,
and (3) EAFE(R) Equity Index Fund and is comprised of the following:
PART A. INFORMATION REQUIRED IN A PROSPECTUS.
<TABLE>
<CAPTION>
Prospectus Heading
(Rule 404(c) Cross Reference)
<S> <C> <C>
Item 1. Cover Page....................(1-3)Cover Page.
Item 2. Synopsis......................(1-3)Summary of Fund Expenses.
Item 3. Condensed Financial
Information..................(1-3)Financial Highlights; (1-3)Performance.
Item 4. General Description of
Registrant...................(1-3)The Fund(s); Investment Principles and Risks; Investment Objectives and Policies;
Special Information
Concerning Master-Feeder Fund Structure; Securities and Investment Practices; Appendix.
Item 5. Management of the Fund........(1-3)Management of the Trust(s) and the Portfolio(s).
Item 6. Capital Stock and Other
Securities...................(1-3)Shareholder and Account Policies; Dividends, Capital Gains, and Taxes; Additional
Information about the Trust(s) and Portfolio(s).
Item 7. Purchase of Securities Being
Offered......................(1-3) How to Buy Shares; Minimum Investments; Investment Services.
Item 8. Redemption or Repurchase......(1-3)How to Sell Shares; Additional Information About Selling Shares;
Exchange Limitations.
Item 9. Legal Proceedings.............None.
<PAGE>
PART B. INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION.
Item 10. Cover Page....................(1-3)Cover Page.
Item 11. Table of Contents.............(1-3)Table of Contents.
Item 12. General Information and
History......................(1-3)Organization of the Trust
Item 13. Investment Objectives and
Policies.....................(1-3)Investment Objective; Investment Practices; Investment Restrictions.
Item 14. Management of the Fund (1-3)Management of the Trust(s) and the Portfolio(s); Trustees' Compensation.
Item 15. Control Persons and Principal
Holders of Securities (1-3) Ownership.
Item 16. Investment Advisory and Other
Services.....................(1-3)Investment Adviser; Administrator.
Item 17. Brokerage Allocation (1-3)Portfolio Transactions and Brokerage Commissions.
Item 18. Capital Stock and Other
Securities (1-3)Not Applicable.
Item 19. Purchase, Redemption and
Pricing of Securities Being
Offered......................(1-3)Valuation of Securities; Redemptions and Purchases in Kind.
Item 20. Tax Status....................(1-3)Taxation.
Item 21. Underwriters (1-3)Not applicable.
Item 22. Calculation of Performance
Data (1-3)Performance Information
Item 23. Financial Statements..........(1-3)Incorporate by reference the Annual Reports of BT ADVISOR FUNDS dated
December 31, 1997 (File Nos.
33-62103 and 811-7347).
</TABLE>
BT PYRAMID MUTUAL FUNDS
BT INVESTMENT EQUITY 500 INDEX FUND
BT ADVISOR FUNDS
U.S. BOND INDEX FUND
SMALL CAP INDEX FUND
EAFE(R) EQUITY INDEX FUND*
(ADVISOR CLASS SHARES)
PROSPECTUS
APRIL 30, 1998
BT Advisor Funds (the "Trust") is an open-end, management investment company
(mutual fund) which consists of several funds. With the exception of the BT
Investment Equity 500 Index Fund (the "Equity 500 Index Fund"), each of the
diversified funds listed above (each, a "Fund") is a separate series of the
Trust and each offers two classes of shares. The shares offered by this
prospectus are the Advisor Class Shares (the "Shares"). The Equity 500 Index
Fund is a series of BT Pyramid Mutual Funds, an open-end management investment
company (together with the Trust, the "Trusts"). Each Fund seeks to replicate as
closely as possible the performance of a selected market index before the
deduction of the expenses allocable to the Shares of the Fund and the
corresponding Portfolio (the "Expenses"). There is no assurance, however, that
each Fund will achieve its stated objective.
Please read this Prospectus before investing, and keep it on file for future
reference. It contains important information, including how each Fund invests
and the services available to shareholders.
A Statement of Additional Information ("SAI") with the same date has been filed
with the Securities and Exchange Commission ("SEC") and is incorporated herein
by reference. You may request a free copy of the SAI or a paper copy of this
prospectus, if you have received your prospectus electronically, free of charge
by calling the Trust's Service Agent at 1-800-730-1313. The SAI, material
incorporated by reference into this document, and other information regarding
the Trust is maintained electronically with the SEC at Internet Web site
(http://www.sec.gov).
UNLIKE OTHER MUTUAL FUNDS, EACH FUND SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE
BY INVESTING ALL OF ITS INVESTABLE ASSETS ("ASSETS") IN A SEPARATE INVESTMENT
COMPANY (THE "PORTFOLIO") WITH AN IDENTICAL INVESTMENT OBJECTIVE. THE INVESTMENT
PERFORMANCE OF EACH FUND WILL CORRESPOND DIRECTLY TO THE INVESTMENT PERFORMANCE
OF THE CORRESPONDING PORTFOLIO. SEE "SPECIAL INFORMATION CONCERNING
MASTER-FEEDER FUND STRUCTURE" HEREIN.
BANKERS TRUST COMPANY ("BANKERS TRUST") IS THE INVESTMENT ADVISER (THE
"ADVISER") OF EACH PORTFOLIO. SHARES OF THE FUNDS ARE NOT DEPOSITS OR
OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, BANKERS TRUST OR ANY OTHER BANKING
OR DEPOSITORY INSTITUTION. SHARES ARE NOT FEDERALLY GUARANTEED OR INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE U.S. GOVERNMENT, THE FEDERAL RESERVE
BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT RISK, INCLUDING THE
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
LIKE SHARES OF ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
* THE EAFE INDEX IS THE EXCLUSIVE PROPERTY OF MORGAN STANLEY. MORGAN STANLEY
CAPITAL INTERNATIONAL IS A SERVICE MARK OF MORGAN STANLEY AND HAS BEEN LICENSED
FOR USE BY BANKERS TRUST COMPANY.
EDGEWOOD SERVICES, INC.
5800 CORPORATE DRIVEOPITTSBURGH, PENNSYLVANIAO15237-5829
<PAGE>
TABLE OF CONTENTS
The Funds 3
Who May Invest 3
Investment Principals and Risks 4
Summary of Fund Expenses 5
Financial Highlights 7
Investment Objective and Policies 11
Risk Factors and Certain Securities and
Investment Practices 15
Net Asset Value 18
Purchase and Redemption of Shares 19
Dividends, Distributions and Taxes 23
Performance Information and Reports 24
Management of the Trust and Portfolio 25
Additional Information 28
<PAGE>
20
THE FUNDS
The Trusts seek to achieve the investment objective of each Fund by investing
all the Assets of the Fund in the corresponding Portfolio. The Portfolios are
not managed according to traditional methods of "active" investment management,
which involve the buying and selling of securities based upon economic,
financial and market analysis and investment judgment. Instead, the Portfolios,
utilizing a "passive" or "indexing" investment approach and attempt to replicate
the investment performance of their respective indices through statistical
procedures.
The following is a description of each Fund's investment objectives.
THE EQUITY 500 INDEX FUND seeks to replicate as closely as possible (before
deduction of Expenses) the total return of the Standard & Poor's 500 Composite
Stock Price Index (the "S&P 500"), an index emphasizing large- capitalization
stocks. The Fund will include the common stock of those companies included in
the S&P 500, other than Bankers Trust Corporation, selected on the basis of
computer generated statistical data, that are deemed representative of the
industry diversification of the entire S&P 500. The Equity 500 Index Fund
invests all of its Assets in the Equity 500 Index Portfolio.
THE U.S. BOND INDEX FUND seeks to replicate as closely as possible (before
deduction of Expenses) the investment performance of the Lehman Brothers
Aggregate Bond Index (the "Aggregate Bond Index"), a broad market weighted index
which encompasses U.S. Treasury and agency securities, corporate investment
grade bonds, international (dollar-denominated) investment grade bonds, and
mortgage-backed securities. The Fund will be invested primarily in fixed income
securities of the U.S. government or any agency thereof, publicly issued fixed
rate domestic debt of industrial, financial, and utility corporations, and U.S.
dollar denominated fixed income securities of foreign and supranational entities
issued publicly in the United States. The Fund will also invest in mortgage
pass-through securities issued by the Government National Mortgage Association,
the Federal Home Loan Mortgage Corporation, and the Federal National Mortgage
Association. The U.S. Bond Index Fund invests all of its Assets in the U.S. Bond
Index Portfolio.
THE SMALL CAP INDEX FUND seeks to replicate as closely as possible (before
deduction of Expenses) the total return of the Russell 2000 Small Stock Index
(the "Russell 2000"), an index consisting of 2,000 small-capitalization common
stocks. The Fund will include the common stock of one or more companies included
in the Russell 2000, on the basis of computer- generated statistical data, that
are deemed representative of the industry diversification of the entire Russell
2000. The Small Cap Index Fund invests all of its Assets in the Small Cap Index
Portfolio.
THE EAFE(R) EQUITY INDEX FUND seeks to replicate as closely as possible (before
deduction of Expenses) the total return of the Morgan Stanley Capital
International Europe, Australia, Far East (EAFE) Index with net dividends (the
"EAFE Index"), a capitalization-weighted index containing approximately 1,100
equity securities of companies located outside the United States. The Fund will
be invested primarily in equity securities of business enterprises organized and
domiciled outside of the United States or for which the principal trading market
is outside the United States. Statistical methods will be employed to replicate
the Index by buying most of the relevant Index securities. Securities purchased
for the Fund will generally, but not necessarily, be traded on a foreign
securities exchange. The EAFE(R) Equity Index Fund invests all of its Assets in
the EAFE(R) Equity Index Portfolio.
WHO MAY INVEST
The EQUITY 500 INDEX FUND, and SMALL CAP INDEX FUND may be appropriate for
investors who are willing to ride out domestic and/or foreign stock market
fluctuations in pursuit of potentially higher long-term returns. Each
corresponding Portfolio invests for growth and does not pursue income. Over
time, stocks, although more volatile, have shown greater growth potential than
other types of securities. In the shorter term, however, stock prices can
fluctuate dramatically in response to market factors.
The U.S. BOND INDEX PORTFOLIO represents all major sectors of the investment
grade fixed-income securities markets. The U.S. BOND INDEX FUND may be a
suitable investment vehicle for those investors seeking ownership in the "bond
market" as a whole, without regard to particular sectors. The U.S. Bond Index
Fund also may be suitable for those investors with common stock holdings who are
seeking a complementary fixed-income investment to create a more balanced asset
mix.
The EAFE(R) EQUITY INDEX FUND may be appropriate for investors who want to
pursue their investment goals in markets outside of the United States. By
including international investments in their portfolio, investors can achieve an
extra level of diversification and also participate in opportunities around the
world. However, there are additional risks involved with international
investing. The performance of international funds depends upon currency values,
the political and regulatory environment, and overall economic factors in the
countries in which a Portfolio invests.
The Trusts are intended to be a long-term investment vehicle and are not
designated to provide investors with a means of speculating on short-term market
movements. Investors who engage in excessive account activity generate
additional costs which are borne by all the Trusts' shareholders. In order to
minimize such costs, each Trust has adopted the following policies. Each Trust
reserves the right to reject any purchase request (including exchange purchases
from other BT Advisor Funds ) that is reasonably deemed to be disruptive to
efficient portfolio management, either because of the timing of the investment
or previous excessive trading by the investor. Additionally, each Trust has
adopted exchange privilege limitations as described in the section "Exchange
Limitations" herein. Finally, each Trust reserves the right to suspend the
offering of its shares.
Each Fund is not in itself a balanced investment plan. Investors should consider
their investment objective and tolerance for risk when making an investment
decision. When an investor sells their Shares, they may be worth more or less
than what they paid for them.
INVESTMENT PRINCIPLES AND RISKS
The value of each Portfolio's investments varies based on many factors. The
value of bonds fluctuates based on changes in domestic or foreign interest
rates, the credit quality of the issuer, market conditions, and other economic
and political news.
In general, bond prices rise when interest rates fall, and vice versa. This
effect is usually more pronounced for longer-term securities. Lower-quality
securities offer higher yields, but also carry more risk. Stock values
fluctuate, sometimes dramatically, in response to the activities of individual
companies and general market and economic conditions. Over time, however, stocks
have shown greater long-term growth potential than other types of securities.
Because many foreign investments are denominated in foreign currencies, changes
in the value of these currencies can significantly affect the EAFE(R) Equity
Index Fund's share price. General economic factors in the various world markets
can also impact the value of an investors investment. When investors sell
Shares, they may be worth more or less than what they paid for them. See "Risk
Factors and Certain Securities and Investment Practices" herein for more
information.
<PAGE>
SUMMARY OF FUND EXPENSES
ANNUAL OPERATING EXPENSES are paid out of the assets of each Portfolio and Fund.
Each Portfolio pays an investment advisory fee and an administrative services
fee to Bankers Trust. Each Fund incurs expenses such as maintaining shareholder
records and furnishing shareholder statements. Each Fund must provide financial
reports.
The following table provides: (i) a summary of expenses relating to purchases
and sales of the Shares of each Fund and the annual operating expenses of the
Fund and expenses of the corresponding Portfolio, in the aggregate, as a
percentage of average daily net assets of each Fund; and (ii) an example
illustrating the dollar cost of such expenses on a $1,000 investment in each
Fund. THE TRUSTEES OF EACH TRUST BELIEVE THAT THE EXPENSES OF EACH FUND AND
EXPENSES OF THE CORRESPONDING PORTFOLIO, IN THE AGGREGATE, WILL BE LESS THAN OR
APPROXIMATELY EQUAL TO THE EXPENSES WHICH THE FUND WOULD INCUR IF THE TRUSTS
RETAINED THE SERVICES OF AN INVESTMENT ADVISER AND THE ASSETS OF EACH FUND WERE
INVESTED DIRECTLY IN THE TYPE OF SECURITIES BEING HELD BY THE CORRESPONDING
PORTFOLIO.
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge on Purchases
(as a percentage of offering price) None*
Maximum Sales Charge on
Reinvested Distributions None
Redemption Fee None*
Exchange Fee None
Shareholder transaction expenses are charges paid when investors buy, sell,
exchange, or hold Shares of a Fund. See "Purchase and Redemption of Shares" for
an explanation of how and when these charges apply.
* A TRANSACTION FEE OF 0.50% IS DEDUCTED FROM REDEMPTIONS AND EXCHANGES OUT OF
THE SMALL CAP INDEX FUND AND THE EAFE(R) EQUITY INDEX FUND. THESE TRANSACTION
FEES ARE PAID TO THE RESPECTIVE FUNDS AND ARE DEDUCTED AUTOMATICALLY FROM THE
AMOUNT REDEEMED.
THE PURPOSE OF THE 0.50% TRANSACTION FEE IS TO ALLOCATE TRANSACTION COSTS
ASSOCIATED WITH REDEMPTIONS AND EXCHANGES TO INVESTORS MAKING THOSE REDEMPTIONS
AND EXCHANGES, THUS INSULATING EXISTING SHAREHOLDERS FROM THOSE TRANSACTION
COSTS. THESE COSTS INCLUDE: (1) BROKERAGE COSTS; (2) THE EFFECT OF THE "BID-ASK"
SPREAD IN SMALL AND MEDIUM SIZED COMPANY STOCK AND INTERNATIONAL MARKETS; AND
(3) TAXES IN SOME COUNTRIES. SINCE THE INVESTOR, NOT THE FUND, BEARS THESE
COSTS, THE FUND IS EXPECTED TO BE ABLE TO TRACK ITS BENCHMARK INDEX MORE
CLOSELY.
ANNUAL OPERATING EXPENSES
(as a percentage of the average daily net assets of each Fund)
EQUITY 500 INDEX FUND
Investment advisory fee 0.075%
12b-1 fees None
Other expenses (after reimbursements or waivers) 0.175%
Total Operating Expenses (after reimbursements or waivers) 0.25%
U.S. BOND INDEX FUND
Investment advisory fee (after reimbursements or waiver) 0.03%
12b-1 fees None
Other expenses (after reimbursements or waivers) 0.32%
Total Operating Expenses (after reimbursements or waivers) 0.35%
<PAGE>
SMALL CAP INDEX FUND
Investment advisory fee (after reimbursements or waiver) 0.07%
12b-1 fees None
Other expenses (after reimbursements or waivers) 0.38%
Total Operating Expenses (after reimbursements or waivers) 0.45%
EAFE(R) EQUITY INDEX FUND
Investment advisory fee (after reimbursements or waiver) 0.14%
12b-1 fees None
Other expenses (after reimbursements or waivers 0.51%
Total Operating Expenses (after reimbursements or waivers) 0.65%
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
EXAMPLES 1 Year 3 Years 5 Years 10 Years
You would pay the following expenses on a $1,000 investment assuming (1) 5%
annual return and (2) redemption at the end of each time period:
U.S. Bond Index Fund $3 $8 $14 $32
Small Cap Index Fund $4 $11 $20 $44
EAFE(R)Equity Index Fund $10 $20 $31 $64
Equity 500 Index Fund $12 $26 $42 $90
</TABLE>
The expense table and the example above show the costs and expenses that an
investor will bear directly or indirectly as a shareholder of a Fund. Bankers
Trust has voluntarily agreed to waive a portion of its investment advisory fee
with respect to each Portfolio except Equity 500 Index Portfolio. Without such
waiver, each Portfolio's investment advisory fee would be equal to the
following: U.S. Bond Index Portfolio- 0.15%; Small Cap Index Portfolio -- 0.15%;
and EAFE(R) Equity Index Portfolio -- 0.25% . The expense table and the example
reflect a voluntary undertaking by BankerS Trust to waive or reimburse expenses
such that the total operating expenses will not exceed the following percentages
of the Funds' Advisor Class Shares average daily net assets: U.S. Bond Index
Fund -- 0.35%; Small Cap Index Fund -- 0.45%; EAFE(R) Equity Index Fund- 0.65%;
and Equity 500 IndeX Fund-0.25%. With respect to the Equity 500 Index Fund
(Portfolio), EAFE Equity Index Fund (Portfolio), Small Cap Index Fund
(Portfolio), and U.S. Bond Index Fund (Portfolio), in the absence of this
undertaking, for the fiscal year ended December 31, 1997, the total operating
expenses would have been equal to approximately 0.46%, 0.98%, 0.98%, and 14.88%,
respectively of each Fund's Advisor Class Shares average net assets annually.
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES
AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. Moreover, while
each example assumes a 5% annual return, actual performance will vary and may
result in a return greater or less than 5%.
The Funds are distributed by Edgewood Services, Inc. ("Edgewood" or the
"Distributor") to customers of Bankers Trust or to customers of another bank,
dealer or other financial intermediary that has a sub-shareholder servicing
agreement with Bankers Trust (along with Bankers Trust, a "Service Agent"). Some
Service Agents may impose certain conditions on their customers in addition to
or different from those imposed by a Fund and may charge their customers a
direct fee for their services. Each Service Agent has agreed to transmit to
shareholders who are its customers appropriate disclosures of any fees that it
may charge them directly.
CURRENTLY, THE FUNDS (WITH THE EXCEPTION OF THE EQUITY 500 INDEX FUND) HAVE
ISSUED TWO CLASSES OF SHARES. THE FUNDS OFFER BY SEPARATE PROSPECTUS ANOTHER
CLASS OF SHARES. BECAUSE THE EXPENSES VARY BETWEEN THE CLASSES, PERFORMANCE WILL
VARY WITH RESPECT TO EACH CLASS. ADDITIONAL INFORMATION CONCERNING THE FUNDS'
OTHER CLASS OF SHARES IS AVAILABLE FROM BANKERS TRUST, AS ADMINISTRATOR, AT
1-800-730-1313.
<PAGE>
FINANCIAL HIGHLIGHTS
The following tables show the selected data for a share outstanding, total
investment return, ratios to average net assets and other supplemental data of
the Funds for the periods indicated. The Funds' Annual Reports have been audited
by Coopers & Lybrand L.L.P., the Funds' independent accountants, whose report
thereon appears in the respective Fund's Annual Report. Each Fund's Annual
Report is incorporated by reference.
U.S. BOND INDEX FUND Advisor Class Shares
For the Period
June 30, 1997* through
December 31, 1997
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, Beginning of Period $10.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.32
Net Realized and Unrealized Gain on Investment Transactions 0.29
Total from Investment Operations 0.61
DISTRIBUTIONS TO SHAREHOLDERS
Net Investment Income (0.31)
Net Realized Gain from Investment Transactions (0.04)
TOTAL DISTRIBUTIONS (0.35)
NET ASSET VALUE, END OF PERIOD $10.26
TOTAL INVESTMENT RETURN 6.15%
SUPPLEMENTAL DATA AND RATIOS:
Net Assets, End of Period (000s omitted) $242
Ratios to Average Net Asset:
Net Investment Income 6.31%**
Expenses, including expenses of the U.S. Bond Index Portfolio 0.35%**
Decrease Reflected in Above Expense Ration Due to Absorption of
Expenses by Bankers Trust 14.53%**
* Commencement of operations
** Annualized
<PAGE>
FINANCIAL HIGHLIGHTS--CONTINUED
SMALL CAP INDEX FUND ADVISOR CLASS SHARES
For the Period
August 8, 1996
For the (Commencement
Year Ended of Operations) to
December 31, 1997 Dec. 31, 1996
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, Beginning of Period $11.04 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.08 0.02
Net Realized and Unrealized Gain on
Investment Transactions 2.63 1.06
Total from Investment Operations 2.71 1.08
DISTRIBUTIONS TO SHAREHOLDERS
Net Investment Income (0.06) (0.04)
Net Realized Gain from Investment Transactions (2.00) (0.00)+
TOTAL DISTRIBUTIONS (2.06) (0.04)
NET ASSET VALUE, END OF PERIOD $11.69 $11.04
TOTAL INVESTMENT RETURN 25.11% 10.87%
SUPPLEMENTAL DATA AND RATIOS:
Net Assets, End of Period (000s omitted) $1,334 $77
Ratios to Average Net Assets:
Net Investment Income 1.13% 1.61*
Expenses, including expenses of the
Small Cap Index Portfolio 0.45% 0.45%*
Decrease Reflected in Above Expense Ration Due to Absorption of
Expenses by Bankers Trust 0.53% 22.69%*
+ Less than $0.01
*Annualized
<PAGE>
FINANCIAL HIGHLIGHTS--CONTINUED
EAFE EQUITY INDEX FUND ADVISOR CLASS SHARES
For the Period
June 21, 1996
For the (Commencement
Year Ended of Operations) to
December 31, 1997 Dec. 31, 1996
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, Beginning of Period $10.14 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.05 0.02
Net Realized and Unrealized Gain
on Investment Transactions 0.13 0.12
Total from Investment Operations 0.18 0.14
DISTRIBUTIONS TO SHAREHOLDERS
Net Investment Income (0.08) (0.00)+
Net Realized Gain from
Investment Transactions (0.61) (0.00)+
TOTAL DISTRIBUTIONS (0.69) (0.00)+
NET ASSET VALUE, END OF PERIOD $9.63 $10.14
TOTAL INVESTMENT RETURN 1.89% 1.57%
SUPPLEMENTAL DATA AND RATIOS:
Net Assets, End of
Period (000s omitted) $3,212 $717
Ratios to Average Net Assets:
Net Investment Income 1.17% 0.67%*
Expenses, including expenses of
the EAFE Equity Index Portfolio 0.65% 0.65%*
Decrease Reflected in Above Expense
Ration Due to Absorption of
Expenses by Bankers Trust 0.33% 1.70%*
+ Less than $0.01
*Annualized
FINANCIAL HIGHLIGHTS--CONTINUED
EQUITY 500 INDEX FUND
December 31, 1992
For the Year ended December 31, (Commencement
1997 1996 1995 1994 1993 of Operations)
PER SHARE OPERATING PERFORMANCE:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $99.06 $82.92 $62.16 $63.42 $60.00 $60.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 1.81 1.80 1.74 1.32 1.44 ------
Net Realized and Unrealized
Gain on Investment Transactions 30.59 16.98 21.18 (0.60) 4.26 ------
Total from Investment Operations 32.40 18.78 22.92 0.72 5.70 ------
DISTRIBUTIONS TO SHAREHOLDERS
Net Investment Income (1.78) (1.80) (1.74) (1.32) (1.44) ------
Net Realized Gain from
Investment Transactions (4.73) (0.84) (0.42) (0.66) (0.84) ------
TOTAL DISTRIBUTIONS (6.51) (2.64) (2.16) (1.98) (2.28) ------
NET ASSET VALUE, END OF PERIOD $124.95 $99.06 $82.92 62.16 $63.42 $60.00
TOTAL INVESTMENT RETURN 33.02% 22.83% 37.15% 1.15% 9.53% ------
SUPPLEMENTAL DATA AND RATIOS:
Net Assets, End of
Period (000s omitted) $637,401 $451,762 $277,140 $181,898 $1,835 $100
Ratios to Average Net Assets:
Net Investment Income 1.59% 2.05% 2.38% 2.68% 2.53% -----
Expenses, including expenses of
the Equity 500 Index Portfolio 0.25% 0.25% 0.25% 0.25% 0.25% -----
Decrease Reflected in Above Expense Ration Due to Absorption of
Expenses by Bankers Trust 0.21% 0.22% 0.23% 0.29% 1.82% -----
* Per share amounts for all years have been restated to reflect 1:6 reverse
stock split effective September 4, 1997.
</TABLE>
Further information about a Fund's performance is contained in the Fund's Annual
Report, dated December 31, 1997, which can be obtained free of charge.
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The Trusts seek to achieve the investment objective of each Fund by investing
all of its Assets in the corresponding Portfolio, which has the same investment
objective as the Fund. Since the investment characteristics of each Fund will
correspond directly to those of the corresponding Portfolio, the following is a
discussion of the various investments of and techniques employed by each
Portfolio. Additional information about the investment policies of each
Portfolio appears in "Risk Factors and Certain Securities and Investment
Practices" herein and in the Funds' SAI. There can be no assurance that the
investment objective of either a Fund or the corresponding Portfolio will be
achieved. The investment objective of each Fund and corresponding Portfolio is
not a fundamental policy and may be changed upon notice to, but without the
approval of, a Fund's shareholders or a Portfolio's investors, respectively. See
"Special Information Concerning Master-Feeder Fund Structure" herein.
EQUITY 500 INDEX PORTFOLIO
The Portfolio is not managed according to traditional methods of "active"
investment management, which involve the buying and selling of securities based
upon economic, financial, and market analyses and investment judgment. Instead,
the Portfolio, utilizing a "passive" or "indexing" investment approach, attempts
to replicate before Expenses, the performance of the S&P 500. There is no
assurance that the Portfolio will achieve its investment objective.
Under normal conditions when the Portfolio's assets are above $10 million, the
Portfolio will invest at least 80% of its assets in common stocks of companies
which compose the S&P 500. In seeking to duplicate the performance of the S&P
500, Bankers Trust, the Portfolio's investment adviser, will attempt over time
to allocate the Portfolio's investments among common stocks in approximately the
same weightings as the S&P 500, beginning with the heaviest-weighted stocks that
make up a larger portion of the Index's value. Over the long term, Bankers Trust
seeks a correlation between the performance of the Portfolio, before expenses,
and that of the S&P 500 of 0.98 or better (0.95 or better if Portfolio asset
levels are below $10 million). A figure of 1.00 would indicate perfect
correlation. In the unlikely event that the targeted correlation is not
achieved, the Portfolio's Board of Trustees will consider alternative
structures.
The Adviser utilizes a two-stage sampling approach in seeking to obtain its
objective. Stage one, which encompasses large cap stocks, maintains the stock
holdings at or near their benchmark weights. Large capitalization stocks are
defined as those securities which represent 0.10% or more of the index. In stage
two, smaller stocks are analyzed and selected using risk characteristics and
industry weights in order to match the sector and risk characteristics of the
smaller companies in the S&P 500. This approach helps to maximize portfolio
liquidity while minimizing costs.
Bankers Trust generally will seek to match the composition of the S&P 500 but
usually will not invest the Portfolio's stock portfolio to mirror the Index
exactly. Because of the difficulty and expense of executing relatively small
stock transactions, the Portfolio may not always be invested in the less heavily
weighted S&P 500 stocks, and may at times have its portfolio weighted
differently from the S&P 500, particularly if the Portfolio has a low level of
assets. When the Portfolio's size is greater, Bankers Trust expects to purchase
more of the stocks in the S&P 500 and to match the relative weighting of the S&P
500 more closely, and anticipates that the Portfolio will be able to mirror,
before expenses, the performance of the S&P 500 with little variance at asset
levels of $10 million or more. In addition, the Portfolio may omit or remove any
S&P 500 stock from the Portfolio if, following objective criteria, Bankers Trust
judges the stock to be insufficiently liquid or believes the merit of the
investment has been substantially impaired by extraordinary events or financial
conditions. Bankers Trust will not purchase the stock of Bankers Trust
Corporation, which is included in the Index, and instead will overweight its
holdings of companies engaged in similar businesses.
Under normal conditions, Bankers Trust will attempt to invest as much of the
Portfolio's assets as is practical in common stocks included in the S&P 500.
However, the Portfolio may maintain up to 20% of its assets in short-term debt
securities and money market instruments hedged with stock index futures and
options to meet redemption requests or to facilitate the investment in common
stocks. See "Additional Information" for further information.
When the Portfolio has cash from new investments in the Portfolio or holds a
portion of its assets in money market instruments, it may enter into stock index
futures or options to attempt to increase its exposure to the stock market.
Strategies the Portfolio could use to accomplish this include purchasing futures
contracts, writing put options, and purchasing call options. When the Portfolio
wishes to sell securities, because of shareholder redemptions or otherwise, it
may use stock index futures or options thereon to hedge against market risk
until the sale can be completed. These strategies could include selling futures
contracts, writing call options, and purchasing put options.
Bankers Trust will choose among futures and options strategies based on its
judgment of how best to meet the Portfolio's goals. In selecting futures and
options, Bankers Trust will assess such factors as current and anticipated stock
prices, relative liquidity and price levels in the options and futures markets
compared to the securities markets, and the Portfolio's cash flow and cash
management needs. If Bankers Trust judges these factors incorrectly, or if price
changes in the Portfolio's futures and options positions are not well correlated
with those of its other investments, the Portfolio could be hindered in the
pursuit of its objective and could suffer losses. The Portfolio could also be
exposed to risks if it could not close out its futures or options positions
because of an illiquid secondary market.
ABOUT THE S&P 500 INDEX
The S&P 500 is a well-known stock market index that includes common stocks of
500 companies from several industrial sectors representing a significant portion
of the market value of all common stocks publicly traded in the United States,
most of which are listed on the New York Stock Exchange Inc. (the "NYSE").
Stocks in the S&P 500 are weighted according to their market capitalization
(i.e., the number of shares outstanding multiplied by the stock's current
price). Bankers Trust believes that the performance of the S&P 500 is
representative of the performance of publicly traded common stocks in general.
The composition of the S&P 500 is determined by S&P and is based on such factors
as the market capitalization and trading activity of each stock and its adequacy
as a representation of stocks in a particular industry group, and may be changed
from time to time.
The Fund and the Portfolio are not sponsored, endorsed, sold or promoted by S&P.
S&P makes no representation or warranty, express or implied, to the owners of
the Fund or the Portfolio or any member of the public regarding the advisability
of investing in securities generally or in the Fund and the Portfolio
particularly or the ability of the S&P 500 to track general stock market
performance. S&P does not guarantee the accuracy and/or the completeness of the
S&P 500 or any data included therein.
S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE RESULTS TO BE OBTAINED BY
THE FUND OR THE PORTFOLIO, OWNERS OF THE FUND OR THE PORTFOLIO, OR ANY OTHER
PERSON OR ENTITY FROM THE USE OF THE S&P 500 OR ANY DATA INCLUDED THEREIN. S&P
MAKES NO EXPRESS OR IMPLIED WARRANTIES AND HEREBY EXPRESSLY DISCLAIMS ALL SUCH
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH
RESPECT TO THE S&P 500 OR ANY DATA INCLUDED THEREIN.
For more complete information about the S&P 500, see the SAI.
U.S. BOND INDEX PORTFOLIO
The U.S. Bond Index Portfolio seeks to replicate as closely as possible (before
deduction of Expenses) the investment performance of the Aggregate Bond Index, a
broad market weighted index which encompasses four major classes of investment
grade fixed-income securities in the United States: U.S. Treasury and agency
securities, corporate bonds, international (dollar-denominated) bonds, and
mortgage-backed securities, with maturities greater than one year.
As of December 31, 1997, the major classes of fixed-income securities
represented the following proportions of the Index's total market value:
AGGREGATE
BOND INDEX
U.S. Treasury and agency securities 49%
Corporate bonds 16%
International (dollar-denominated) bonds 4%
Mortgage-backed securities 30%
Asset Backed Securities 1%
Dollar-weighted average maturity (Years) 8.8
The U.S. Bond Index Portfolio will be unable to hold all of the individual
issues which comprise the Index because of the large number of securities
involved. Instead, the Portfolio will hold a representative sample of the
securities in the Index, selecting one or two issues to represent entire
"classes" or types of securities in the Index. The Portfolio will be constructed
so as to match as closely as possible the composition of the Index by investing
in fixed-income securities approximating their relative proportion of the
Index's total market value.
At the broadest level, the U.S. Bond Index Portfolio will seek to hold
securities and other investments which reflect the weighting of the major asset
classes in the Index. These classes include U.S. Treasury and agency securities,
corporate bonds, and mortgage-backed securities. For example, if U.S. Treasury
and agency securities represent approximately 51% of the Index's interest rate
risk, then approximately 51% of the Portfolio's interest rate risk will come
from such securities and other investments. Similarly, if corporate bonds
represent 14% of the interest rate risk of the Index, then they will represent
approximately 14% of the interest rate risk of the Portfolio. Such a sampling
technique is expected to be an effective means of substantially replicating the
income and capital returns provided by the Index before deduction of Fund and
Portfolio expenses. The Portfolio may, from time to time, substitute one type of
investment grade bond for another. For instance, a Portfolio may hold more
short-term corporate bonds (and, in turn, hold fewer short U.S. Treasury bonds)
than represented in the Index so as to increase income. This corporate
substitution strategy will entail the assumption of additional credit risk;
however, substantial diversification within the corporate sector should moderate
issue-specific credit risk. Overall, credit risk is expected to be very low for
the U.S. Bond Index Portfolio.
Fixed-income securities will be primarily of investment grade quality,
i.e., those rated at least Baa by Moody's Investors Service, Inc. ("Moody's") or
BBB-by Standard & Poor's ("S&P"). Securities rated Baa or BBB possess some
speculative characteristics. The Portfolio may invest in U.S. Treasury bills,
notes and bonds and other "full faith and credit" obligations of the U.S.
government and in U.S. government agency securities, which are debt obligations
issued or guaranteed by agencies or instrumentalities of the U.S. government
("U.S. Government Securities"). Such "agency" securities may not be backed by
the "full faith and credit" of the U.S. government. Such U.S. government
agencies may include the Farm Credit Banks, the Resolution Trust Corporation and
the Government National Mortgage Association. Even though they all carry top
(AAA) credit ratings, "agency" obligations are not explicitly guaranteed by the
U.S. government and so are perceived as somewhat riskier than comparable
Treasury bonds.
As a mutual fund investing primarily in fixed-income securities, the
Portfolio is subject to interest rate, income, call and credit risks. Since the
Portfolio also invests in mortgage-backed securities, it is also subject to
prepayment risk. See "Risk Factors and Certain Securities and Investment
Practices."
For more information about the historical performance of the Aggregate Bond
Index, see the SAI.
SMALL CAP INDEX PORTFOLIO
The Small Cap Index Portfolio seeks to replicate as closely as possible (before
deduction of Expenses) the total return of the Russell 2000. The Russell 2000 is
composed of approximately 2,000 small-capitalization common stocks. A company's
stock market capitalization is the total market value of its floating
outstanding shares. As of December 31, 1997, the average stock market
capitalization of the Russell 2000 was $440 million and the weighted average
stock market capitalization of the Russell 2000 was $640 million.
The Small Cap Fund and the Small Cap Portfolio are neither sponsored by nor
affiliated with the Frank Russell Company. Frank Russell's only relationship to
the Fund and the Portfolio is the licensing of the use of the Russell 2000.
Frank Russell Company is the owner of the trademarks and copyrights relating to
the Russell indices. The Small Cap Portfolio invests in a statistically selected
sample of the approximately 2,000 stocks included in the Russell 2000. The
stocks of the Russell 2000 to be included in the Small Cap Index Portfolio will
be selected utilizing a statistical sampling technique known as "optimization."
This process selects stocks for the Portfolio so that various industry
weightings, market capitalizations and fundamental characteristics (e.g.
price-to-book, price- to-earnings, debt-to-asset ratios, and dividend yields)
closely approximate those of the Russell 2000. For instance, if 10% of the
capitalization of the Russell 2000 consists of utility companies with relatively
small capitalizations, then the Small Cap Portfolio is constructed so that
approximately 10% of the Portfolio's assets are invested in the stocks of
utility companies with relatively small capitalizations. The stocks held by the
Portfolio are weighted to make the Portfolio's aggregate investment
characteristics similar to those of the Russell 2000 Index as a whole.
For more information about the historical performance of the Russell 2000, see
the SAI.
EAFE(R) EQUITY INDEX PORTFOLIO
The EAFE(R) Equity Index Portfolio seeks to replicate as closely as possible
(before deduction of Expenses) the total return of the EAFE Index. The Portfolio
attempts to achieve this objective by investing in a statistically selected
sample of the equity securities included in the EAFE Index.
The EAFE Index is a capitalization-weighted index containing approximately 1,100
equity securities of companies located outside the United States. The countries
currently included in the EAFE Index are Australia, Austria, Belgium, Denmark,
Finland, France, Germany, Hong Kong, Ireland, Italy, Japan, Malaysia, The
Netherlands, New Zealand, Norway, Singapore, Spain, Sweden, Switzerland and
United Kingdom.
Inclusion of a security in the EAFE Index in no way implies an opinion by Morgan
Stanley as to its attractiveness as an investment. Neither the Fund nor the
Portfolio is sponsored by or affiliated with Morgan Stanley. The EAFE(R) Equity
Index Portfolio is constructed to have aggregate investment characteristics
similar to those of the EAFE Index. The Portfolio invests in a statistically
selected sample of the securities included in the EAFE Index, although not all
companies within a country will be represented in the Portfolio at the same
time. Stocks are selected for inclusion in the Portfolio based on country of
origin, market capitalization, yield, volatility and industry sector. Bankers
Trust will manage the Portfolio using advanced statistical techniques to
determine which stocks are to be purchased or sold to replicate the EAFE Index.
From time to time, adjustments may be made in the Portfolio because of changes
in the composition of the EAFE Index, but such changes should be infrequent.
This Fund and Portfolio are not sponsored, endorsed, sold or promoted by Morgan
Stanley. Morgan Stanley makes no representation or warranty, express or implied,
to the owners of this Fund or any member of the public regarding the
advisability of investing in securities generally or in this Fund and Portfolio
particularly or the ability of the EAFE Index to track general stock market
performance. Morgan Stanley is the licensor of certain trademarks, service marks
and trade names of Morgan Stanley and of the EAFE Index which is determined,
composed and calculated by Morgan Stanley without regard to the issuer of this
Fund and Portfolio or this Fund and Portfolio itself. Morgan Stanley has no
obligation to take the needs of the issuer of this Fund and Portfolio or the
owners of this Fund and Portfolio into consideration in determining, composing
or calculating the EAFE Index. Inclusion of a security in the EAFE Index in no
way implies an opinion by Morgan Stanley as to its attractiveness as an
investment. Morgan Stanley is not responsible for and has not participated in
the determination of the timing of, prices at, or quantities of this Fund and
Portfolio to be issued or in the determination or calculation of the equation by
which this Fund is redeemable for cash. Morgan Stanley has no obligation or
liability to owners of this Fund and Portfolio in connection with the
administration, marketing or trading of this Fund and Portfolio. This Fund and
Portfolio is neither sponsored by nor affiliated with Morgan Stanley.
ALTHOUGH MORGAN STANLEY SHALL OBTAIN INFORMATION FOR INCLUSION IN OR FOR USE IN
THE CALCULATION OF THE INDICES FROM SOURCES WHICH MORGAN STANLEY CONSIDERS
RELIABLE, MORGAN STANLEY DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS
OF THE INDICES OR ANY DATA INCLUDED THEREIN. MORGAN STANLEY MAKES NO WARRANTY,
EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE, LICENSEE'S
CUSTOMERS AND COUNTERPARTIES, OWNERS OF THE PRODUCTS, OR ANY OTHER PERSON OR
ENTITY FROM THE USE OF THE INDICES OR ANY DATA INCLUDED THEREIN IN CONNECTION
WITH THE RIGHTS LICENSED HEREUNDER OR FOR ANY OTHER USE. MORGAN STANLEY MAKES NO
EXPRESS OR IMPLIED WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE INDEXES
OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT
SHALL MORGAN STANLEY HAVE ANY LIABILITY FOR ANY DIRECT, INDIRECT, SPECIAL,
PUNITIVE, CONSEQUENTIAL OR ANY OTHER DAMAGES (INCLUDING LOST PROFITS) EVEN IF
NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
For more information about the performance of the EAFE Index, see the SAI.
GENERAL
Over time, the correlation between the performance of each Fund, before the
deduction of Expenses, and the respective index is expected to be 0.95 or
higher. A correlation of 1.00 would indicate perfect correlation, which would be
achieved when the net asset value of the Fund, including the value of its
dividend and any capital gain distributions, increases or decreases in exact
proportion to changes in its respective Index. Each Fund's ability to track its
respective index may be affected by, among other things, transaction costs,
administration and other expenses incurred by the Funds or the corresponding
Portfolio, changes in either the composition of the Index or the assets of a
Portfolio, and the timing and amount of Portfolio investor contributions and
withdrawals, if any. In the unlikely event that a high correlation is not
achieved, the Trusts' Boards of Trustees will consider alternatives. Because
each Portfolio seeks to track the respective index, Bankers Trust will not
attempt to judge the merits of any particular stock as an investment.
Under normal circumstances, each Portfolio will invest at least 80% of its
assets in the securities of its respective index.
As diversified funds, no more than 5% of the assets of each Portfolio may be
invested in the securities of one issuer (other than U.S. Government
Securities), except that up to 25% of each Portfolio's assets may be invested
without regard to this limitation. Each Portfolio will not invest more than 25%
of its assets in the securities of issuers in any one industry. In the unlikely
event that the S&P 500 should concentrate to an extent greater than that amount,
each Portfolio's ability to achieve its investment objective may be impaired.
These are fundamental investment policies of the Portfolios which may not be
changed without investor approval. No more than 15% of each Portfolio's net
assets may be invested in illiquid or not readily marketable securities
(including repurchase agreements and time deposits maturing in more than seven
calendar days). Additional investment policies of each Portfolio are contained
in the SAI.
Each Portfolio may maintain up to 20% of its assets in short-term debt
securities and money market instruments to meet redemption requests or to
facilitate investment in the securities of the respective index. Securities
index futures contracts and related options, warrants, convertible securities
and swap agreements may be used for several reasons: to simulate full investment
in the underlying index while retaining a cash balance for fund management
purposes, to facilitate trading, or to reduce transaction costs or to seek
higher investment returns when a futures contract, option, warrant, convertible
security or swap agreement is priced more attractively than the underlying
equity security or index. These instruments may be considered derivatives. See
"Risk Factors and Certain Securities and Investment Practices" herein.
The use of derivatives for non-hedging purposes may be considered speculative.
While each of these securities can be used as leveraged investments, a Portfolio
may not use them to leverage its net assets. No Portfolio will invest in such
instruments as part of a temporary defensive strategy (such as altering the
aggregate maturity of the Portfolio) to protect the Portfolio against potential
market declines. Each Portfolio may lend its investment securities and purchase
securities on a when-issued and a delayed delivery basis. The U.S. Bond Index
Portfolio may invest in mortgage-related and other asset-backed securities. The
EAFE(R) Equity Index Portfolio may engage in foreign currency forward and
futures transactions for the purpose of enhancing portfolio returns or hedging
against foreign exchange risk arising from the Portfolio's investment or
anticipated investment in securities denominated in foreign currencies. See
"Risk Factors and Certain Securities and Investment Practices" herein and in the
SAI for more information about the investment practices of the Portfolios.
RISK FACTORS AND CERTAIN SECURITIES AND INVESTMENT PRACTICES
The following pages contain more detailed information about types of instruments
in which a Portfolio may invest and strategies Bankers Trust may employ in
pursuit of a Portfolio's investment objective. A summary of risks and
restrictions associated with these instrument types and investment practices is
included as well.
Bankers Trust may not buy all of these instruments or use all of these
techniques to the full extent permitted unless it believes that doing so will
help a Portfolio achieve its goal. Holdings and recent investment strategies are
described in the financial reports of a Fund and the corresponding Portfolio,
which are sent to Fund shareholders twice a year. For a free SAI or financial
report, call an Investment Professional or Bankers Trust.
FIXED INCOME SECURITY RISK - U.S. BOND INDEX FUND
Investors in the U.S. Bond Index Fund are exposed to four types of risk from
fixed income securities: (1) Interest rate risk is the potential for
fluctuations in bond prices due to changing interest rates; (2) Income risk is
the potential for a decline in a Portfolio's income due to falling market
interest rates; (3) Credit risk is the possibility that a bond issuer will fail
to make timely payments of either interest or principal to the Portfolio; and
(4) Prepayment risk or call risk is the likelihood that, during periods of
falling interest rates, securities with high stated interest rates will be
prepaid (or "called") prior to maturity, requiring the Portfolio to invest the
proceeds at generally lower interest rates.
MARKET RISK - EQUITY 500 INDEX FUND, SMALL CAP INDEX FUND AND EAFE(R)
EQUITY INDEX FUND
As mutual funds investing primarily in common stocks, these Portfolios are
subject to market risk-i.e., the possibility that common stock prices will
decline over short or even extended periods. The U.S. and foreign stock markets
tend to be cyclical, with periods when stock prices generally rise and periods
when prices generally decline.
RISKS OF INVESTING IN MEDIUM- AND SMALL-CAPITALIZATION STOCKS --SMALL CAP
INDEX FUND
Historically, medium- and small-capitalization stocks have been more volatile in
price than the larger-capitalization stocks included in the S&P 500. Among the
reasons for the greater price volatility of these securities are the less
certain growth prospects of smaller firms, the lower degree of liquidity in the
markets for such stocks, and the greater sensitivity of medium- and small-size
companies to changing economic conditions. In addition to exhibiting greater
volatility, medium- and small-size company stocks may fluctuate independently of
larger company stocks. Medium- and small-size company stocks may decline in
price as large company stocks rise, or rise in prices as large company stocks
decline.
RISKS OF INVESTING IN FOREIGN SECURITIES -EAFE(R) EQUITY INDEX PORTFOLIO
Investors should realize that investing in securities of foreign issuers
involves considerations not typically associated with investing in securities of
companies organized and operated in the United States. Investors should realize
that the value of a Portfolio's foreign investments may be adversely affected by
changes in political or social conditions, diplomatic relations, confiscatory
taxation, expropriation, nationalization, limitation on the removal of funds or
assets, or imposition of (or change in) exchange control or tax regulations in
foreign countries. In addition, changes in government administrations or
economic or monetary policies in the United States or abroad could result in
appreciation or depreciation of portfolio securities and could favorably or
unfavorably affect the Portfolio's operations. Furthermore, the economies of
individual foreign nations may differ from the U.S. economy, whether favorably
or unfavorably, in areas such as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments position; it may also be more difficult to obtain and enforce a
judgment against a foreign issuer. In general, less information is publicly
available with respect to foreign issuers than is available with respect to U.S.
companies.
Most foreign companies are also not subject to the uniform accounting and
financial reporting requirements applicable to issuers in the United States. Any
foreign investments made by the Portfolio must be made in compliance with U.S.
and foreign currency restrictions and tax laws restricting the amounts and types
of foreign investments.
Because foreign securities generally are denominated and pay dividends or
interest in foreign currencies, the value of the net assets of the Portfolio as
measured in U.S. dollars will be affected favorably or unfavorably by changes in
exchange rates. In order to protect against uncertainty in the level of future
foreign currency exchange rates, the Portfolio is also authorized to enter into
certain foreign currency exchange transactions. Furthermore, the Portfolio's
foreign investments may be less liquid and their prices may be more volatile
than comparable investments in securities of U.S. companies. The settlement
periods for foreign securities, which are often longer than those for securities
of U.S. issuers, may affect portfolio liquidity. Finally, there may be less
government supervision and regulation of securities exchanges, brokers and
issuers in foreign countries than in the United States.
SPECIAL INFORMATION CONCERNING MASTER-FEEDER FUND STRUCTURE
Unlike other open-end management investment companies (mutual funds) which
directly acquire and manage their own portfolio securities, each Fund seeks to
achieve its investment objective by investing all of its Assets in the
corresponding Portfolio, a separate registered investment company with the same
investment objectives as the Fund. Therefore, an investor's interest in the
Portfolio's securities is indirect, like investments in other investment
companies and pooled investment vehicles. In addition to selling a beneficial
interest to the corresponding Fund, each Portfolio may sell beneficial interests
to other mutual funds or institutional investors. Such investors will invest in
a Portfolio on the same terms and conditions and will pay a proportionate share
of the Portfolio's expenses. However, the other investors investing in a
Portfolio are not required to sell their shares at the same public offering
price as the Fund due to variations in sales commissions and other operating
expenses. Therefore, investors in a Fund should be aware that these differences
may result in differences in returns experienced by investors in the different
funds that invest in the Portfolio. Such differences in returns are also present
in other mutual fund structures. Information concerning other holders of
interests in the Portfolio is available from Bankers Trust, as the
Administrator, at 1-800-730-1313.
The master-feeder fund structure is relatively complex, so shareholders
should carefully consider this investment approach.
Smaller funds investing in a Portfolio may be materially affected by the actions
of larger funds investing in the Portfolio. For example, if a large fund
withdraws from a Portfolio, the remaining funds may experience higher pro rata
operating expenses, thereby producing lower returns (however, this possibility
exists as well for traditionally structured funds which have large institutional
investors). Additionally, a Portfolio may become less diverse, resulting in
increased portfolio risk. Also, funds with a greater pro rata ownership in a
Portfolio could have effective voting control of the operations of the
Portfolio. Except as permitted by the SEC, whenever a Trust is requested to vote
on matters pertaining to a Portfolio, each Trust will hold a meeting of
shareholders of the Fund and will cast all of its votes in the same proportion
as the votes of the Fund's shareholders. Fund shareholders who do not vote will
not affect a Trust's votes at the Portfolio meeting. The percentage of a Trust's
votes representing Fund shareholders not voting will be voted by the Trustees or
officers of the Trust in the same proportion as the Fund shareholders who do, in
fact, vote. Certain changes in the Portfolio's investment objectives, policies
or restrictions may require the Fund to withdraw its interest in the Portfolio.
Any such withdrawal could result in a distribution "in kind" of portfolio
securities (as opposed to a cash distribution from the Portfolio). If securities
are distributed, the Fund could incur brokerage, tax or other charges in
converting the securities to cash. In addition, the distribution in kind may
result in a less diversified portfolio of investments or adversely affect the
liquidity of the Fund. Notwithstanding the above, there are other means for
meeting redemption requests, such as borrowing.
A Fund may withdraw its investment from a Portfolio at any time, if the Board of
Trustees of a Trust determines that it is in the best interests of the
shareholders of the Fund to do so.
Upon any such withdrawal, the Board of Trustees of the Trust would consider what
action might be taken, including the investment of all the Assets of the Fund in
another pooled investment entity having the same investment objectives as the
Fund or the retaining of an investment adviser to manage the Fund's Assets in
accordance with the investment policies described herein with respect to the
corresponding Portfolio.
Each Fund's investment objective is not a fundamental policy and may be changed
upon notice to but without the approval of the Fund's shareholders. If there is
a change in a Fund's investment objective, the Fund's shareholders should
consider whether the Fund remains an appropriate investment in light of their
then-current needs. The investment objective of each Portfolio is also not a
fundamental policy. Shareholders of the Funds will receive 30 days prior written
notice with respect to any change in the investment objective of a Fund or the
corresponding Portfolio. See "Risk Factors and Certain Securities and Investment
Practices" in the SAI for a description of the fundamental policies of each
Portfolio that cannot be changed without approval by "the vote of a majority of
the outstanding voting securities"(as defined in the Investment Company Act of
1940, as amended (the "1940 Act"), of the Portfolio.
For descriptions of the investment objective, policies and restrictions of each
Portfolio, see "The Funds in Detail" herein and "Risk Factors and Certain
Securities and Investment Practices" herein and in the SAI. For descriptions of
the management and expenses of the Trusts and the Portfolios, see "Management of
the Trusts and the Portfolios" herein and in the SAI.
PORTFOLIO TURNOVER
The frequency of Portfolio transactions-the Portfolio's portfolio turnover
rate-will vary from year to year depending on market conditions and the
Portfolio's cash flows. Each Portfolio's annual portfolio turnover rate is not
expected to exceed 100%.
The fiscal years ended December 31, 1997, and 1996, the portfolio turnover rates
for the Equity 500 Index Portfolio were 19% and 15%, respectively. For the
fiscal year ended December 31, 1997 and for the period from January 24, 1996
(commencement of operations) to December 31, 1996, the portfolio turnover rates
for the EAFE Equity Index Portfolio were 44% and 4%, respectively. For the
fiscal year ended December 31, 1997 and for the period from July 1, 1996
(commencement of operations) to December 31, 1996, the portfolio turnover rates
for the Small Cap Index Portfolio were 88% and 16%, respectively.
NET ASSET VALUE
The net asset value ("NAV") per share of each Fund is calculated on each day on
which the New York Stock Exchange, Inc. (the "NYSE") is open (each such day
being a "Valuation Day"). The NYSE is currently open on each day, Monday through
Friday, except: (a) January 1st, Martin Luther King Jr. Day (the third Monday in
January), Presidents' Day (the third Monday in February), Good Friday, Memorial
Day (the last Monday in May), July 4th, Labor Day (the first Monday in
September), Thanksgiving Day (the last Thursday in November) and December 25th;
and (b) the preceding Friday or the subsequent Monday when one of the
calendar-determined holidays falls on a Saturday or Sunday, respectively.
With the exception of the EAFE(R) Equity Index Fund, the Funds are open for
business each day the NYSE is open. Each Fund's NAV is calculated on each
Valuation Day as of the close of regular trading on the NYSE (the "Valuation
Time"), which is currently 4:00 p.m. Eastern time or in the event that the NYSE
closes early, at the time of such early closing. The EAFE(R) Equity Index Fund
will not process orders on any day when either the NYSE or the Tokyo Stock
Exchange is closed. Orders received on such days will be priced on the next day
the Fund computes its NAV. As such, investors may experience a delay in
purchasing or redeeming Shares of the EAFE(R) Equity Index Fund.
A Fund's NAV is the value of a single Share. The NAV of each Fund is computed by
dividing the value of the Fund's Assets (i.e., the value of its investment in
the Portfolio and other assets), less all liabilities, allocable to the Advisor
Class Shares by the total number of its Shares outstanding. Each Portfolio's
securities and other assets are valued primarily on the basis of market
quotations or, if quotations are not readily available, by Bankers Trust
pursuant to procedures adopted by the Portfolio's Board of Trustees. These
procedures require Bankers Trust to value such a security at the same value as
an equivalent security which is readily marketable and, in making such
comparisons, to consider all relevant factors under applicable guidelines of the
SEC.
Under procedures adopted by the Board, a NAV for a Fund later determined to have
been inaccurate for any reason will be recalculated. Purchases and redemptions
made at NAV determined to have been inaccurate will be adjusted, although in
certain circumstances, such as where the difference between the original NAV and
the recalculated NAV divided by the recalculated NAV is 0.005 (1/2 of 1%) or
less or shareholder transactions are otherwise insubstantially affected, further
action is not required.
PURCHASE AND REDEMPTION OF SHARES
HOW TO BUY SHARES
The Trusts accept purchase orders for Shares of each Fund at the NAV per Share
(and, if applicable, of the respective class of shares) next determined after
the order is received on each Valuation Day. See "Net Asset Value" herein.
Shares of each Fund may be available through Investment Professionals, such as
broker/dealers and investment advisers (including Service Agents).
Purchase orders for Shares of each Fund (including those purchased through a
Service Agent) that are transmitted to the Trusts' Transfer Agent (the "Transfer
Agent"), prior to the Valuation Time on any Valuation Day will be effective at
that day's Valuation Time. The Trusts and Transfer Agent reserve the right to
reject any purchase order.
Shares must be purchased in accordance with procedures established by the
Transfer Agent and each Service Agent. It is the responsibility of each Service
Agent to transmit to the Transfer Agent purchase and redemption orders and to
transmit to Bankers Trust as the Trust's custodian (the "Custodian") purchase
payments by the following business day (trade date + 1) after an order for
Shares is placed. A shareholder must settle with the Service Agent for his or
her entitlement to an effective purchase or redemption order as of a particular
time. Because Bankers Trust is the Custodian and Transfer Agent of the Trust,
funds may be transferred directly from or to a customer's account held with
Bankers Trust to settle transactions with the Fund without incurring the
additional costs or delays associated with the wiring of federal funds.
The Trust and Bankers Trust have authorized one or more brokers to accept on the
Trust's behalf purchase and redemption orders for Equity 500 Index Fund. Such
brokers are authorized to designate other intermediaries to accept purchase and
redemption orders on the Trust's behalf. The Transfer Agent will be deemed to
have received a purchase or redemption order when an authorized broker or, if
applicable, a broker's authorized designee, accepts the order. Customer orders
will be priced at the Fund's NAV next computed after it is accepted by an
authorized broker or the broker's authorized designee.
Certificates for Shares will not be issued. Each shareholder's account will be
maintained by a Service Agent or Transfer Agent.
If orders are placed through an Investment Professional, it is the
responsibility of the Investment Professional to transmit the order to buy
Shares of each class to the Transfer Agent before 4:00 p.m. Eastern time. The
Transfer Agent must receive payment within one business day after an order for
Shares is placed; otherwise, the purchase order may be canceled and the investor
could be held liable for resulting fees and/or losses.
MINIMUM INVESTMENTS
TO OPEN AN ACCOUNT $2,500
For retirement accounts 500
Through automatic investment plans 1,000
TO ADD TO AN ACCOUNT $250
For retirement accounts 100
Through automatic investment plan 100
MINIMUM BALANCE $1,000
For retirement accounts None
IF YOU ARE NEW TO BT ADVISOR FUNDS OR BT PYRAMID MUTUAL FUNDS, complete and sign
an account application and mail it along with your check to the address listed
below. If there is no account application accompanying this Prospectus, call the
BT Service Center at 1-800-730-1313.
<PAGE>
BT Service Center
P.O. Box 419210
Kansas City, MO 64141-6210
Overnight mailings:
BT Service Center
210 West 10th Street, 8th Floor
Kansas City, MO 64105-1716
IF YOU ALREADY HAVE MONEY INVESTED IN A FUND IN THE BT FAMILY OF FUNDS, you can:
o Mail an account application with a check,
o Wire money into your account,
o Open an account by exchanging from another fund in the BT Family
of Funds, or
o Contact your Service Agent or Investment Professional.
If you are investing through a tax-sheltered retirement plan, such as an IRA,
for the first time, you will need a special application. Contact your Investment
Professional for more information and a retirement account application.
ADDITIONAL INFORMATION ABOUT BUYING SHARES
TO OPEN AN ACCOUNT TO ADD TO AN ACCOUNT
BY WIRE Call the BT Service Center at Call your Investment Professional
or wire
1-800-730-1313 to receive additional investment to:
wire instructions for account
establishment.
ROUTING NO.: 021001033
ATTN: Bankers Trust/IFTC Deposit
DDA NO.: 00-226-296
FBO: (Account name)
(Account number)
CREDIT: Fund Number (see table below)
EAFE Equity Index-Advisor Class-510
Small Cap Index-Advisor Class- 509
U.S. Bond Index Fund-Advisor Class-507
BT Investment Equity 500 Index Fund-462
Specify the complete name
of the Fund of your
choice, and include your
account number and your
name.
BY PHONE
Contact your Service Agent, Contact your Service Agent,
Investment Professional, or call Investment Professional, or call
BT's Service Center at BT's Service Center at
1-800-730-1313. If you are an 1-800-730-1313. If you are an
existing shareholder, you may existing shareholder, you may
exchange from another BT account exchange from another BT account
with the same registration, including, with the same registration, including,
name, address, and taxpayer name, address, and taxpayer
ID number. ID number.
<PAGE>
BY MAIL Complete and sign the account Make your check payable to the
application. Make your check complete name of the Fund of your choice
payable to the complete name of the Indicate your Fund account
Fund of your choice. Mail to the number on your check and mail to the
appropriate address indicated on the address printed on your
application. account statement.
HOW TO SELL SHARES
You can arrange to take money out of your Fund account at any time by selling
(redeeming) some or all of your Shares. Your Shares shall be sold at the next
NAV calculated after an order is received by the Transfer Agent. Redemption
requests should be transmitted by customers in accordance with procedures
established by the Transfer Agent and the Shareholder's Service Agent.
Redemption requests for Shares of the Fund received by the Service Agent and
transmitted to the Transfer Agent prior to the Valuation Time on each Valuation
Day will be effective at that day's Valuation Time and the redemption proceeds
normally will be delivered to the shareholder's account the next day, but in any
event within seven calendar days following receipt of the request.
Service Agents may allow redemptions or exchanges by telephone and may disclaim
liability for following instructions communicated by telephone that the Service
Agent reasonably believes to be genuine. The Service Agent must provide the
investor with an opportunity to choose whether or not to utilize the telephone
redemption or exchange privilege. The Transfer Agent and the Service Agent must
employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. If the Shareholder Servicing Agent does not do so, it may
be liable for any losses due to unauthorized or fraudulent instructions. Such
procedures may include, among others, requiring some form of personal
identification prior to acting upon instructions received by telephone,
providing written confirmation of such transactions and/or tape recording of
telephone instructions.
Redemption orders are processed without charge by the Trust. A Service Agent may
on at least 30 days' notice involuntarily redeem a shareholder's account with
the Fund having a balance below the minimum, but not if an account is below the
minimum due to a change in market value. See "Minimum Investments" above for
minimum balance amounts.
TO SELL SHARES IN A RETIREMENT ACCOUNT, your request must be made in writing,
except for exchanges to other eligible funds in the BT Family of Funds, which
can be requested by phone or in writing. For information on retirement
distributions, contact your Service Agent or call the BT Service Center at
1-800-730-1313.
IF YOU ARE SELLING SOME BUT NOT ALL OF YOUR NON-RETIREMENT ACCOUNT SHARES, leave
at least $1,000 worth of Shares in the account to keep it open.
TO SELL SHARES BY BANK WIRE you will need to sign up for these services in
advance when completing your account application.
CERTAIN REQUESTS MUST INCLUDE A SIGNATURE GUARANTEE to protect you and Bankers
Trust from fraud. Redemption requests in writing must include a signature
guarantee if any of the following situations apply:
o Your account registration has changed within the last 30 days,
o The check is being mailed to a different address than the one on your
account (record address),
o The check is being made payable to someone other than the account owner,
o The redemption proceeds are being transferred to a BT account with a
different registration, or
o You wish to have redemption proceeds wired to a non-predesignated bank
account.
A signature guarantee is also required if you change the pre-designated bank
information for receiving redemption proceeds on your account.
You should be able to obtain a signature guarantee from a bank, broker, dealer,
credit union (if authorized under state law), securities exchange or
association, clearing agency, or savings association. A notary public cannot
provide a signature guarantee.
<PAGE>
ADDITIONAL INFORMATION ABOUT SELLING SHARES
BY WIRE - You must sign up for the wire feature before using it. To verify that
it is in place, call 1-800-730-1313. Minimum wire: $1,000. Your wire redemption
request must be received by the Transfer Agent before 4:00 p.m. Eastern time for
money to be wired on the next business day.
IN WRITING - Write a signed "letter of instruction" with your name, the Fund's
name and Fund's number, your Fund account number, the dollar amount or number of
Shares to be redeemed, and mail to one of the following addresses:
BT Service Center
P.O. Box 419210
Kansas City, MO 64141-6210
Overnight mailings:
BT Service Center
210 West 10th Street, 8th Floor
Kansas City, MO 64105-1716
For Trust accounts, the trustee must sign the letter indicating capacity as
trustee. If the trustee's name is not on the account registration, provide a
copy of the trust document certified within the last 60 days.
For a Business or Organization account, at least one person authorized by
corporate resolution to act on the account must sign the letter.
Unless otherwise instructed, the Transfer Agent will send a check to the account
address of record. The Trust reserves the right to close investor accounts via
30 day notice in writing if the Fund account balance falls below the Fund
minimums.
INVESTOR SERVICES
BT Advisor Funds, and BT Pyramid Mutual Funds provide a variety of services to
help you manage your account.
INFORMATION SERVICES
STATEMENTS AND REPORTS that your Investment Professional or the Transfer Agent
may send to you include the following:
o Confirmation statements (after every transaction that affects your account
balance, including distributions or your account registration)
o Account statements (monthly)
o Financial reports (every six months)
To reduce expenses, only one copy of most financial reports will be mailed, even
if you have more than one account in the Fund. Call your Investment Professional
or the BT Service Center at 1-800-730-1313 if you need additional copies of
financial reports.
The Transfer Agent reserves the right to deduct an annual maintenance fee of
$12.00 from accounts with a value of less than $2,500 (including any amount paid
as a sales charge.) The fee, which is payable to the Transfer Agent, is designed
to offset in part the relatively higher costs of servicing smaller accounts.
The Transfer Agent may charge a fee for special services, such as providing
historical account documents, that are beyond the normal scope of its services.
EXCHANGE PRIVILEGE
Shareholders may exchange their Shares for shares of certain other funds in the
BT Family of Funds registered in their state. The Fund reserves the right to
terminate or modify the exchange privilege in the future. To make an exchange,
follow the procedures indicated in "How to Buy Shares" and "How to Sell Shares"
herein. Before making an exchange, please note the following:
o Call your Service Agent for information and a prospectus. Read the prospectus
for relevant information.
o Complete and sign an application, taking care to register your new account in
the same name, address and taxpayer identification number as your existing
account(s).
o Each exchange represents the sale of shares of one fund and the purchase
of shares of another, which may produce a gain or loss for tax purposes.
Your Service Agent will receive a written confirmation of each exchange
transaction.
Note that exchanges out of a Fund may be limited to four per calendar year and
that they may have tax consequences for you.
SYSTEMATIC PROGRAMS
TO MOVE MONEY FROM YOUR BANK ACCOUNT TO BT ADVISOR FUNDS OR BT PYRAMID MUTUAL
FUNDS
MINIMUM MINIMUM FREQUENCY SETTING UP OR CHANGING
INITIAL SUBSEQUENT
$1,000 $100 Monthly, bimonthly, For a new account, complete the
quarterly or semi- appropriate section
annually on the application.
For existing accounts, call your
Investment Professional for an
application. To change the amount or
frequency of your investment, contact
your Investment Professional directly or
call 1-800-730-1313. Call at least 10
business days prior to your next
scheduled investment date.
SYSTEMATIC WITHDRAWAL PROGRAM lets you set up periodic redemptions from your
account. Because of the Shares' front-end sales charge, you may not want to set
up a systematic withdrawal plan during a period when you are buying Shares on a
regular basis.
<TABLE>
<CAPTION>
MINIMUM FREQUENCY SETTING UP OR CHANGING
<S> <C> <C>
$100 Monthly, quarterly, To establish, call your Investment Professional
semi-annually or annually or call 1-800-730-1313 after your account is open.
The accounts from which the
withdrawals be processed must
have a minimum balance of
$10,000, other than retirement
accounts subject to required
minimum distributions.
</TABLE>
TAX-SAVING RETIREMENT PLANS
Retirement plans offer significant tax savings and are available to individuals,
partnerships, small businesses, corporations, nonprofit organizations and other
institutions. Contact Bankers Trust for further information. Bankers Trust can
set up your new account in the Fund under a number of several tax-savings or
tax-deferred plans. Minimums may differ from those listed elsewhere in this
Prospectus.
o INDIVIDUAL RETIREMENT ACCOUNTS (IRAS): personal savings plans that offer
tax advantages for individuals to set aside money for retirement and allow
new contributions of $2,000 per tax year.
o ROLLOVER IRAS: tax-deferred retirement accounts that retain the special
tax advantages of lump sum distributions from qualified retirement plans
and transferred IRA accounts.
<PAGE>
DIVIDENDS, DISTRIBUTIONS, AND TAXES
DISTRIBUTIONS. Each Fund distributes substantially all of its net income and
capital gains to shareholders each year. Each Fund distributes capital gains
annually. Normally, income dividends for the Equity 500 Index Fund are
distributed quarterly; income dividends for the Small Cap Index Fund and EAFE
Equity Index Fund are distributed annually; and income dividends for the U.S.
Bond Index Fund are declared daily and distributed monthly.
Each Fund intends to qualify as a regulated investment company, as defined in
the Internal Revenue Code of 1986, as amended (the "Code"). Provided the Funds
meet the requirements imposed by the Code, the Funds will not pay any Federal
income of excise taxes. The Portfolios will also not be required to pay any
Federal income or excise taxes. Dividends paid by a Fund from its taxable net
investment income and distributions by a Fund of its net realized short-term
capital gains are taxable to shareholders as ordinary income, whether received
in cash or reinvested in additional shares of a Fund. Each Fund's dividends and
distribution will not qualify for the dividends-received deduction for
corporations.
DISTRIBUTION OPTIONS. When you open an account, specify on your account
application how you want to receive distributions. The Trusts offer four
options:
1. REINVESTMENT OPTION. Your dividend and capital gain distributions will be
automatically reinvested in additional Shares of the Fund. If you do not
indicate a choice on your application you will be assigned this option.
2. INCOME-EARNED OPTION. Your capital gain distributions will be
automatically reinvested in additional Shares of the Fund, but you will be
sent a check for each dividend distribution.
3. CASH OPTION. You will be sent a check for your dividend and capital gain
distributions.
4. AUTOMATIC DIVIDENDS PROGRAM. Your dividend and capital gain distributions
be automatically invested in another fund in the BT Family of Funds as
long as the minimums for that account are met.
If you select distribution option 2 or 3 and the U.S. Postal Service cannot
deliver your checks, or if your checks remain uncashed for six months, those
checks will be reinvested in your account at the current NAV and your election
may be converted to the Reinvestment Option. You may change distribution option
at anytime by notifying the Transfer Agent in writing.
FOR RETIREMENT ACCOUNTS, all distributions are automatically reinvested. When
you are over 59 1/2 years old, you can receive distributions in cash. If
distributions from a retirement account for any taxable year following the year
in which the participant reaches age 70 1/2 are less than the "minimum required
distribution" for that taxable year, an excise tax equal to 50% of the
deficiency may be imposed by the Internal Revenue Service (the "IRS"). The
administrator, trustee or custodian of such a retirement account will be
responsible for reporting distributions from such accounts to the IRS.
When each of the Funds deducts a distribution from its NAV, the reinvestment
price is the applicable Fund's NAV at the close of business that day.
Distribution checks will be mailed within seven days, or longer for a December
ex-dividend date.
FEDERAL TAXES. The Trusts intends to qualify each Fund as a regulated investment
company, as defined in the Internal Revenue Code of 1986, as amended (the
"Code"). Provided each Fund meets the requirements imposed by the Code and
distributes all of its income and gains, each Fund will not pay any federal
income or excise taxes. Each Portfolio will also not be required to pay any
federal income or excise taxes.
Distributions from the Fund's income and short-term capital gains are taxed as
dividends, and long-term capital gains distributions are taxed as long- term
capital gains. The Fund's distributions are taxable when they are paid, whether
you take them in cash or reinvest them in additional shares. Distributions
declared to shareholders of record in November and December and paid in January
are taxable as if paid on December 31. The Funds will send each shareholder a
tax statement by January 31 showing the tax status of the distributions received
in the past year.
CAPITAL GAINS. You may realize a capital gain or loss when you redeem (sell) or
exchange shares. Because the tax treatment also depends on your purchase price
and your personal tax position, you should keep your regular account statements
to use in determining your tax.
"BUYING A DIVIDEND." On the ex-date for a distribution from income and/or
capital gains, the Fund's share value is reduced by the amount of the
distribution.
If you buy shares just before the ex-date ("buying a dividend"), you will pay
the full price for the shares and then receive a portion of the price back as a
taxable distribution.
OTHER TAX INFORMATION. In addition to Federal taxes, you may be subject to state
or local taxes on your investment, depending on the laws in your area. You
should consult with your own tax adviser concerning the application of Federal,
state and local taxes to your distributions from the Fund.
PERFORMANCE INFORMATION AND REPORTS
Each Portfolio's recent strategies and holdings, and the corresponding Fund's
performance, is detailed twice a year in the Funds' financial reports (not
available during the first year for each Fund other than the Equity 500 Index
Fund), which are sent to all Fund shareholders.
For current Fund performance or a free copy of a Fund's financial report, please
contact an Investment Professional or a Service Agent.
Mutual fund performance is commonly measured as TOTAL RETURN and/or YIELD. Each
Fund's performance is affected by the expenses of that Fund.
EXPLANATION OF TERMS
TOTAL RETURN is the change in value of an investment in a Fund over a given
period, assuming reinvestment of any dividends and capital gains. A cumulative
total return reflects actual performance over a stated period of time. An
AVERAGE annual total return is a hypothetical rate of return that, if achieved
annually, would have produced the same cumulative total return if performance
had been constant over the entire period. Average annual total return
calculations smooth out variations in performance; they are not the same as
actual year-by-year results. Average annual total returns covering periods of
less than one year assume that performance will remain constant for the rest of
the year.
<TABLE>
<CAPTION>
Cumulative Total Return Average Annual Total Return
for the period from for the period from
Total Return commencement of commencement of
for 1 year operations through operations through
ended 12/31/97 12/31/97 12/31/97
<S> <C> <C> <C>
Equity 500 Index Fund(a) 32.02% 148.25% 19.95%
Small Cap Index Fund--
Advisor Class Shares(b) 25.11% 38.71% 26.41%
EAFE Equity Index Fund--
Advisor Class Shares(c) 1.89%- 3.49% 2.27%
U.S. Bond Index Fund--
Advisor Class Shares(d) N/A 6.15% N/A
(a) Fund commenced operations on December 31, 1992
(b) Fund commenced operations on August 8, 1996
(c) Fund commenced operations on June 21, 1996
(d) Fund commenced operations on June 30, 1997
</TABLE>
<PAGE>
YIELD refers to the income generated by an investment in a Fund over a given
period of time, expressed as an annual percentage rate. Yields are calculated
according to a standard that is required for all stock and bond funds. Because
this differs from other accounting methods, the quoted yield may not equal the
income actually paid to shareholders. This difference may be significant for a
Fund investing in a Portfolio whose investments are denominated in foreign
currencies.
Performance information may include comparisons of a Fund's investment results
to various unmanaged indices or results of other mutual funds or investment or
savings vehicles. From time to time, Fund rankings may be quoted from various
sources, such as Lipper Analytical Services, Inc., Value Line, and Morningstar,
Inc.
The 30-day SEC yield for the period ended December 31, 1997 for the Equity
500 Index Fund was 1.45%.
Unlike some bank deposits or other investments which pay a fixed yield for a
stated period of time, the total return of a Fund will vary depending upon
interest rates, the current market value of the securities held by the
corresponding Portfolio and changes in the expenses of the Fund or Portfolio. In
addition, during certain periods for which total return may be provided, Bankers
Trust may have voluntarily agreed to waive portions of its fees, or reimburse
certain operating expenses of a Fund or Portfolio, on a month-to-month basis.
Such waivers will have the effect of increasing the Fund's net income (and
therefore its yield and total return) during the period such waivers are in
effect.
TOTAL RETURNS AND YIELDS ARE BASED ON PAST RESULTS AND ARE NOT AN INDICATION OF
FUTURE PERFORMANCE.
MANAGEMENT OF THE TRUSTS AND THE PORTFOLIOS
BOARD OF TRUSTEES
Each Trust and each Portfolio is governed by a Board of Trustees which is
responsible for protecting the interests of investors. A majority of the
Trustees who are not "interested persons" (as defined in the 1940 Act) of the
Trusts or the Portfolio, as the case may be, have adopted written procedures
reasonably appropriate to deal with potential conflicts of interest arising from
the fact that certain of the same individuals are Trustees of the Trusts and the
Portfolios, up to and including creating separate boards of trustees. See
"Management of the Trusts and the Portfolios" in the SAI for more information
with respect to the Trustees and officers of the Trusts and each Portfolio.
INVESTMENT ADVISER
The Trusts have not retained the services of an investment adviser since
the Trusts seek to achieve the investment objective of each Fund by investing
all the Assets of the Fund in the corresponding Portfolio. Each Portfolio has
retained the services of Bankers Trust as investment adviser.
BANKERS TRUST COMPANY AND ITS AFFILIATES
Bankers Trust Company, a New York banking corporation with principal offices at
130 Liberty Street (One Bankers Trust Plaza), New York, New York 10006, is a
wholly owned subsidiary of Bankers Trust Corporation. Bankers Trust conducts a
variety of general banking and trust activities and is a major wholesale
supplier of financial services to the international and domestic institutional
market.
As of December 31, 1997, Bankers Trust Corporation was the seventh largest bank
holding company in the United States with total assets of over $100 billion.
Bankers Trust is dedicated to servicing the needs of corporations, governments,
financial institutions and private clients through a global network of over 90
offices in more than 50 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 over $300 billion in assets under
management globally. Of that total, approximately $148 billion are in U.S.
equity index assets alone.
<PAGE>
Bankers Trust has more than 50 years of experience managing retirement assets
for the nation's largest corporations and institutions. In the past, these
clients have been serviced through separate account and commingled fund
structures. Now, the BT Family of Funds brings Bankers Trust's extensive
investment management expertise - once available to only the largest
institutions in the U.S. - to individual investors. Bankers Trust's officers
have had extensive experience in managing investment portfolios having
objectives similar to those of each Portfolio.
Bankers Trust, subject to the supervision and direction of the Board of Trustees
of each Portfolio, manages each Portfolio in accordance with the Portfolio's
investment objective and stated investment policies, makes investment decisions
for the Portfolio, places orders to purchase and sell securities and other
financial instruments on behalf of the Portfolio and employs professional
investment managers and securities analysts who provide research services to the
Portfolio. Bankers Trust may utilize the expertise of any of its world wide
subsidiaries and affiliates to assist it in its role as investment adviser. All
orders for investment transactions on behalf of a Portfolio are placed by
Bankers Trust with broker-dealers and other financial intermediaries that it
selects, including those affiliated with Bankers Trust. A Bankers Trust
affiliate will be used in connection with a purchase or sale of an investment
for the Portfolio only if Bankers Trust believes that the affiliate's charge for
the transaction does not exceed usual and customary levels. The Portfolio will
not invest in obligations for which Bankers Trust or any of its affiliates is
the ultimate obligor or accepting bank. The Portfolio may, however, invest in
the obligations of correspondents and customers of Bankers Trust.
Bankers Trust receives an investment advisory fee from each Portfolio, accrued
daily and paid monthly, equal on an annual basis to the following percentages of
the average daily net assets of the Portfolio for its then-current fiscal year:
U.S. Bond Index Portfolio, 0.15%; Small Cap Index Portfolio, 0.15%; EAFE(R)
Equity Index Portfolio, 0.25%; and Equity 500 Index Portfolio, 0.075%. Under
certain circumstances Bankers Trust has agreed to pay fees to certain securities
brokers, dealers and other entities that facilitate the sale of Equity 500 Index
Fund shares, and in connection therewith provide administrative, shareholder, or
distribution related services to the Fund or its shareholders. Fees paid to
entities that administer mutual fund "supermarkets" may be higher than fees paid
for other types of services.
Bankers Trust has been advised by its counsel that, in counsel's opinion,
Bankers Trust currently may perform the services for the Trusts and the
Portfolios described in this Prospectus and the SAI without violation of the
Glass-Steagall Act or other applicable banking laws or regulations.
Bankers Trust investment personnel may invest in securities for their own
account pursuant to a code of ethics that establishes procedures for personal
investing and restricts certain transactions.
PORTFOLIO MANAGERS
Frank Salerno, Managing Director of Bankers Trust, is responsible for the
management of the Small Cap Portfolio and the Equity 500 Index Portfolio. Mr.
Salerno oversees administration, management and trading of international and
domestic equity index strategies. He has been employed by Bankers Trust since
1981 and has managed the Portfolios' assets since each Portfolio commenced
operations.
Richard J. Vella, Managing Director of Bankers Trust, has been co-manager of the
EAFE(R) Equity Index Portfolio since inception. Mr. Vella has been employed by
Bankers Trust since 1985 and has ten years of trading and investment experience.
Steven Wetter, Vice President of Bankers Trust, has been co-manager of the
EAFE(R) Equity Index Portfolio since inception. Mr. Wetter has been employed by
Bankers Trust since 1992 and has ten years of trading and investment experience.
Louis R. D'Arienzo, Vice President of Bankers Trust, has been responsible
for the day-to-day management of the U.S. Bond Index Portfolio since inception.
Mr. D'Arienzo has been employed by Bankers Trust since 1981 and has twelve years
of trading and investment experience in fixed income securities.
ADMINISTRATOR
Under its Administration and Services Agreement with each Trust, Bankers Trust
calculates the net asset value of each Fund and generally assists the Board of
Trustees of the Trust in all aspects of the administration and operation of the
Funds. The Administration and Services Agreement provides for the respective
Trust to pay Bankers Trust a fee, accrued daily and paid monthly equal on an
annual basis to the following percentages of the average daily net assets of the
Fund, attributable to the Class, for its then-current fiscal year: U.S. Bond
Index Fund, 0.20%; Small Cap Index Fund, 0.25%; EAFE(R) Equity Index Fund,
0.30%; and Equity 500 Index Fund, 0.30%.
Under an Administration and Services Agreement with each Portfolio, Bankers
Trust calculates the value of the assets of the Portfolio and generally assists
the respective Board of Trustees in all aspects of the administration and
operation of the Portfolios. For these services, the Equity 500 Index Portfolio
pays to Bankers Trust a fee, computed daily and paid monthly, equal to the
lesser of 0.05% of the average net assets of the Portfolio or an amount that
brings the total operating expenses of the Portfolio to 0.08% of the average
daily net assets of the Portfolio. The Administration and Services Agreement
provides for U.S. Bond Index Portfolio, Small Cap Index Portfolio, and EAFE
Equity Index Portfolio to pay Bankers Trust a fee, accrued daily and paid
monthly, equal on an annual basis to the following percentages of the
Portfolio's average daily net assets for its then- current fiscal year: U.S.
Bond Index Portfolio, 0.05%; Small Cap Index Portfolio, 0.05%; and EAFE(R)
Equity Index Portfolio, 0.10%. Under each Administration and Services Agreement,
Bankers Trust may delegate one or more of its responsibilities to others,
including affiliates of Edgewood, at Bankers Trust's expense.
DISTRIBUTOR
Edgewood Services, Inc. is the principal distributor for Shares of the
Funds. In addition, Edgewood and its affiliates provide the Trusts with office
facilities and currently provide administration and distribution services for
other registered investment companies. The principal business address of
Edgewood and its affiliates is 5800 Corporate Drive, Pittsburgh, Pennsylvania
15237-5829.
CUSTODIAN AND TRANSFER AGENT
Bankers Trust acts as custodian of the assets of the Trusts and each Portfolio
and serves as the transfer agent (the "Transfer Agent") for the Trusts and each
Portfolio under the Administration and Services Agreement with the Trusts and
each Portfolio.
ORGANIZATION OF THE TRUSTS AND FUNDS
Each Fund is a mutual fund: an investment that pools shareholders' money and
invests it toward a specified goal. Each Fund (with the exception of the Equity
500 Index Fund) is a separate diversified series of BT Advisor Funds, a
Massachusetts business trust. The Equity 500 Index Fund is separate diversified
series of BT Pyramid Mutual Funds. Each Fund (with the exception of the Equity
500 Index Fund) offers two classes of Shares of beneficial interest, Advisor
Class Shares and Institutional Class Shares. Each of the U.S. Bond Index
Portfolio, Small Cap Index Portfolio, and EAFE(R) Equity Index Portfolio is a
separate diversified series of BT Investment Portfolios, a New York master trust
fund. The Equity 500 Index Portfolio is a separate New York trust. Each Trust
and BT Investment Portfolios reserves the right to add additional series in the
future. The Trust also reserves the right to issue additional classes of Shares
of each Fund.
The Trusts or a Portfolio may hold special meetings and mail proxy materials.
These meetings may be called to elect or remove trustees, change fundamental
policies, approve Portfolio's investment advisory agreement, or for other
purposes. Shareholders not attending these meetings are encouraged to vote by
proxy. Each Trust's Transfer Agent will mail proxy materials in advance,
including a voting card and information about the proposals to be voted on.
When matters are submitted for shareholder vote, shareholders of each Fund will
have one vote for each full share held and proportionate, fractional votes for
fractional shares held. A separate vote of one of the Funds or classes is
required on any matter affecting only that Fund or class on which shareholders
are entitled to vote. Shareholders of a Fund or class are not entitled to vote
on Trust matters that do not affect that Fund or class, respectively, and do not
require a separate vote of the Fund or class. All series of each Trust and all
classes will vote together on certain matters, such as electing trustees or
approving independent public auditors. There normally will be no meetings of
shareholders for the purpose of electing Trustees unless and until such time as
less than a majority of Trustees holding office have been elected by
shareholders, at which time the Trustees then in office will call a
shareholders' meeting for the election of Trustees. Any Trustee may be removed
from office upon the vote of shareholders holding at least two-thirds of that
Trust's outstanding shares at a meeting called for that purpose. The Trustees
are required to call such a meeting upon the written request of shareholders
holding at least 10% of that Trust's outstanding shares. Each Trust will also
assist shareholders in communicating with one another as provided for in the
1940 Act. As of April 1, 1998, Linsco/Private Ledger Assetrack Special Customer
Account for the exclusive benefit of customers of LPL, San Diego, California,
owned approximately 25.33% of the EAFE Equity Index Fund-Advisor Class, and,
therefore, may, for certain purposes, be deemed to control the Fund and be able
to affect the outcome of certain matters as presented for a vote of
shareholders.
Each series of a Trust will vote separately on any matter involving the
corresponding Portfolio. Shareholders of all of the series of a Trust will,
however, vote together to elect Trustees of that Trust and for certain other
matters. Under certain circumstances, the shareholders of one or more series
could control the outcome of these votes. The series of BT Investment Portfolios
will vote together or separately on matters in the same manner, and in the same
circumstances, as do the series of the Trusts. As with the Trusts, the investors
in one or more series of BT Investment Portfolios could control the outcome of
these votes.
The Trusts are each an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a business trust
may, under certain circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the Trust itself was unable to meet its
obligations.
The Declaration of Trust of each of BT Investment Portfolios and the Equity 500
Index Portfolio provides that each Fund and other entities investing in a
Portfolio (e.g., other investment companies, insurance company separate accounts
and common and commingled trust funds) will each be liable for all obligations
of that Portfolio. However, the risk of a Fund incurring financial loss on
account of such liability is limited to circumstances in which both inadequate
insurance existed and a Portfolio itself was unable to meet its obligations.
Accordingly, the Trustees of the Trusts believe that neither the Funds nor their
shareholders will be adversely affected by reason of the Funds' investing in the
Portfolios. No series of BT Investment Portfolios has any preference over any
other series.
ADDITIONAL INFORMATION
SHORT-TERM INVESTMENTS. Each Portfolio may invest in certain short-term fixed
income securities. Such securities may be used to invest uncommitted cash
balances, to maintain liquidity to meet shareholder redemptions or to serve as
collateral for the obligations underlying a Portfolio's investment in securities
index futures or related options or warrants. These securities include:
obligations issued or guaranteed by the U.S. government or any of its agencies
or instrumentalities or by any of the states, repurchase agreements, time
deposits, certificates of deposit, bankers' acceptances, commercial paper, and
shares of money market funds (see "Investment Company Securities" herein).
U.S. GOVERNMENT SECURITIES are obligations of, or guaranteed by, the U.S.
government, its agencies or instrumentalities. Some U.S. government securities,
such as Treasury bills, notes and bonds, are supported by the full faith and
credit of the United States; others, such as those of the Federal Home Loan
Banks, are supported by the right of the issuer to borrow from the Treasury;
others, such as those of the Federal National Mortgage Association, are
supported by the discretionary authority of the U.S. government to purchase the
agency's obligations; and still others, such as those of the Student Loan
Marketing Association, are supported only by the credit of the instrumentality.
SECURITIES LENDING. Each Portfolio is permitted to lend up to 30% of the total
value of its securities. These loans must be secured continuously be cash or
securities issued or guaranteed by the United States government, its agencies or
instrumentalities or by a letter of credit at least equal to the market value of
the securities loaned plus accrued income. By lending its securities, a
Portfolio may increase its income by continuing to receive income on the loaned
securities as well as by the opportunity to receive interest on the collateral.
During the term of the loan, a Portfolio continues to bear the risk of
fluctuations in the price of the loaned securities. In lending securities to
brokers, dealers and other organizations, a Portfolio is subject to risks which,
like those associated with other extensions of credit, include delays in
receiving additional collateral, in recovery should the borrower fail
financially and possible loss of the collateral. Upon receipt of appropriate
regulatory approval, cash collateral may be invested in a money market fund
managed by Bankers Trust (or its affiliate) and Bankers Trust may serve as the
Portfolio's lending agent and may share in revenue received from securities
lending transactions as compensation for this service.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each Portfolio may purchase
securities on a when-issued or delayed delivery basis. Delivery of and payment
for these securities may take place as long as a month or more after the date of
the purchase commitment. The value of these securities is subject to market
fluctuation during this period and no income accrues to the Portfolio until
settlement takes place. The Portfolio segregates with the Custodian liquid
securities in an amount at least equal to these commitments.
<PAGE>
MORTGAGE-RELATED SECURITIES. As part of its effort to replicate the investment
performance of its Index, the U.S. Bond Index Portfolio may invest in
mortgage-backed securities. Mortgage-backed securities represent an interest in
an underlying pool of mortgages. Unlike ordinary fixed-income securities, which
generally pay a fixed rate of interest and return principal upon maturity,
mortgage-backed securities repay both interest income and principal as part of
their periodic payments. Because the mortgages underlying mortgage-backed
certificates can be prepaid at any time by homeowners or corporate borrowers,
mortgage-backed securities give rise to certain unique "pre-payment" risks. See
"Risk Factors and Certain Securities and Investment Practices" herein.
THE U.S. BOND INDEX PORTFOLIO may purchase mortgage-backed securities issued by
the Government National Mortgage Association (GNMA), the Federal Home Loan
Mortgage Corporation (FHLMC), the Federal National Mortgage Association (FNMA),
and the Federal Housing Authority (FHA). GNMA securities are guaranteed by the
U.S. government as to the timely payment of principal and interest; securities
from other Government-sponsored entities are generally not secured by an
explicit pledge of the U.S. government. The U.S. Bond Index Portfolio may also
invest in conventional mortgage securities, which are packaged by private
corporations and are not guaranteed by the U.S. government. Mortgage securities
that are guaranteed by the U.S. government are guaranteed only as to the timely
payment of principal and interest. The market value of such securities is not
guaranteed and may fluctuate.
DERIVATIVES. Each Portfolio may invest in various instruments that are commonly
known as "derivatives." Generally, a derivative is a financial arrangement, the
value of which is based on, or "derived" from, a traditional security, asset, or
market index. Some "derivatives" such as mortgage-related and other asset-backed
securities are in many respects like any other investment, although they may be
more volatile or less liquid than more traditional debt securities. There are,
in fact, many different types of derivatives and many different ways to use
them. There are a range of risks associated with those uses. Futures and options
are commonly used for traditional hedging purposes to attempt to protect a fund
from exposure to changing interest rates, securities prices, or currency
exchange rates and as a low cost method of gaining exposure to a particular
securities market without investing directly in those securities. The Adviser
will only use derivatives for cash management purposes. Derivatives will not be
used to increase portfolio risk above the level that could be achieved using
only traditional investment securities or to acquire exposure to changes in the
value of assets or indices that by themselves would not be purchased for the
Portfolio.
SECURITIES INDEX FUTURES AND RELATED OPTIONS. Each Portfolio may enter into
securities index futures contracts and related options provided that not more
than 5% of its assets are required as a margin deposit for futures contracts or
options and provided that not more than 20% of a Portfolio's assets are invested
in futures and options at any time. When a Portfolio has cash from new
investments in the Portfolio or holds a portion of its assets in money market
instruments, it may enter into index futures or options to attempt to increase
its exposure to the market. Strategies the Portfolio could use to accomplish
this include purchasing futures contracts, writing put options, and purchasing
call options. When the Portfolio wishes to sell securities, because of
shareholder redemptions or otherwise, it may use index futures or options to
hedge against market risk until the sale can be completed. These strategies
could include selling futures contracts, writing call options, and purchasing
put options.
SWAP AGREEMENTS. Each Portfolio may enter into swap agreements only to the
extent that obligations under such agreements represent not more than 10% of the
Portfolio's total assets.
Swap agreements are contracts between parties in which one party agrees to make
payments to the other party based on the change in market value of a specified
index or asset. In return, the other party agrees to make payments to the first
party based on the return of a different specified index or asset.
Although swap agreements entail the risk that a party will default on its
payment obligations thereunder, a Portfolio will minimize this risk by entering
into agreements that mark to market no less frequently than quarterly. Swap
agreements also bear the risk that a Portfolio will not be able to meet its
obligation to the counterparty. This risk will be mitigated by investing a
Portfolio in the specific asset for which it is obligated to pay a return.
WARRANTS. Each Portfolio's investment in warrants will not exceed more than 5%
of its assets (2% with respect to warrants not listed on the New York or
American Stock Exchanges). Warrants are instruments which entitle the holder to
buy underlying equity securities at a specific price for a specific period of
time. A warrant tends to be more volatile than its underlying securities and
ceases to have value if it is not exercised prior to its expiration date. In
addition, changes in the value of a warrant do not necessarily correspond to
changes in the value of its underlying securities.
CONVERTIBLE SECURITIES. Each Portfolio may invest in convertible securities
which are a bond or preferred stock which may be converted at a stated price
within a specific period of time into a specified number of shares of common
stock of the same or different issuer. Convertible securities are senior to
common stock in a corporation's capital structure, but usually are subordinated
to non-convertible debt securities. While providing a fixed income stream-
generally higher in yield than in the income derived from a common stock but
lower than that afforded by a non-convertible debt security-a convertible
security also affords an investor the opportunity, through its conversion
feature, to participate in the capital appreciation of common stock into which
it is convertible.
In general, the market value of a convertible security is the higher of its
investment value (its value as a fixed income security) or its conversion value
(the value of the underlying shares of common stock if the security is
converted). As a fixed income security, the market value of a convertible
security generally increases when interest rates decline and generally decreases
when interest rates rise; however, the price of a convertible security generally
increases as the market value of the underlying stock increases, and generally
decreases as the market value of the underlying stock declines. Investments in
convertible securities generally entail less risk than investments in the common
stock of the same issuer.
FURTHER RISKS ASSOCIATED WITH THE USE OF FUTURES CONTRACTS, OPTIONS, WARRANTS,
CONVERTIBLE SECURITIES AND SWAP AGREEMENTS. The risk of loss associated with
futures contracts in some strategies can be substantial due to both the low
margin deposits required and the extremely high degree of leverage involved in
futures pricing. As a result, a relatively small price movement in a futures
contract may result in an immediate and substantial loss or gain. However, the
Portfolios will not use futures contracts, options, warrants, convertible
securities and swap agreements for speculative purposes or to leverage their net
assets. Accordingly, the primary risks associated with the use of futures
contracts, options, warrants, convertible securities and swap agreements by the
Portfolios are: (i) imperfect correlation between the change in market value of
the securities held by a Portfolio and the prices of futures contracts, options,
warrants, convertible securities and swap agreements; and (ii) possible lack of
a liquid secondary market for a futures contract and the resulting inability to
close a futures position prior to its maturity date. The risk of imperfect
correlation will be minimized by investing only in those contracts whose
behavior is expected to resemble that of a Portfolio's underlying securities.
The risk that a Portfolio will be unable to close out a futures position will be
minimized by entering into stock transactions on an exchange with an active and
liquid secondary market. However options, warrants, convertible securities and
swap agreements purchased or sold over-the-counter may be less liquid than
exchange-traded securities. Illiquid securities, in general, may not represent
more than 15% of the net assets of a Portfolio.
FOREIGN CURRENCY FORWARD, FUTURES AND RELATED OPTIONS TRANSACTIONS. The EAFE(R)
Equity Index Portfolio may enter into foreign currency forward and foreign
currency futures contracts in order to maintain the same currency exposure as
the EAFE Index. The Portfolio may not enter into such contracts as a way of
protecting against anticipated adverse changes in exchange rates between foreign
currencies and the U.S. dollar. A foreign currency forward contract is an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. Such contracts do not
eliminate fluctuations in the underlying prices of securities held by the
Portfolios. Although such contracts tend to minimize the risk of loss due to a
decline in the value of a currency that has been sold forward, and the risk of
loss due to an increase in the value of a currency that has been purchased
forward, at the same time they tend to limit any potential gain that might be
realized should the value of such currency increase.
Successful use of forward contracts depends on Bankers Trust's skill in
analyzing and predicting relative currency values. Forward contracts alter the
EAFE(R) Equity Index Portfolio's exposure to currency exchange rate activity and
could result in losses to that Portfolio if currencies do not perform as Bankers
Trust anticipates. The Portfolio may also incur significant costs when
converting assets from one currency to another.
<PAGE>
ASSET COVERAGE. To assure that a Portfolio's use of futures and related options,
as well as when-issued and delayed delivery securities, interest rate swaps and
foreign currency forward futures and related options transactions are not used
to achieve excessive investment leverage, a Portfolio will cover such
transactions, as required under applicable interpretations of the SEC, either by
owning the underlying securities, entering into an off-setting transaction, or
by segregating with the Portfolio's Custodian liquid securities in an amount at
all times equal to or exceeding the Portfolio's commitment with respect to these
instruments or contracts.
<PAGE>
37
i
BT PYRAMID MUTUAL FUNDS
BT INVESTMENT EQUITY 500 INDEX FUND
BT ADVISOR FUNDS
U.S. BOND INDEX FUND
SMALL CAP INDEX FUND
EAFE(R) EQUITY INDEX FUND
(ADVISOR CLASS SHARES)
INVESTMENT ADVISER OF EACH PORTFOLIO AND ADMINISTRATOR
BANKERS TRUST COMPANY
130 Liberty Street
(One Bankers Trust Plaza)
New York, NY 10006
DISTRIBUTOR
EDGEWOOD SERVICES, INC.
Clearing Operations
P.O. Box 897
Pittsburgh, PA 15230-0897
CUSTODIAN AND TRANSFER AGENT
BANKERS TRUST COMPANY
130 Liberty Street
(One Bankers Trust Plaza)
New York, NY 10006
INDEPENDENT ACCOUNTANTS
COOPERS & LYBRAND L.L.P.
1100 Main Street, Suite 900
Kansas City, MO 64105
COUNSEL
WILLKIE FARR & GALLAGHER
153 East 53rd Street
New York, NY 10022
No person has been authorized to give any information or to make any
representations other than those contained in the Trusts' Prospectuses, the
corresponding SAIs or the Trusts' official sales literature in connection with
the offering of the Trust's Shares and, if given or made, such other information
or representations must not be relied on as having been authorized by a Trust.
This Prospectus does not constitute an offer in any state in which, or to any
person to whom, such offer may not lawfully be made.
Cusips #05576L866
#000000000
#05576L858
#05576L106
#055847107
COMBADV300 (4/98)
STATEMENT OF ADDITIONAL INFORMATION
APRIL 30, 1998
BT PYRAMID MUTUAL FUNDS
BT INVESTMENT EQUITY 500 INDEX FUND
BT ADVISOR FUNDS -- ADVISOR CLASS SHARES
U.S. BOND INDEX FUND
SMALL CAP INDEX FUND
EAFE(R) EQUITY INDEX FUND
BT Advisor Funds (the "Trust") is comprised of several funds. The funds listed
above (each a "Fund" and together the "Funds") are (with the exception of BT
Investment Equity 500 Index Fund) each a series of the Trust and offers two
classes of shares (each a "Class" and collectively the "Classes"). This
Statement of Additional Information describes the Advisor Class Shares. BT
Investment Equity 500 Index Fund (the "Equity 500 Index Fund") is a series of BT
Pyramid Mutual Funds (the "Pyramid Trust") (together with the Trust, the
"Trusts").
As described in the Prospectus, the Trusts seek to achieve the investment
objectives of each Fund by investing all the investable assets ("Assets") of the
Fund in a diversified open-end management investment company (or a series
thereof) having the same investment objectives as such Fund. These investment
companies are, respectively, BT Investment Portfolios and Equity 500 Index
Portfolio. U.S. Bond Index Portfolio, Small Cap Index Portfolio and EAFE(R)
Equity Index Portfolio are each a series of BT Investment Portfolios.
Shares of the Funds are sold by Edgewood Services, Inc. ("Edgewood"), the
Trusts' Distributor, to clients and customers (including affiliates and
correspondents) of Bankers Trust Company ("Bankers Trust"), the Portfolios'
Adviser, and to clients and customers of other organizations.
The Trusts' Prospectuses for the Funds are dated April 30, 1998. The Prospectus
provides the basic information investors should know before investing. This
Statement of Additional Information ("SAI"), which is not a Prospectus, is
intended to provide additional information regarding the activities and
operations of the Trusts and should be read in conjunction with a Fund's
Prospectus. You may request a copy of a prospectus or a paper copy of this SAI,
if you have received it electronically, free of charge by calling the Trust at
the telephone number listed below or by contacting any Service Agent. This SAI
is not an offer of any Fund for which an investor has not received a Prospectus.
Capitalized terms not otherwise defined in this SAI have the meanings accorded
to them in the Fund's Prospectus.
BANKERS TRUST COMPANY
INVESTMENT ADVISER OF EACH PORTFOLIO AND ADMINISTRATOR
EDGEWOOD SERVICES, INC.
DISTRIBUTOR
5800 Corporate Drive
Pittsburgh, Pennsylvania 15237-5829
1-800-730-1313
<PAGE>
I
TABLE OF CONTENTS
Risk Factors and Certain Securities and Investment Practices.............1
Performance Information.................................................22
Valuation of Securities; Redemptions and Purchases in Kind..............24
Management of the Trusts and Portfolios.................................26
Organization of the Trusts..............................................32
Taxation................................................................32
Financial Statements....................................................33
Appendix................................................................34
<PAGE>
39
RISK FACTORS AND CERTAIN SECURITIES AND INVESTMENT PRACTICES
INVESTMENT OBJECTIVES
The investment objective(s) of each Fund is described in the Funds' Prospectus.
There can, of course, be no assurance that any Fund will achieve its investment
objective(s).
INVESTMENT PRACTICES
Each Fund seeks to achieve its investment objective by investing all of its
Assets in the corresponding Portfolio. The Trusts may withdraw a Fund's
investment from the corresponding Portfolio at any time if the Board of Trustees
of the respective Trust determines that it is in the best interests of the Fund
to do so.
Since the investment characteristics of each Fund will correspond directly to
those of the corresponding Portfolio, the following is a discussion of the
various investments of and techniques employed by each Portfolio.
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 to this SAI.
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.
<PAGE>
The Securities and Exchange Commission (the "SEC") has adopted Rule 144A, which
allows a broader institutional trading market for securities otherwise subject
to restriction on their resale to the general public. Rule 144A establishes a
"safe harbor" from the registration requirements of the 1933 Act of resales of
certain securities to qualified institutional buyers. The Adviser anticipates
that the market for certain restricted securities such as institutional
commercial paper will expand further as a result of this regulation and the
development of automated systems for the trading, clearance and settlement of
unregistered securities of domestic and foreign issuers, such as the PORTAL
System sponsored by the National Association of Securities Dealers, Inc.
The Adviser will monitor the liquidity of Rule 144A securities in each
Portfolio's portfolio under the supervision of the Portfolio's Board of
Trustees. In reaching liquidity decisions, the Adviser will consider, among
other things, the following factors: (i) the frequency of trades and quotes for
the security; (ii) the number of dealers and other potential purchasers wishing
to purchase or sell the security; (iii) dealer undertakings to make a market in
the security and (iv) the nature of the security and of the marketplace trades
(e.g., the time needed to dispose of the security, the method of soliciting
offers and the mechanics of the transfer).
LENDING OF PORTFOLIO SECURITIES. Each Portfolio has the authority to lend
portfolio securities to brokers, dealers and other financial organizations. By
lending its securities, a Portfolio may increase its income by continuing to
receive payments in respect of dividends and 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 a fee paid by the borrower when irrevocable
letters of credit and U.S. Government Obligations are used as collateral. Each
Portfolio will adhere to the following conditions whenever its securities are
loaned: (i) the Portfolio must receive at least 100% collateral 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 substitute payments in respect of all dividends,
interest or other distributions on the loaned securities; and (v) 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 retain the right to terminate the loan and recall and vote the securities.
SHORT-TERM INSTRUMENTS. When a Portfolio experiences large cash inflows through
the sale of securities and desirable equity securities, that are consistent with
the Portfolio's investment objective, which are unavailable in sufficient
quantities or at attractive prices, the Portfolio may hold short-term
investments (or shares of money market mutual funds) for a limited time pending
availability of such equity securities. Short-term instruments consist of
foreign and domestic: (i) short-term obligations of sovereign governments, their
agencies, instrumentalities, authorities or political subdivisions; (ii) other
short-term debt securities rated AA or higher by ("S&P") or Aa or higher by
Moody's Investors Service, 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.
<PAGE>
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each Portfolio may purchase
securities on a when-issued or delayed delivery basis. For example, delivery of
and payment for these securities can take place a month or more after the date
of the purchase commitment. The purchase price and the interest rate payable, if
any, on the securities are fixed on the purchase commitment date or at the time
the settlement date is fixed. The value of such securities is subject to market
fluctuation and no interest accrues to a Portfolio until settlement takes place.
At the time a Portfolio makes the commitment to purchase securities on a
when-issued or delayed delivery basis, it will record the transaction, reflect
the value each day of such securities in determining its net asset value and, if
applicable, calculate the maturity for the purposes of average maturity from
that date. At the time of settlement a when-issued security may be valued at
less than the purchase price. To facilitate such acquisitions, each Portfolio
will maintain with the Custodian a segregated account with liquid assets,
consisting of cash, U.S. government securities or other appropriate securities,
in an amount at least equal to such commitments. On delivery dates for such
transactions, each Portfolio will meet its obligations from maturities or sales
of the securities held in the segregated account and/or from cash flow. If a
Portfolio chooses to dispose of the right to acquire a when-issued security
prior to its acquisition, it could, as with the disposition of any other
portfolio obligation, incur a gain or loss due to market fluctuation. It is the
current policy of each Portfolio not to enter into when-issued commitments
exceeding in the aggregate 15% of the market value of the Portfolio's total
assets, less liabilities other than the obligations created by when-issued
commitments.
ADDITIONAL U.S. GOVERNMENT OBLIGATIONS. Each Portfolio may invest in obligations
issued or guaranteed by U.S. government agencies or instrumentalities. These
obligations may or may not be backed by the "full faith and credit" of the
United States. In the case of securities not backed by the full faith and credit
of the United States, each Portfolio must look principally to the federal agency
issuing or guaranteeing the obligation for ultimate repayment, and may not be
able to assert a claim against the United States itself in the event the agency
or instrumentality does not meet its commitments. Securities in which each
Portfolio may invest that are not backed by the full faith and credit of the
United States include, but are not limited to, obligations of the Tennessee
Valley Authority, the Federal Home Loan Mortgage Corporation and the U.S. Postal
Service, each of which has the right to borrow from the U.S. Treasury to meet
its obligations, and obligations of the Farm Credit Banks and the Federal Home
Loan Banks, both of whose obligations may be satisfied only by the individual
credits of each issuing agency. Securities which are backed by the full faith
and credit of the United States include obligations of the Government National
Mortgage Association, the Farmers Home Administration, and the Export-Import
Bank.
EQUITY INVESTMENTS. With the exception of the U.S. Bond Index Portfolio, each
Portfolio may invest in equity securities listed on any domestic or foreign
securities exchange or traded in the over-the-counter market as well as certain
restricted or unlisted securities. They may or may not pay dividends or carry
voting rights. Common stock occupies the most junior position in a company's
capital structure.
SWAP AGREEMENTS. Swap agreements are contracts entered into by two parties,
primarily institutional investors, for periods ranging from a few weeks to more
than one year. In a standard swap transaction, two parties agree to exchange the
returns (or differentials in rates of return) earned or realized on particular
predetermined investments or instruments. The gross returns to be exchanged or
swapped between the parties are calculated with respect to a notional amount,
I.E., the return on or increase in value of a particular dollar amount invested
at a particular interest rate, in a particular foreign currency, or in a basket
of securities representing a particular index. The notional amount of the swap
agreement is only a fictive basis on which to calculate the obligations which
the parties to a swap agreement have agreed to exchange. A Portfolio's
obligations (or rights) under a swap agreement will generally be equal only to
the net amount to be paid or received under the agreement based on the relative
values of the positions held by each party to the agreement (the "net amount").
A Portfolio's obligations under a swap agreement will be accrued daily (offset
against any amounts owing to the Portfolio) and any accrued but unpaid net
amounts owed to a swap counterparty will be covered by the maintenance of a
segregated account consisting of cash, U.S. government securities, or high grade
debt obligations, to avoid any potential leveraging of the Portfolio's
portfolio.
The use of swap agreements will be successful in furthering its investment
objective will depend on the Adviser's ability to correctly predict whether
certain types of investments are likely to produce greater returns than other
investments. Swap agreements may be considered to be illiquid because they are
two party contracts and because they may have terms of greater than seven days.
Moreover, a Portfolio bears the risk of loss of the amount expected to be
received under a swap agreement in the event of the default or bankruptcy of a
swap agreement counterparty. A Portfolio will enter into swap agreements only
with counterparties that would be eligible for consideration as repurchase
agreement counterparties under the Portfolio's repurchase agreement guidelines.
Certain restrictions imposed on the Portfolios by the Internal Revenue Code may
limit the Portfolios' ability to use swap agreements. The swaps market is a
relatively new market and is largely unregulated. It is possible that
developments in the swaps market, including potential government regulation,
could adversely affect a Portfolio's ability to terminate existing swap
agreements or to realize amounts to be received under such agreements.
Certain swap agreements are exempt from most provisions of the Commodity
Exchange Act (the "CEA") and, therefore, are not regulated as futures or
commodity option transactions under the CEA, pursuant to regulations approved by
the Commodity Futures Trading Commission (the "CFTC") effective February 22,
1993. To qualify for this exemption, a swap agreement must be entered into by
eligible participants, which includes the following, provided the participant's
total assets exceed established levels: a bank or trust company, savings
association or credit union, insurance company, investment company subject to
regulation under the Investment Company Act of 1940, as amended (the "1940
Act"), commodity pool, corporation, partnership, proprietorship, organization,
trust or other entity, employee benefit plan, governmental entity,
broker-dealer, futures commission merchant, natural person, or regulated foreign
person. To be eligible, natural persons and most other entities must have total
assets exceeding $10 million; commodity pools and employee benefit plans must
have asset exceeding $5 million. In addition, an eligible swap transaction must
meet three conditions. First, the swap agreement may not be part of a fungible
class of agreements that are standardized as to their material economic terms.
Second, the creditworthiness of parties with actual or potential obligations
under the swap agreement must be a material consideration in entering into or
determining the terms of the swap agreement, including pricing, cost or credit
enhancement terms. Third, swap agreements may not be entered into and traded on
or through a multilateral transaction execution facility.
This exemption is not exclusive, and participants may continue to rely on
existing exclusions for swaps, such as the Policy Statement issued in July 1989
which recognized a "safe harbor" for swap transactions from regulation as
futures or commodity option transactions under the CEA or its regulations. The
Policy Statement applies to swap transactions settled in cash that: (i) have
individually tailored terms; (ii) lack exchange style offset and the use of a
clearing organization or margin system; (iii) are undertaken in conjunction with
a line of business; and (iv) are not marketed to the public.
REVERSE REPURCHASE AGREEMENTS. The Portfolios may borrow funds for temporary or
emergency purposes, such as meeting larger than anticipated redemption requests,
and not for leverage, by among other things, agreeing to sell portfolio
securities to financial institutions such as banks and broker-dealers and to
repurchase them at a mutually agreed date and price (a "reverse repurchase
agreement"). At the time a Portfolio enters into a reverse repurchase agreement
it will place in a segregated custodial account cash, U.S. Government
Obligations or high-grade debt obligations having a value equal to the
repurchase price, including accrued interest. Reverse repurchase agreements
involve the risk that the market value of the securities sold by a Portfolio may
decline below the repurchase price of those securities. Reverse repurchase
agreements are considered to be borrowings by a Portfolio.
<PAGE>
WARRANTS. Warrants entitle the holder to buy common stock from the issuer at a
specific price (the strike price) for a specific period of time. The strike
price of warrants sometimes is much lower than the current market price of the
underlying securities, yet warrants are subject to similar price fluctuations.
As a result, warrants may be more volatile investments than the underlying
securities.
Warrants do not entitle the holder to dividends or voting rights with respect to
the underlying securities and do not represent any rights in the assets of the
issuing company. Also, the value of the warrant does not necessarily change with
the value of the underlying securities and a warrant ceases to have value if it
is not exercised prior to the expiration date.
CONVERTIBLE SECURITIES. Convertible securities may be a debt security or
preferred stock which may be converted into common stock or carries the right to
purchase common stock. Convertible securities entitle the holder to exchange the
securities for a specified number of shares of common stock, usually of the same
company, at specified prices within a certain period of time.
The terms of any convertible security determine its ranking in a company's
capital structure. In the case of subordinated convertible debentures, the
holders' claims on assets and earnings are subordinated to the claims of other
creditors, and are senior to the claims of preferred and common shareholders. In
the case of convertible preferred stock, the holders' claims on assets and
earnings are subordinated to the claims of all creditors and are senior to the
claims of common shareholders.
GINNIE MAE CERTIFICATES. The Government National Mortgage Association ("Ginnie
Mae") is a wholly-owned corporate instrumentality of the United States within
the Department of Housing and Urban Development. The National Housing Act of
1934, as amended (the "Housing Act"), authorizes Ginnie Mae to guarantee the
timely payment of the principal of and interest on certificates that are based
on and backed by a pool of mortgage loans insured by the Federal Housing
Administration under the Housing Act, or Title V of the Housing Act of 1949
("FHA Loans"), or guaranteed by the Department of Veterans Affairs under the
Servicemen's Readjustment Act of 1944, as amended ("VA Loans"), or by pools of
other eligible mortgage loans. The Housing Act provides that the full faith and
credit of the U.S. government is pledged to the payment of all amounts that may
be required to be paid under any Ginnie Mae guaranty. In order to meet its
obligations under such guaranty, Ginnie Mae is authorized to borrow from the
U.S. Treasury with no limitations as to amount.
The Ginnie Mae Certificates in which the U.S. Bond Index Portfolio will invest
will represent a pro rata interest in one or more pools of the following types
of mortgage loans: (i) fixed-rate level payment mortgage loans; (ii) fixed-rate
graduated payment mortgage loans; (iii) fixed-rate growing equity mortgage
loans; (iv) fixed-rate mortgage loans secured by manufactured (mobile) homes;
(v) mortgage loans on multifamily residential properties under construction;
(vi) mortgage loans on completed multifamily projects; (vii) fixed-rate mortgage
loans as to which escrowed funds are used to reduce the borrower's monthly
payments during the early years of the mortgage loans ("buydown" mortgage
loans); (viii) mortgage loans that provide for adjustments in payments based on
periodic changes in interest rates or in other payment terms of the mortgage
loans; and (ix) mortgage-backed serial notes. All of these mortgage loans will
be FHA Loans or VA Loans and, except as otherwise specified above, will be
fully-amortizing loans secured by first liens on one- to four-family housing
units.
FANNIE MAE CERTIFICATES. The Federal National Mortgage Association ("Fannie
Mae") is a federally chartered and privately owned corporation organized and
existing under the Federal National Mortgage Association Charter Act of 1938.
The obligations of Fannie Mae are not backed by the full faith and credit of the
U.S. government.
Each Fannie Mae Certificate will represent a pro rata interest in one or more
pools of FHA Loans, VA Loans or conventional mortgage loans (i.e., mortgage
loans that are not insured or guaranteed by any governmental agency) of the
following types: (i) fixed-rate level payment mortgage loans; (ii) fixed-rate
growing equity mortgage loans; (iii) fixed-rate graduated payment mortgage
loans; (iv) variable rate mortgage loans; (v) other adjustable rate mortgage
loans; and (vi) fixed-rate and adjustable mortgage loans secured by multifamily
projects.
FREDDIE MAC CERTIFICATES. The Federal Home Loan Mortgage Corporation ("Freddie
Mac") is a corporate instrumentality of the United States created pursuant to
the Emergency Home Finance Act of 1970, as amended (the "FHLMC Act"). The
obligations of Freddie Mac are obligations solely of Freddie Mac and are not
backed by the full faith and credit of the U.S. government.
Freddie Mac Certificates represent a pro rata interest in a group of mortgage
loans (a "Freddie Mac Certificate group") purchased by Freddie Mac. The mortgage
loans underlying the Freddie Mac Certificates will consist of fixed-rate or
adjustable rate mortgage loans with original terms to maturity of between ten
and thirty years, substantially all of which are secured by first liens on one-
to four-family residential properties or multifamily projects. Each mortgage
loan must meet the applicable standards set forth in the FHLMC Act. A Freddie
Mac Certificate group may include whole loans, participating interests in whole
loans and undivided interests in whole loans and participations comprising
another Freddie Mac Certificate group.
ADJUSTABLE RATE MORTGAGES - INTEREST RATE INDICES. Adjustable rate mortgages in
which the U.S. Bond Index Portfolio invests may be adjusted on the basis of one
of several indices. The One Year Treasury Index is the figure derived from the
average weekly quoted yield on U.S. Treasury Securities adjusted to a constant
maturity of one year. The Cost of Funds Index reflects the monthly weighted
average cost of funds of savings and loan associations and savings banks whose
home offices are located in Arizona, California and Nevada (the "FHLB Eleventh
District") that are member institutions of the Federal Home Loan Bank of San
Francisco (the "FHLB of San Francisco"), as computed from statistics tabulated
and published by the FHLB of San Francisco. The FHLB of San Francisco normally
announces the Cost of Funds Index on the last working day of the month following
the month in which the cost of funds was incurred.
A number of factors affect the performance of the Cost of Funds Index and may
cause the Cost of Funds Index to move in a manner different from indices based
upon specific interest rates, such as the One Year Treasury Index. Because of
the various origination dates and maturities of the liabilities of members of
the FHLB Eleventh District upon which the Cost of Funds Index is based, among
other things, at any time the Cost of Funds Index may not reflect the average
prevailing market interest rates on new liabilities of similar maturities. There
can be no assurance that the Cost of Funds Index will necessarily move in the
same direction or at the same rate as prevailing interest rates since as longer
term deposits or borrowings mature and are renewed at market interest rates, the
Cost of Funds Index will rise or fall depending upon the differential between
the prior and the new rates on such deposits and borrowings. In addition,
dislocations in the thrift industry in recent years have caused and may continue
to cause the cost of funds of thrift institutions to change for reasons
unrelated to changes in general interest rate levels. Furthermore, any movement
in the Cost of Funds Index as compared to other indices based upon specific
interest rates may be affected by changes instituted by the FHLB of San
Francisco in the method used to calculate the Cost of Funds Index. To the extent
that the Cost of Funds Index may reflect interest changes on a more delayed
basis than other indices, in a period of rising interest rates, any increase may
produce a higher yield later than would be produced by such other indices, and
in a period of declining interest rates, the Cost of Funds Index may remain
higher than other market interest rates which may result in a higher level of
principal prepayments on mortgage loans which adjust in accordance with the Cost
of Funds Index than mortgage loans which adjust in accordance with other
indices.
LIBOR, the London interbank offered rate, is the interest rate that the most
creditworthy international banks dealing in U.S. dollar-denominated deposits and
loans charge each other for large dollar-denominated loans. LIBOR is also
usually the base rate for large dollar-denominated loans in the international
market. LIBOR is generally quoted for loans having rate adjustments at one,
three, six or twelve month intervals.
ASSET-BACKED SECURITIES. The asset-backed securities in which the U.S. Bond
Index Portfolio may invest are limited to those which are readily marketable,
dollar-denominated and rated BBB or higher by S&P or Baa or higher by Moody's.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities do not have the benefit
of the same type of security interest in the related collateral. Credit card
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
give such debtors the right to avoid payment of certain amounts owed on the
credit cards, thereby reducing the balance due. Most issuers of automobile
receivables permit the servicer to retain possession of the underlying
obligations. If the servicer were to sell these obligations to another party,
there is a risk that the purchaser would acquire an interest superior to that of
the holders of the related automobile receivables. In addition, because of the
large number of vehicles involved in a typical issuance and technical
requirements under state laws, the trustee for the holders of the automobile
receivables may not have a proper security interest in all of the obligations
backing such receivables. Therefore, there is the possibility that recoveries on
repossessed collateral may not, in some cases, be available to support payments
on these securities.
MORTGAGE-BACKED SECURITIES AND ASSET-BACKED SECURITIES--TYPES OF CREDIT SUPPORT.
The mortgage-backed securities in which the U.S. Bond Index Portfolio may invest
are limited to those relating to residential mortgages. Mortgage-backed
securities and asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failure by obligors on underlying assets to make payments, such
securities may contain elements of credit support. Such credit support falls
into two categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the pass-through of
payments due on the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default enhances the likelihood of
ultimate payment of the obligations on at least a portion of the assets in the
pool. Such protection may be provided through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor from third parties, through
various means of structuring the transaction or through a combination of such
approaches. The U.S. Bond Index Portfolio will not pay any additional fees for
such credit support, although the existence of credit support may increase the
price of a security.
The ratings of mortgage-backed securities and asset-backed securities for which
third-party credit enhancement provides liquidity protection or protection
against losses from default are generally dependent upon the continued
creditworthiness of the provider of the credit enhancement. The ratings of such
securities could be subject to reduction in the event of deterioration in the
creditworthiness of the credit enhancement provider even in cases where the
delinquency and loss experience on the underlying pool of assets is better than
expected.
Examples of credit support arising out of the structure of the transaction
include "senior-subordinated securities" (multiple class securities with one or
more classes subordinate to other classes as to the payment of principal thereof
and interest thereon, with the result that defaults on the underlying assets are
borne first by the holders of the subordinated class), creation of "reserve
funds" (where cash or investments, sometimes funded from a portion of the
payments on the underlying assets, are held in reserve against future losses)
and "over-collateralization" (where the scheduled payments on, or the principal
amount of, the underlying assets exceed those required to make payment of the
securities and pay any servicing or other fees). The degree of credit support
provided for each issue is generally based on historical information with
respect to the level of credit risk associated with the underlying assets.
Delinquency or loss in excess of that which is anticipated could adversely
affect the return on an investment in such a security.
<PAGE>
STRIPPED MORTGAGE-BACKED SECURITIES. The cash flows and yields on IO and PO
classes are extremely sensitive to the rate of principal payments (including
prepayments) on the related underlying mortgage assets. For example, a rapid or
slow rate of principal payments may have a material adverse effect on the yield
to maturity of IOs or POs, respectively. If the underlying mortgage assets
experience greater than anticipated prepayments of principal, an investor may
fail to recoup fully its initial investment in an IO class of a stripped
mortgage-backed security, even if the IO class is rated AAA or Aaa. Conversely,
if the underlying mortgage assets experience slower than anticipated prepayments
of principal, the yield on a PO class will be affected more severely than would
be the case with a traditional mortgage-backed security.
FOREIGN SECURITIES: SPECIAL CONSIDERATIONS CONCERNING 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.
The securities markets in Asia 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 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 Asia 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 Asian securities markets may represent a disproportionately large percentage
of market capitalization and trading value. The limited liquidity of securities
markets in Asia may also affect the Portfolio's ability to acquire or dispose of
securities at the price and time it wishes to do so. The EAFE Equity Index
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 Asian
securities markets are susceptible to being influenced by large investors
trading significant blocks of securities.
Many 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.
The EAFE Equity Index Portfolio invests in securities denominated in
currencies of Asian 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.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
GENERAL. The successful use of such instruments draws upon the Adviser's skill
and experience with respect to such instruments and usually depends on the
Adviser's ability to forecast interest rate and currency exchange rate movements
correctly. Should interest or exchange rates move in an unexpected manner, a
Portfolio may not achieve the anticipated benefits of futures contracts or
options on futures contracts or may realize losses and thus will be in a worse
position than if such strategies had not been used. In addition, the correlation
between movements in the price of futures contracts or options on futures
contracts and movements in the price of the securities and currencies hedged or
used for cover will not be perfect and could produce unanticipated losses.
Successful use of the futures contract and related options are subject to
special risk considerations. A liquid secondary market for any futures or
options contract may not be available when a futures or options position is
sought to be closed. In addition, there may be an imperfect correlation between
movements in the securities or currency in the Portfolio. Successful use of
futures or options contracts is further dependent on Bankers Trust's ability to
correctly predict movements in the securities or foreign currency markets and no
assurance can be given that its judgment will be correct. Successful use of
options on securities or stock indices are subject to similar risk
considerations. In addition, by writing covered call options, the Portfolio
gives up the opportunity, while the option is in effect, to profit from any
price increase in the underlying securities above the options exercise price.
FUTURES CONTRACTS. Each Portfolio may enter into contracts for the purchase or
sale for future delivery of fixed-income securities, foreign currencies, or
contracts based on financial indices including any index of U.S. government
securities, foreign government securities or corporate debt securities. U.S.
futures contracts have been designed by exchanges which have been designated
"contracts markets" by the CFTC, and must be executed through a futures
commission merchant, or brokerage firm, which is a member of the relevant
contract market. Futures contracts trade on a number of exchange markets, and,
through their clearing corporations, the exchanges guarantee performance of the
contracts as between the clearing members of the exchange. Each Portfolio may
enter into futures contracts which are based on debt securities that are backed
by the full faith and credit of the U.S. government, such as long-term U.S.
Treasury Bonds, Treasury Notes, Ginnie Mae modified pass-through mortgage-backed
securities and three-month U.S. Treasury Bills. A Portfolio may also enter into
futures contracts which are based on bonds issued by entities other than the
U.S. government.
At the same time a futures contract is purchased or sold, the Portfolio must
allocate cash or securities as a deposit payment ("initial deposit"). It is
expected that the initial deposit would be approximately 1 1/2% to 5% of a
contract's face value. Daily thereafter, the futures contract is valued and the
payment of "variation margin" may be required, since each day the Portfolio
would provide or receive cash that reflects any decline or increase in the
contract's value.
At the time of delivery of securities pursuant to such a contract, adjustments
are made to recognize differences in value arising from the delivery of
securities with a different interest rate from that specified in the contract.
In some (but not many) cases, securities called for by a futures contract may
not have been issued when the contract was written.
Although futures contracts by their terms call for the actual delivery or
acquisition of securities, in most cases the contractual obligation is fulfilled
before the date of the contract without having to make or take delivery of the
securities. The offsetting of a contractual obligation is accomplished by buying
(or selling, as the case may be) on a commodities exchange an identical futures
contract calling for delivery in the same month. Such a transaction, which is
effected through a member of an exchange, cancels the obligation to make or take
delivery of the securities. Since all transactions in the futures market are
made, offset or fulfilled through a clearinghouse associated with the exchange
on which the contracts are traded, the Portfolio will incur brokerage fees when
it purchases or sells futures contracts.
The purpose of the acquisition or sale of a futures contract, in the case of a
Portfolio which holds or intends to acquire fixed-income securities, is to
attempt to protect the Portfolio from fluctuations in interest or foreign
exchange rates without actually buying or selling fixed-income securities or
foreign currencies. For example, if interest rates were expected to increase,
the Portfolio might enter into futures contracts for the sale of debt
securities. Such a sale would have much the same effect as selling an equivalent
value of the debt securities owned by the Portfolio. If interest rates did
increase, the value of the debt security in the Portfolio would decline, but the
value of the futures contracts to the Portfolio would increase at approximately
the same rate, thereby keeping the net asset value of the Portfolio from
declining as much as it otherwise would have. The Portfolio could accomplish
similar results by selling debt securities and investing in bonds with short
maturities when interest rates are expected to increase. However, since the
futures market is more liquid than the cash market, the use of futures contracts
as an investment technique allows the Portfolio to maintain a defensive position
without having to sell its portfolio securities.
Similarly, when it is expected that interest rates may decline, futures
contracts may be purchased to attempt to hedge against anticipated purchases of
debt securities at higher prices. Since the fluctuations in the value of futures
contracts should be similar to those of debt securities, a Portfolio could take
advantage of the anticipated rise in the value of debt securities without
actually buying them until the market had stabilized. At that time, the futures
contracts could be liquidated and the Portfolio could then buy debt securities
on the cash market. To the extent a Portfolio enters into futures contracts for
this purpose, the assets in the segregated asset account maintained to cover the
Portfolio's obligations with respect to such futures contracts will consist of
cash, cash equivalents or high quality liquid debt securities from its portfolio
in an amount equal to the difference between the fluctuating market value of
such futures contracts and the aggregate value of the initial and variation
margin payments made by the Portfolio with respect to such futures contracts.
The ordinary spreads between prices in the cash and futures market, due to
differences in the nature of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by the Adviser may still not
result in a successful transaction.
In addition, futures contracts entail risks. Although the Adviser believes that
use of such contracts will benefit the Portfolios, if the Adviser's investment
judgment about the general direction of interest rates is incorrect, a
Portfolio's overall performance would be poorer than if it had not entered into
any such contract. For example, if a Portfolio has hedged against the
possibility of an increase in interest rates which would adversely affect the
price of debt securities held in its portfolio and interest rates decrease
instead, the Portfolio will lose part or all of the benefit of the increased
value of its debt securities which it has hedged because it will have offsetting
losses in its futures positions. In addition, in such situations, if a Portfolio
has insufficient cash, it may have to sell debt securities from its portfolio to
meet daily variation margin requirements. Such sales of bonds may be, but will
not necessarily be, at increased prices which reflect the rising market. A
Portfolio may have to sell securities at a time when it may be disadvantageous
to do so.
OPTIONS ON FUTURES CONTRACTS. Each Portfolio may purchase and write options on
futures contracts for hedging purposes. The purchase of a call option on a
futures contract is similar in some respects to the purchase of a call option on
an individual security. Depending on the pricing of the option compared to
either the price of the futures contract upon which it is based or the price of
the underlying debt securities, it may or may not be less risky than ownership
of the futures contract or underlying debt securities. As with the purchase of
futures contracts, when a Portfolio is not fully invested it may purchase a call
option on a futures contract to hedge against a market advance due to declining
interest rates.
The writing of a call option on a futures contract constitutes a partial hedge
against declining prices of the underlying security or foreign currency which is
deliverable upon exercise of the futures contract. If the futures price at
expiration of the option is below the exercise price, a Portfolio will retain
the full amount of the option premium which provides a partial hedge against any
decline that may have occurred in the Portfolio's portfolio holdings. The
writing of a put option on a futures contract constitutes a partial hedge
against increasing prices of the underlying security or foreign currency which
is deliverable upon exercise of the futures contract. If the futures price at
expiration of the option is higher than the exercise price, the Portfolio will
retain the full amount of the option premium which provides a partial hedge
against any increase in the price of securities which the Portfolio intends to
purchase. If a put or call option the Portfolio has written is exercised, the
Portfolio will incur a loss which will be reduced by the amount of the premium
it receives. Depending on the degree of correlation between changes in the value
of its portfolio securities and changes in the value of its futures positions,
the Portfolio's losses from existing options on futures may to some extent be
reduced or increased by changes in the value of portfolio securities.
The purchase of a put option on a futures contract is similar in some respects
to the purchase of protective put options on portfolio securities. For example,
a Portfolio may purchase a put option on a futures contract to hedge its
portfolio against the risk of rising interest rates.
The amount of risk a Portfolio assumes when it purchases an option on a futures
contract is the premium paid for the option plus related transaction costs. In
addition to the correlation risks discussed above, the purchase of an option
also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the option purchased.
The Board of Trustees of each Portfolio has adopted the requirement that futures
contracts and options on futures contracts be used as a hedge and may also use
stock index futures on continual basis to equitize cash so that the Portfolio
may maintain 100% equity exposure. In addition to this requirement, the Board of
Trustees of each Portfolio has also adopted a restriction that the Portfolio
will not enter into any futures contracts or options on futures contracts if
immediately thereafter the amount of margin deposits on all the futures
contracts of the Portfolio and premiums paid on outstanding options on futures
contracts owned by the Portfolio (other than those entered into for bona fide
hedging purposes) would exceed 5% of the market value of the total assets of the
Portfolio.
OPTIONS ON FOREIGN CURRENCIES. The EAFE(R) Equity Index Portfolio may purchase
and write options on foreign currencies for hedging purposes in a manner similar
to that in which futures contracts on foreign currencies, or forward contracts,
will be utilized. For example, a decline in the dollar value of a foreign
currency in which portfolio securities are denominated will reduce the dollar
value of such securities, even if their value in the foreign currency remains
constant. In order to protect against such diminutions in the value of portfolio
securities, the Portfolio may purchase put options on the foreign currency. If
the value of the currency does decline, the Portfolio will have the right to
sell such currency for a fixed amount in dollars and will thereby offset, in
whole or in part, the adverse effect on its portfolio which otherwise would have
resulted.
Conversely, where a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby increasing the cost of such
securities, the EAFE(R) Equity Index Portfolio may purchase call options
thereon. The purchase of such options could offset, at least partially, the
effects of the adverse movements in exchange rates. As in the case of other
types of options, however, the benefit to the Portfolio deriving from purchases
of foreign currency options will be reduced by the amount of the premium and
related transaction costs. In addition, where currency exchange rates do not
move in the direction or to the extent anticipated, the Portfolio could sustain
losses on transactions in foreign currency options which would require it to
forego a portion or all of the benefits of advantageous changes in such rates.
The EAFE(R) Equity Index Portfolio may write options on foreign currencies for
the same types of hedging purposes. For example, where the Portfolio anticipates
a decline in the dollar value of foreign currency denominated securities due to
adverse fluctuations in exchange rates it could, instead of purchasing a put
option, write a call option on the relevant currency. If the expected decline
occurs, the options will most likely not be exercised, and the diminution in
value of portfolio securities will be offset by the amount of the premium
received.
Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, the EAFE(R) Equity
Index Portfolio could write a put option on the relevant currency which, if
rates move in the manner projected, will expire unexercised and allow the
Portfolio to hedge such increased cost up to the amount of the premium. As in
the case of other types of options, however, the writing of a foreign currency
option will constitute only a partial hedge up to the amount of the premium, and
only if rates move in the expected direction. If this does not occur, the option
may be exercised and the Portfolio would be required to purchase or sell the
underlying currency at a loss which may not be offset by the amount of the
premium. Through the writing of options on foreign currencies, the Portfolio
also may be required to forego all or a portion of the benefits which might
otherwise have been obtained from favorable movements in exchange rates.
The EAFE(R) Equity Index Portfolio intends to write covered call options on
foreign currencies. A call option written on a foreign currency by the Portfolio
is "covered" if the Portfolio owns the underlying foreign currency covered by
the call or has an absolute and immediate right to acquire that foreign currency
without additional cash consideration (or for additional cash consideration held
in a segregated account by its Custodian) upon conversion or exchange of other
foreign currency held in its portfolio. A call option is also covered if the
Portfolio has a call on the same foreign currency and in the same principal
amount as the call written where the exercise price of the call held (a) is
equal to or less than the exercise price of the call written or (b) is greater
than the exercise price of the call written if the difference is maintained by
the Portfolio in cash, U.S. government securities and other high quality liquid
debt securities in a segregated account with its custodian.
The EAFE(R) Equity Index Portfolio also intends to write call options on foreign
currencies that are not covered for cross-hedging purposes. A call option on a
foreign currency is for cross-hedging purposes if it is not covered, but is
designed to provide a hedge against a decline in the U.S. dollar value of a
security which the Portfolio owns or has the right to acquire and which is
denominated in the currency underlying the option due to an adverse change in
the exchange rate. In such circumstances, the Portfolio collateralizes the
option by maintaining in a segregated account with its custodian, cash or U.S.
government securities or other high quality liquid debt securities in an amount
not less than the value of the underlying foreign currency in U.S. dollars
marked to market daily.
ADDITIONAL RISKS OF OPTIONS ON FUTURES CONTRACTS, FORWARD CONTRACTS AND OPTIONS
ON FOREIGN CURRENCIES. Unlike transactions entered into by a Portfolio in
futures contracts, options on foreign currencies and forward contracts are not
traded on contract markets regulated by the CFTC or (with the exception of
certain foreign currency options) by the SEC. To the contrary, such instruments
are traded through financial institutions acting as market-makers, although
foreign currency options are also traded on certain national securities
exchanges such as the Philadelphia Stock Exchange and the Chicago Board Options
Exchange, subject to SEC regulation. Similarly, options on currencies may be
traded over-the-counter. In an over-the-counter trading environment, many of the
protections afforded to exchange participants will not be available. For
example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of time.
Although the purchaser of an option cannot lose more than the amount of the
premium plus related transaction costs, this entire amount could be lost.
Moreover, the option writer and a trader of forward contracts could lose amounts
substantially in excess of their initial investments, due to the margin and
collateral requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges are within
the jurisdiction of the SEC, as are other securities traded on such exchanges.
As a result, many of the protections provided to traders on organized exchanges
will be available with respect to such transactions. In particular, all foreign
currency option positions entered into on a national securities exchange are
cleared and guaranteed by the Options Clearing Corporation (the "OCC"), thereby
reducing the risk of counterparty default. Further, a liquid secondary market in
options traded on a national securities exchange may be more readily available
than in the over-the-counter market, potentially permitting a Portfolio to
liquidate open positions at a profit prior to exercise or expiration, or to
limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however, is
subject to the risks of the availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effects of other political and
economic events. In addition, exchange-traded options on foreign currencies
involve certain risks not presented by the over-the-counter market. For example,
exercise and settlement of such options must be made exclusively through the
OCC, which has established banking relationships in applicable foreign countries
for this purpose. As a result, the OCC may, if it determines that foreign
governmental restrictions or taxes would prevent the orderly settlement of
foreign currency option exercises, or would result in undue burdens on the OCC
or its clearing member, impose special procedures on exercise and settlement,
such as technical changes in the mechanics of delivery of currency, the fixing
of dollar settlement prices or prohibitions on exercise.
As in the case of forward contracts, certain options on foreign currencies are
traded over-the-counter and involve liquidity and credit risks which may not be
present in the case of exchange-traded currency options. A Portfolio's ability
to terminate over-the-counter options will be more limited than with
exchange-traded options. It is also possible that broker-dealers participating
in over-the-counter options transactions will not fulfill their obligations.
Until such time as the staff of the SEC changes its position, each Portfolio
will treat purchased over-the-counter options and assets used to cover written
over-the-counter options as illiquid securities. With respect to options written
with primary dealers in U.S. government securities pursuant to an agreement
requiring a closing purchase transaction at a formula price, the amount of
illiquid securities may be calculated with reference to the repurchase formula.
In addition, futures contracts, options on futures contracts, forward contracts
and options on foreign currencies may be traded on foreign exchanges. Such
transactions are subject to the risk of governmental actions affecting trading
in or the prices of foreign currencies or securities. The value of such
positions also could be adversely affected by: (i) other complex foreign
political and economic factors; (ii) lesser availability than in the United
States of data on which to make trading decisions; (iii) delays in the
Portfolio's ability to act upon economic events occurring in foreign markets
during nonbusiness hours in the United States; (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States; and (v) lesser trading volume.
OPTIONS ON SECURITIES. Each Portfolio may write (sell) covered call and put
options to a limited extent on its portfolio securities ("covered options") in
an attempt to increase income. However, the Portfolio may forgo the benefits of
appreciation on securities sold or may pay more than the market price on
securities acquired pursuant to call and put options written by the Portfolio.
When a Portfolio writes a covered call option, it gives the purchaser of the
option the right to buy the underlying security at the price specified in the
option (the "exercise price") by exercising the option at any time during the
option period. If the option expires unexercised, the Portfolio will realize
income in an amount equal to the premium received for writing the option. If the
option is exercised, a decision over which the Portfolio has no control, the
Portfolio must sell the underlying security to the option holder at the exercise
price. By writing a covered call option, the Portfolio forgoes, in exchange for
the premium less the commission ("net premium"), the opportunity to profit
during the option period from an increase in the market value of the underlying
security above the exercise price.
When a Portfolio writes a covered put option, it gives the purchaser of the
option the right to sell the underlying security to the Portfolio at the
specified exercise price at any time during the option period. If the option
expires unexercised, the Portfolio will realize income in the amount of the
premium received for writing the option. If the put option is exercised, a
decision over which the Portfolio has no control, the Portfolio must purchase
the underlying security from the option holder at the exercise price. By writing
a covered put option, the Portfolio, in exchange for the net premium received,
accepts the risk of a decline in the market value of the underlying security
below the exercise price. The Portfolio will only write put options involving
securities for which a determination is made at the time the option is written
that the Portfolio wishes to acquire the securities at the exercise price.
A Portfolio may terminate its obligation as the writer of a call or put option
by purchasing an option with the same exercise price and expiration date as the
option previously written. This transaction is called a "closing purchase
transaction." The Portfolio will realize a profit or loss for a closing purchase
transaction if the amount paid to purchase an option is less or more, as the
case may be, than the amount received from the sale thereof. To close out a
position as a purchaser of an option, the Portfolio, may make a "closing sale
transaction" which involves liquidating the Portfolio's position by selling the
option previously purchased. Where the Portfolio cannot effect a closing
purchase transaction, it may be forced to incur brokerage commissions or dealer
spreads in selling securities it receives or it may be forced to hold underlying
securities until an option is exercised or expires.
When a Portfolio writes an option, an amount equal to the net premium received
by the Portfolio is included in the liability section of the Portfolio's
Statement of Assets and Liabilities as a deferred credit. The amount of the
deferred credit will be subsequently marked to market to reflect the current
market value of the option written. The current market value of a traded option
is the last sale price or, in the absence of a sale, the mean between the
closing bid and asked price. If an option expires on its stipulated expiration
date or if the Portfolio enters into a closing purchase transaction, the
Portfolio will realize a gain (or loss if the cost of a closing purchase
transaction exceeds the premium received when the option was sold), and the
deferred credit related to such option will be eliminated. If a call option is
exercised, the Portfolio will realize a gain or loss from the sale of the
underlying security and the proceeds of the sale will be increased by the
premium originally received. The writing of covered call options may be deemed
to involve the pledge of the securities against which the option is being
written. Securities against which call options are written will be segregated on
the books of the custodian for the Portfolio.
A Portfolio may purchase call and put options on any securities in which it may
invest. The Portfolio would normally purchase a call option in anticipation of
an increase in the market value of such securities. The purchase of a call
option would entitle the Portfolio, in exchange for the premium paid, to
purchase a security at a specified price during the option period. The Portfolio
would ordinarily have a gain if the value of the securities increased above the
exercise price sufficiently to cover the premium and would have a loss if the
value of the securities remained at or below the exercise price during the
option period.
A Portfolio would normally purchase put options in anticipation of a decline in
the market value of securities in its portfolio ("protective puts") or
securities of the type in which it is permitted to invest. The purchase of a put
option would entitle the Portfolio, in exchange for the premium paid, to sell a
security, which may or may not be held in the Portfolio's portfolio, at a
specified price during the option period. The purchase of protective puts is
designed merely to offset or hedge against a decline in the market value of the
Portfolio's portfolio securities. Put options also may be purchased by the
Portfolio for the purpose of affirmatively benefiting from a decline in the
price of securities which the Portfolio does not own. The Portfolio would
ordinarily recognize a gain if the value of the securities decreased below the
exercise price sufficiently to cover the premium and would recognize a loss if
the value of the securities remained at or above the exercise price. Gains and
losses on the purchase of protective put options would tend to be offset by
countervailing changes in the value of underlying portfolio securities.
Each Portfolio has adopted certain other nonfundamental policies concerning
option transactions which are discussed below. The Portfolio's activities in
options may also be restricted by the requirements of the Internal Revenue Code
of 1986, as amended (the "Code"), for qualification as a regulated investment
company.
The hours of trading for options on securities may not conform to the hours
during which the underlying securities are traded. To the extent that the option
markets close before the markets for the underlying securities, significant
price and rate movements can take place in the underlying securities markets
that cannot be reflected in the option markets. It is impossible to predict the
volume of trading that may exist in such options, and there can be no assurance
that viable exchange markets will develop or continue.
A Portfolio may engage in over-the-counter options transactions with
broker-dealers who make markets in these options. At present, approximately ten
broker-dealers, including several of the largest primary dealers in U.S.
government securities, make these markets. The ability to terminate
over-the-counter option positions is more limited than with exchange-traded
option positions because the predominant market is the issuing broker rather
than an exchange, and may involve the risk that broker-dealers participating in
such transactions will not fulfill their obligations. To reduce this risk, the
Portfolio will purchase such options only from broker-dealers who are primary
government securities dealers recognized by the Federal Reserve Bank of New York
and who agree to (and are expected to be capable of) entering into closing
transactions, although there can be no guarantee that any such option will be
liquidated at a favorable price prior to expiration. The Adviser will monitor
the creditworthiness of dealers with whom the Portfolio enters into such options
transactions under the general supervision of the Portfolios' Trustees.
OPTIONS ON SECURITIES INDICES. In addition to options on securities, each
Portfolio may also purchase and write (sell) call and put options on securities
indices. Such options give the holder the right to receive a cash settlement
during the term of the option based upon the difference between the exercise
price and the value of the index. Such options will be used for the purposes
described above under "Options on Securities."
EAFE(R) Equity Index Portfolio may, to the extent allowed by Federal and state
securities laws, invest in securities indices instead of investing directly in
individual foreign securities.
Options on securities indices entail risks in addition to the risks of options
on securities. The absence of a liquid secondary market to close out options
positions on securities indices is more likely to occur, although the Portfolio
generally will only purchase or write such an option if the Adviser believes the
option can be closed out.
Use of options on securities indices also entails the risk that trading in such
options may be interrupted if trading in certain securities included in the
index is interrupted. The Portfolio will not purchase such options unless the
Adviser believes the market is sufficiently developed such that the risk of
trading in such options is no greater than the risk of trading in options on
securities.
Price movements in a Portfolio's portfolio may not correlate precisely with
movements in the level of an index and, therefore, the use of options on indices
cannot serve as a complete hedge. Because options on securities indices require
settlement in cash, the Adviser may be forced to liquidate portfolio securities
to meet settlement obligations.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Because each Portfolio may buy and
sell securities denominated in currencies other than the U.S. dollar and
receives interest, dividends and sale proceeds in currencies other than the U.S.
dollar, each Portfolio from time to time may enter into foreign currency
exchange transactions to convert to and from different foreign currencies and to
convert foreign currencies to and from the U.S. dollar. A Portfolio either
enters into these transactions on a spot (I.E., cash) basis at the spot rate
prevailing in the foreign currency exchange market or uses forward contracts to
purchase or sell foreign currencies.
A forward foreign currency exchange contract is an obligation by a Portfolio to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract. Forward foreign currency exchange
contracts establish an exchange rate at a future date. These contracts are
transferable in the interbank market conducted directly between currency traders
(usually large commercial banks) and their customers. A forward foreign currency
exchange contract generally has no deposit requirement and is traded at a net
price without commission. Each Portfolio maintains with its custodian a
segregated account of high grade liquid assets in an amount at least equal to
its obligations under each forward foreign currency exchange contract. Neither
spot transactions nor forward foreign currency exchange contracts eliminate
fluctuations in the prices of the Portfolio's securities or in foreign exchange
rates, or prevent loss if the prices of these securities should decline.
Each Portfolio may enter into foreign currency hedging transactions in an
attempt to protect against changes in foreign currency exchange rates between
the trade and settlement dates of specific securities transactions or changes in
foreign currency exchange rates that would adversely affect a portfolio position
or an anticipated investment position. Since consideration of the prospect for
currency parities will be incorporated into Bankers Trust's long-term investment
decisions, a Portfolio will not routinely enter into foreign currency hedging
transactions with respect to security transactions; however, Bankers Trust
believes that it is important to have the flexibility to enter into foreign
currency hedging transactions when it determines that the transactions would be
in the Portfolio's best interest. Although these transactions tend to minimize
the risk of loss due to a decline in the value of the hedged currency, at the
same time they tend to limit any potential gain that might be realized should
the value of the hedged currency increase. The precise matching of the forward
contract amounts and the value of the securities involved will not generally be
possible because the future value of such securities in foreign currencies will
change as a consequence of market movements in the value of such securities
between the date the forward contract is entered into and the date it matures.
The projection of currency market movements is extremely difficult, and the
successful execution of a hedging strategy is highly uncertain.
While these contracts are not presently regulated by the CFTC, the CFTC may in
the future assert authority to regulate forward contracts. In such event the
Portfolio's ability to utilize forward contracts in the manner set forth in the
Prospectus may be restricted. Forward contracts may reduce the potential gain
from a positive change in the relationship between the U.S. dollar and foreign
currencies. Unanticipated changes in currency prices may result in poorer
overall performance for the Portfolio than if it had not entered into such
contracts. The use of foreign currency forward contracts may not eliminate
fluctuations in the underlying U.S. dollar equivalent value of the prices of or
rates of return on a Portfolio's foreign currency denominated portfolio
securities and the use of such techniques will subject a Portfolio to certain
risks.
The matching of the increase in value of a forward contract and the decline in
the U.S. dollar equivalent value of the foreign currency denominated asset that
is the subject of the hedge generally will not be precise. In addition, a
Portfolio may not always be able to enter into foreign currency forward
contracts at attractive prices and this will limit the Portfolio's ability to
use such contract to hedge or cross-hedge its assets. Also, with regard to a
Portfolio's use of cross-hedges, there can be no assurance that historical
correlations between the movement of certain foreign currencies relative to the
U.S. dollar will continue. Thus, at any time poor correlation may exist between
movements in the exchange rates of the foreign currencies underlying a
Portfolio's cross-hedges and the movements in the exchange rates of the foreign
currencies in which the Portfolio's assets that are the subject of such
cross-hedges are denominated.
YEAR 2000 MATTERS
Like other mutual funds, financial and business organizations and individuals
around the world, the Funds could be adversely affected if the computer systems
used by Bankers Trust and other service providers do not properly process and
calculate date-related information and data from and after January 1, 2000. This
is commonly known as the "Year 2000 Problem." Bankers Trust is taking steps that
it believes are reasonably designed to address the Year 2000 Problem with
respect to computer systems that it uses and to obtain reasonable assurances
that comparable steps are being taken by the Funds' other major service
providers. At this time, however, there can be no assurance that these steps
will be sufficient to avoid any adverse impact to the Fund nor can there be any
assurance that the Year 2000 Problem will not have an adverse effect on the
companies whose securities are held by the Fund or on global markets or
economies, generally.
RATING SERVICES
The ratings of rating services represent their opinions as to the quality of the
securities that they undertake to rate. It should be emphasized, however, that
ratings are relative and subjective and are not absolute standards of quality.
Although these ratings are an initial criterion for selection of portfolio
investments, Bankers Trust also makes its own evaluation of these securities,
subject to review by the Board of Trustees. After purchase by a Portfolio, an
obligation may cease to be rated or its rating may be reduced below the minimum
required for purchase by the Portfolio. Neither event would require a Fund to
eliminate the obligation from its portfolio, but Bankers Trust will consider
such an event in its determination of whether a Fund should continue to hold the
obligation. A description of the ratings used herein and in the Funds'
Prospectus is set forth in the Appendix herein.
INVESTMENT RESTRICTIONS
The following investment restrictions are "fundamental policies" of each Fund
and each Portfolio and may not be changed with respect to the Fund or the
Portfolio without the approval of a "majority of the outstanding voting
securities" of the Fund or the Portfolio, as the case may be. "Majority of the
outstanding voting securities" under the 1940 Act, and as used in this SAI and
the Prospectus, means, with respect to the Fund (or the Portfolio), the lesser
of (i) 67% or more of the outstanding voting securities of the Fund (or of the
total beneficial interests of the Portfolio) present at a meeting, if the
holders of more than 50% of the outstanding voting securities of the Fund or of
the total beneficial interests of the Portfolio) are present or represented by
proxy or (ii) more than 50% of the outstanding voting securities of the Fund (or
of the total beneficial interests of the Portfolio). Whenever the Trust is
requested to vote on a fundamental policy of a Portfolio, the Trust will hold a
meeting of the corresponding Fund's shareholders and will cast its vote as
instructed by that Fund's shareholders. Fund shareholders who do not vote will
not affect the Trust's votes at the Portfolio meeting. The percentage of the
Trust's votes representing Fund shareholders not voting will be voted by the
Trustees of the Trust in the same proportion as the Fund shareholders who do, in
fact, vote.
As a matter of fundamental policy, no Portfolio (or Fund) may (except that no
investment restriction of a Fund shall prevent a Fund from investing all of its
Assets in an open-end investment company with substantially the same investment
objectives):
(1) borrow money or mortgage or hypothecate assets of the Portfolio (Fund),
except that in an amount not to exceed 1/3 of the current value of the
Portfolio's (Fund's) assets, it may borrow money as a temporary measure for
extraordinary or emergency purposes and enter into reverse repurchase agreements
or dollar roll transactions, and except that it may pledge, mortgage or
hypothecate not more than 1/3 of such assets to secure such borrowings (it is
intended that money would be borrowed only from banks and only either to
accommodate requests for the withdrawal of beneficial interests (redemption of
shares) while effecting an orderly liquidation of portfolio securities or to
maintain liquidity in the event of an unanticipated failure to complete a
portfolio security transaction or other similar situations) or reverse
repurchase agreements, provided that collateral arrangements with respect to
options and futures, including deposits of initial deposit and variation margin,
are not considered a pledge of assets for purposes of this restriction and
except that assets may be pledged to secure letters of credit solely for the
purpose of participating in a captive insurance company sponsored by the
Investment Company Institute; for additional related restrictions, see clause
(i) under the caption "Additional Restrictions" below (as an operating policy,
the Portfolios may not engage in dollar roll transactions);
(2) underwrite securities issued by other persons except insofar as the
Portfolios (Trust or the Funds) may technically be deemed an underwriter under
the 1933 Act in selling a portfolio security;
<PAGE>
(3) make loans to other persons except: (a) through the lending of the
Portfolio's (Fund's) portfolio securities and provided that any such loans not
exceed 30% of the Portfolio's (Fund's) total assets (taken at market value); (b)
through the use of repurchase agreements or the purchase of short-term
obligations; or (c) by purchasing a portion of an issue of debt securities of
types distributed publicly or privately;
(4) purchase or sell real estate (including limited partnership interests but
excluding securities secured by real estate or interests therein), interests in
oil, gas or mineral leases, commodities or commodity contracts (except futures
and option contracts) in the ordinary course of business (except that the
Portfolio (Trust) may hold and sell, for the Portfolio's (Fund's) portfolio,
real estate acquired as a result of the Portfolio's (Fund's) ownership of
securities);
(5) concentrate its investments in any particular industry (excluding U.S.
government securities), but if it is deemed appropriate for the achievement of a
Portfolio's (Fund's) investment objective(s), up to 25% of its total assets may
be invested in any one industry; and
(6) issue any senior security (as that term is defined in the 1940 Act) if such
issuance is specifically prohibited by the 1940 Act or the rules and regulations
promulgated thereunder, provided that collateral arrangements with respect to
options and futures, including deposits of initial deposit and variation margin,
are not considered to be the issuance of a senior security for purposes of this
restriction.
ADDITIONAL RESTRICTIONS. In order to comply with certain statutes and policies
each Portfolio (or the Trust, on behalf of each Fund) will not as a matter of
operating policy (except that no operating policy shall prevent a Fund from
investing all of its Assets in an open-end investment company with substantially
the same investment objectives):
(i) borrow money (including through reverse repurchase or forward roll
transactions) for any purpose in excess of 5% of the Portfolio's (Fund's)
total assets (taken at cost), except that the Portfolio (Fund) 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 (Fund'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
(Fund), and the value of securities of any one issuer in which the
Portfolio (Fund) is short exceeds the lesser of 2.0% of the value of the
Portfolio's (Fund'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 (Fund) 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 (Funds) have no current intention to
engage in short selling);
(v) invest for the purpose of exercising control or management;
(vi) purchase securities issued by any investment company except by
purchase in the open market where no commission or profit to a sponsor
or dealer results from such purchase other than the customary broker's
commission, or except when such purchase, though not made in the open
market, is part of a plan of merger or consolidation; provided,
however, that securities of any investment company will not be
purchased for the Portfolio (Fund) if such purchase at the time
thereof would cause: (a) more than 10% of the Portfolio's (Fund'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 (Fund'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 (Fund), unless permitted to exceed these
limitations by an exemptive order of the SEC; provided further that,
except in the case of a merger or consolidation, the Portfolio (Fund)
shall not purchase any securities of any open-end investment company
unless the Portfolio (Fund) (1) waives the investment advisory fee
with respect to assets invested in other open-end investment companies
and (2) incurs no sales charge in connection with the investment;
(vii) invest more than 10% of the Portfolio's (Fund's) total assets (taken at
the greater of cost or market value) in securities that are restricted as
to resale under the 1933 Act (other than Rule 144A securities deemed
liquid by the Portfolio's (Fund's) Board of Trustees);
(viii)invest more than 15% of the Portfolio's (Fund's) net assets (taken at the
greater of cost or market value) in securities that are illiquid or not
readily marketable not including (a) Rule 144A securities that have been
determined to be liquid by the Board of Trustees; and (b) commercial paper
that is sold under section 4(2) of the 1933 Act which: (i) is not traded
flat or in default as to interest or principal; and (ii) is rated in one
of the two highest categories by at least two nationally recognized
statistical rating organizations and the Portfolio's (Fund's) Board of
Trustees have determined the commercial paper to be liquid; or (iii) is
rated in one of the two highest categories by one nationally recognized
statistical rating agency and the Portfolio's (Fund's) Board of Trustees
have determined that the commercial paper is equivalent quality and is
liquid;
(ix) no more than 5% of the Portfolio's (Fund's) total assets are invested in
securities issued by issuers which (including predecessors) have been in
operation less than three years;
(x) with respect to 75% of the Portfolio's (Fund's) total assets, purchase
securities of any issuer if such purchase at the time thereof would cause
the Portfolio (Fund) to hold more than 10% of any class of securities of
such issuer, for which purposes all indebtedness of an issuer shall be
deemed a single class and all preferred stock of an issuer shall be deemed
a single class, except that futures or option contracts shall not be
subject to this restriction;
(xi) if the Portfolio (Fund) is a "diversified" fund with respect to 75% of its
assets, invest more than 5% of its total assets in the securities
(excluding U.S. government securities) of any one issuer;
(xii) 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 partner of the Adviser, if after the purchase
of the securities of such issuer for the Portfolio (Fund) one or more of
such persons owns beneficially more than 1/2 of 1% of the shares or
securities, or both, all taken at market value, of such issuer, and such
persons owning more than 1/2 of 1% of such shares or securities together
own beneficially more than 5% of such shares or securities, or both, all
taken at market value;
(xiii)invest in warrants (other than warrants acquired by the Portfolio (Fund)
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 (Fund's) net assets or if, as a
result, more than 2% of the Portfolio's (Fund's) net assets would be
invested in warrants not listed on a recognized United States or foreign
stock exchange, to the extent permitted by applicable state securities
laws;
(xiv) write puts and calls on securities unless each of the following conditions
are met: (a) the security underlying the put or call is within the
Investment Practices of the Portfolio (Fund) 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 (Fund's) net assets; (c) the securities subject to the
exercise of the call written by the Portfolio (Fund) must be owned by the
Portfolio (Fund) at the time the call is sold and must continue to be
owned by the Portfolio (Fund) until the call has been exercised, has
lapsed, or the Portfolio (Fund) has purchased a closing call, and such
purchase has been confirmed, thereby extinguishing the Portfolio's
(Fund's) obligation to deliver securities pursuant to the call it has
sold; and (d) at the time a put is written, the Portfolio (Fund)
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 (Fund) 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 (Fund) has purchased a closing put, which is a put of the same
series as the one previously written); and
(xv) buy and sell puts and calls on securities, stock index futures or options
on stock index futures, or financial futures or options on financial
futures unless such options are written by other persons and: (a) the
options or futures are offered through the facilities of a national
securities association or are listed on a national securities or
commodities exchange, except for put and call options issued by non-U.S.
entities or listed on non-U.S. securities or commodities exchanges; (b)
the aggregate premiums paid on all such options which are held at any time
do not exceed 20% of the Portfolio's (Fund'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 (Fund'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.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
The Adviser is responsible for decisions to buy and sell securities, futures
contracts and options on such securities and futures for each Portfolio, the
selection of brokers, dealers and futures commission merchants to effect
transactions and the negotiation of brokerage commissions, if any.
Broker-dealers may receive brokerage commissions on portfolio transactions,
including options, futures and options on futures transactions and the purchase
and sale of underlying securities upon the exercise of options. Orders may be
directed to any broker-dealer or futures commission merchant, including to the
extent and in the manner permitted by applicable law, Bankers Trust or its
subsidiaries or affiliates. Purchases and sales of certain portfolio securities
on behalf of a Portfolio are frequently placed by the Adviser with the issuer or
a primary or secondary market-maker for these securities on a net basis, without
any brokerage commission being paid by the Portfolio. Trading does, however,
involve transaction costs. Transactions with dealers serving as market-makers
reflect the spread between the bid and asked prices. Transaction costs may also
include fees paid to third parties for information as to potential purchasers or
sellers of securities. Purchases of underwritten issues may be made which will
include an underwriting fee paid to the underwriter.
The Adviser seeks to evaluate the overall reasonableness of the brokerage
commissions paid (to the extent applicable) in placing orders for the purchase
and sale of securities for a Portfolio taking into account such factors as
price, commission (negotiable in the case of national securities exchange
transactions), if any, size of order, difficulty of execution and skill required
of the executing broker-dealer through familiarity with commissions charged on
comparable transactions, as well as by comparing commissions paid by the
Portfolio to reported commissions paid by others. The Adviser reviews on a
routine basis commission rates, execution and settlement services performed,
making internal and external comparisons.
<PAGE>
The Adviser is authorized, consistent with Section 28(e) of the Securities
Exchange Act of 1934, as amended, when placing portfolio transactions for a
Portfolio with a broker to pay a brokerage commission (to the extent applicable)
in excess of that which another broker might have charged for effecting the same
transaction on account of the receipt of research, market or statistical
information. The term "research, market or statistical information" includes
advice as to the value of securities; the advisability of investing in,
purchasing or selling securities; the availability of securities or purchasers
or sellers of securities; and furnishing analyses and reports concerning
issuers, industries, securities, economic factors and trends, portfolio strategy
and the performance of accounts.
Consistent with the policy stated above, the Rules of Fair Practice of the NASD
and such other policies as the Trustees of the Portfolio may determine, the
Adviser may consider sales of shares of the Fund 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 each Portfolio's assets, as well as the assets of other clients.
Except for implementing the policies stated above, there is no intention to
place portfolio transactions with particular brokers or dealers or groups
thereof. In effecting transactions in over-the-counter securities, orders are
placed with the principal market-makers for the security being traded unless,
after exercising care, it appears that more favorable results are available
otherwise.
Although certain research, market and statistical information from brokers and
dealers can be useful to a Portfolio and to the Adviser, it is the opinion of
the management of the Portfolios that such information is only supplementary to
the Adviser's own research effort, since the information must still be analyzed,
weighed and reviewed by the Adviser's staff. Such information may be useful to
the Adviser in providing services to clients other than the Portfolios, and not
all such information is used by the Adviser in connection with the Portfolios.
Conversely, such information provided to the Adviser by brokers and dealers
through whom other clients of the Adviser effect securities transactions may be
useful to the Adviser in providing services to the Portfolios.
In certain instances there may be securities which are suitable for a Portfolio
as well as for one or more of the Adviser's other clients. Investment decisions
for a Portfolio and for the Adviser's other clients are made with a view to
achieving their respective investment objectives. It may develop that a
particular security is bought or sold for only one client even though it might
be held by, or bought or sold for, other clients. Likewise, a particular
security may be bought for one or more clients when one or more clients are
selling that same security. Some simultaneous transactions are inevitable when
several clients receive investment advice from the same investment adviser,
particularly when the same security is suitable for the investment objectives of
more than one client. When two or more clients are simultaneously engaged in the
purchase or sale of the same security, the securities are allocated among
clients in a manner believed to be equitable to each. It is recognized that in
some cases this system could have a detrimental effect on the price or volume of
the security as far as a Portfolio is concerned. However, it is believed that
the ability of a Portfolio to participate in volume transactions will produce
better executions for the Portfolio.
For the fiscal years ended December 31, 1997, 1996, and 1995, Equity 500 Index
Portfolio paid brokerage commissions in the amount of $341,058, $289,791, and
$172,924, respectively.
For the fiscal year ended December 31, 1997 and for the period from July 10,
1996 (commencement of operations) to December 31, 1996, the Small Cap Index
Portfolio, paid brokerage commissions in the amount of $64,041 and $55,569,
respectively.
<PAGE>
For the fiscal year ended December 31, 1997 and for the period from January 24,
1996 (commencement of operations) to December 31, 1996, the EAFE Equity Index
Portfolio, paid brokerage commissions in the amount of $33,474 and $66,791,
respectively.
For the period from June 30, 1997 (commencement of operations) to December 31,
1997, the U.S. Bond Index Portfolio did not pay any brokerage commissions.
PERFORMANCE INFORMATION
STANDARD PERFORMANCE INFORMATION
From time to time, quotations of a Fund's performance may be included in
advertisements, sales literature or shareholder reports. These performance
figures are calculated in the following manner:
YIELD: Yields for a Fund used in advertising are computed by dividing the
Fund's interest and dividend income for a given 30-day or one-month
period, net of expenses, by the average number of shares entitled to
receive distributions during the period, dividing this figure by the
Fund's net asset value per share at the end of the period, and annualizing
the result (assuming compounding of income) in order to arrive at an
annual percentage rate. Income is calculated for purpose of yield
quotations in accordance with standardized methods applicable to all stock
and bond mutual funds. Dividends from equity investments are treated as if
they were accrued on a daily basis, solely for the purpose of yield
calculations. In general, interest income is reduced with respect to bonds
trading at a premium over their par value by subtracting a portion of the
premium from income on a daily basis, and is increased with respect to
bonds trading at a discount by adding a portion of the discount to daily
income. Capital gains and losses generally are excluded from the
calculation.
Income calculated for the purposes of calculating a Fund's yield differs
from income as determined for other accounting purposes. Because of the
different accounting methods used, and because of the compounding assumed
in yield calculations, the yield quoted for a Fund may differ from the
rate of distributions of the Fund paid over the same period or the rate of
income reported in the Fund's financial statements.
TOTAL RETURN: A Fund's average annual total return is calculated for
certain periods by determining the average annual compounded rates of
return over those periods that would cause an investment of $1,000 (made
at the maximum public offering price with all distributions reinvested) to
reach the value of that investment at the end of the periods. A Fund may
also calculate total return figures which represent aggregate performance
over a period or year-by-year performance.
PERFORMANCE RESULTS: Any total return quotation provided for a Fund should
not be considered as representative of the performance of the Fund in the
future since the net asset value and public offering price of shares of
the Fund will vary based not only on the type, quality and maturities of
the securities held in the corresponding Portfolio, but also on changes in
the current value of such securities and on changes in the expenses of the
Fund and the corresponding Portfolio. These factors and possible
differences in the methods used to calculate total return should be
considered when comparing the total return of a Fund to total returns
published for other investment companies or other investment vehicles.
Total return reflects the performance of both principal and income.
COMPARISON OF FUND PERFORMANCE
Comparison of the quoted nonstandardized performance of various investments is
valid only if performance is calculated in the same manner. Since there are
different methods of calculating performance, investors should consider the
effect of the methods used to calculate performance when comparing performance
of a Fund with performance quoted with respect to other investment companies or
types of investments.
In connection with communicating its performance to current or prospective
shareholders, a Fund also may compare these figures to the performance of other
mutual funds tracked by mutual fund rating services or to unmanaged indices
which may assume reinvestment of dividends but generally do not reflect
deductions for administrative and management costs.
Evaluations of a Fund's performance made by independent sources may also be used
in advertisements concerning the Fund. Sources for a Fund's performance
information could include the following:
Asian Wall Street Journal, a weekly Asian newspaper that often reviews U.S.
mutual funds investing internationally.
Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds investing abroad.
Changing Times, The Kiplinger Magazine, a monthly investment advisory
publication that periodically features the performance of a variety of
securities.
Consumer Digest, a monthly business/financial magazine that includes a "Money
Watch" section featuring financial news.
Financial Times, Europe's business newspaper, which features from time to time
articles on international or country-specific funds.
Financial World, a general business/financial magazine that includes a "Market
Watch" department reporting on activities in the mutual fund industry.
Forbes, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the performance
of a variety of mutual funds.
Global Investor, a European publication that periodically reviews the
performance of U.S. mutual funds investing internationally.
Investor's Daily, a daily newspaper that features financial, economic and
business news.
Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a weekly
publication of industry-wide mutual fund averages by type of fund.
Money, a monthly magazine that from time to time features both specific funds
and the mutual fund industry as a whole.
Morningstar Inc., a publisher of financial information and mutual fund research.
New York Times, a nationally distributed newspaper which regularly covers
financial news.
Personal Investing News, a monthly news publication that often reports on
investment opportunities and market conditions.
Personal Investor, a monthly investment advisory publication that includes a
"Mutual Funds Outlook" section reporting on mutual fund performance measures,
yields, indices and portfolio holdings.
Success, a monthly magazine targeted to the world of entrepreneurs and growing
business, often featuring mutual fund performance data.
U.S. News and World Report, a national business weekly that periodically
reports mutual fund performance data.
Value Line, a biweekly publication that reports on the largest 15,000 mutual
funds.
Wall Street Journal, a Dow Jones and Company, Inc. newspaper which
regularly covers financial news.
Weisenberger Investment Companies Services, an annual compendium of information
about mutual funds and other investment companies, including comparative data on
funds' backgrounds, management policies, salient features, management results,
income and dividend records, and price ranges.
Working Women, a monthly publication that features a "Financial Workshop"
section reporting on the mutual fund/financial industry.
ECONOMIC AND MARKET INFORMATION
Advertising and sales literature of a Fund may include discussions of economic,
financial and political developments and their effect on the securities market.
Such discussions may take the form of commentary on these developments by Fund
portfolio managers and their views and analysis on how such developments could
affect the Funds. In addition, advertising and sales literature may quote
statistics and give general information about the mutual fund industry,
including the growth of the industry, from sources such as the Investment
Company Institute ("ICI"). For example, according to the ICI, thirty-seven
percent of American households are pursuing their financial goals through mutual
funds. These investors, as well as businesses and institutions, have entrusted
over $4.4 trillion to the more than 6,700 funds available.
VALUATION OF SECURITIES; REDEMPTIONS AND PURCHASES IN KIND
Equity and debt securities (other than short-term debt obligations maturing in
60 days or less), including listed securities and securities for which price
quotations are available, will normally be valued on the basis of market
valuations furnished by a pricing service. Short-term debt obligations and money
market securities maturing in 60 days or less are valued at amortized cost,
which approximates market.
Securities for which market quotations are not available are valued by Bankers
Trust pursuant to procedures adopted by each Portfolio's Board of Trustees. It
is generally agreed that securities for which market quotations are not readily
available should not be valued at the same value as that carried by an
equivalent security which is readily marketable.
The problems inherent in making a good faith determination of value are
recognized in the codification effected by SEC Financial Reporting Release No. 1
("FRR 1" (formerly Accounting Series Release No. 113)) which concludes that
there is "no automatic formula" for calculating the value of restricted
securities. It recommends that the best method simply is to consider all
relevant factors before making any calculation.
According to FRR 1 such factors would include consideration of the:
type of security involved, financial statements, cost at date of
purchase, size of holding, discount from market value of
unrestricted securities of the same class at the time of purchase,
special reports prepared by analysts, information as to any
transactions or offers with respect to the security, existence of
merger proposals or tender offers affecting the security, price and
extent of public trading in similar securities of the issuer or
comparable companies, and other relevant matters.
To the extent that a Portfolio purchases securities which are restricted as to
resale or for which current market quotations are not available, the Adviser of
the Portfolio will value such securities based upon all relevant factors as
outlined in FRR 1.
The Trust, on behalf of each Fund, and each Portfolio reserve the right, if
conditions exist which make cash payments undesirable, to honor any request for
redemption or repurchase order by making payment in whole or in part in readily
marketable securities chosen by the Trust, or the Portfolio, as the case may be,
and valued as they are for purposes of computing the Fund's or the Portfolio's
net asset value, as the case may be (a redemption in kind). If payment is made
to a Fund shareholder in securities, an investor, including the Fund, the
shareholder may incur transaction expenses in converting these securities into
cash. The Trust, on behalf of each Fund, and each Portfolio have elected,
however, to be governed by Rule 18f-1 under the 1940 Act as a result of which
each Fund and each Portfolio are obligated to redeem shares or beneficial
interests, as the case may be, with respect to any one investor during any
90-day period, solely in cash up to the lesser of $250,000 or 1% of the net
asset value of the Fund or the Portfolio, as the case may be, at the beginning
of the period.
Each Portfolio has agreed to make a redemption in kind to the corresponding Fund
whenever the Fund wishes to make a redemption in kind and therefore shareholders
of the Fund that receive redemptions in kind will receive portfolio securities
of the corresponding Portfolio and in no case will they receive a security
issued by the Portfolio. The Portfolio has advised the Trust that the Portfolio
will not redeem in kind except in circumstances in which the Fund is permitted
to redeem in kind or unless requested by the Fund.
Each investor in a Portfolio, including the corresponding Fund, may add to or
reduce its investment in the Portfolio on each day the Portfolio determines its
net asset value. At the close of each such business day, the value of each
investor's beneficial interest in the Portfolio will be determined by
multiplying the net asset value of the Portfolio by the percentage, effective
for that day, which represents that investor's share of the aggregate beneficial
interests in the Portfolio. Any additions or withdrawals which are to be
effected as of the close of business on that day will then be effected. The
investor's percentage of the aggregate beneficial interests in the Portfolio
will then be recomputed as the percentage equal to the fraction (i) the
numerator of which is the value of such investor's investment in the Portfolio
as of the close of business on such day plus or minus, as the case may be, the
amount of net additions to or withdrawals from the investor's investment in the
Portfolio effected as of the close of business on such day, and (ii) the
denominator of which is the aggregate net asset value of the Portfolio as of the
close of business on such day plus or minus, as the case may be, the amount of
net additions to or withdrawals from the aggregate investments in the Portfolio
by all investors in the Portfolio. The percentage so determined will then be
applied to determine the value of the investor's interest in the Portfolio as
the close of business on the following business day.
Each Fund may, at its own option, accept securities in payment for shares. The
securities delivered in payment for shares are valued by the method described
under "Net Asset Value" as of the day the Fund receives the securities. This is
a taxable transaction to the shareholder. Securities may be accepted in payment
for shares only if they are, in the judgment of Bankers Trust, appropriate
investments for the Fund's corresponding Portfolio. In addition, securities
accepted in payment for shares must: (i) meet the investment objective and
policies of the acquiring Fund's corresponding Portfolio; (ii) be acquired by
the applicable Fund for investment and not for resale (other than for resale to
the Fund's corresponding Portfolio); (iii) be liquid securities which are not
restricted as to transfer either by law or liquidity of market; and (iv) if
stock, have a value which is readily ascertainable as evidenced by a listing on
a stock exchange, over-the-counter market or by readily available market
quotations from a dealer in such securities. When securities are used as payment
for shares or as a redemption in kind from the fund, the transaction fee will
not be assessed. However, the shareholder will be charged the costs associated
with receiving or delivering the securities. These costs include security
movement costs and taxes and registration costs. Each Fund reserves the right to
accept or reject at its own option any and all securities offered in payment for
its shares.
TRADING IN FOREIGN SECURITIES
With respect to the EAFE(R) Equity Index Fund, trading in foreign cities may be
completed at times which vary from the closing of the New York Stock Exchange
("NYSE"). In computing the net asset values, the Funds value foreign securities
at the latest closing price on the exchange on which they are traded immediately
prior to the closing of the NYSE. Similarly, foreign securities quoted in
foreign currencies are translated into U.S. dollars at the foreign exchange
rates.
Occasionally, events that affect values and exchange rates may occur between the
times at which they are determined and the closing of the NYSE. If such events
materially affect the value of portfolio securities, these securities may be
valued at their fair value as determined in good faith by the Trustees, although
the actual calculation may be done by others.
MANAGEMENT OF THE TRUSTS AND THE PORTFOLIOS
Each Board of Trustees is composed of persons experienced in financial matters
who meet throughout the year to oversee the activities of the Funds or
Portfolios they represent. In addition, the Trustees review contractual
arrangements with companies that provide services to the Funds/Portfolios and
review the Funds' performance.
The Trustees and officers of the Trusts and Portfolios their birthdates, their
principal occupations during the past five years, and addresses are set forth
below. Their titles may have varied during that period. Unless otherwise
indicated, the address of each officer is 5800 Corporate Drive, Pittsburgh,
Pennsylvania 15237-5829.
TRUSTEES OF THE BT ADVISOR FUNDS
MARTIN J. GRUBER (birthdate: July 15, 1937) -- Trustee; Chairman of the
Finance Department and Nomura Professor of Finance, Leonard N. Stern School of
Business, New York University (since 1964). His address is 229 S. Irving Street,
Ridgewood, New Jersey 07450.
RICHARD J. HERRING (birthdate: February 18, 1946) -- Trustee; Vice Dean and
Director, Wharton Undergraduate Division, Professor, Finance Department, The
Wharton School, university of Pennsylvania. His address is 3255 Roberts Road,
Bryn Mawr, Pennsylvania 19010.
BRUCE E. LANGTON (birthdate: May 10, 1931) -- Trustee; Retired; Director,
Adela Investment Co. and University Patents, Inc.; formerly Assistant Treasurer
of IBM Corporation (until 1986). His address is 99 Jordan Lane, Stamford,
Connecticut 06903.
<PAGE>
HARRY VAN BENSCHOTEN (birthdate: February 18, 1928) -- Trustee; Retired (since
1987); Corporate Vice President, Newmont Mining Corporation (prior to 1987);
Director, Canada Life Insurance Company of New York and Competitive
Technologies, Inc., a public company listed on the American Stock Exchange. His
address is 6581 Ridgewood Drive, Naples, Florida 33963.
TRUSTEES OF BT PYRAMID MUTUAL FUNDS
MARTIN J. GRUBER (birthdate: July 15, 1937) -- Trustee; Chairman of the
Finance Department and Nomura Professor of Finance, Leonard N. Stern School of
Business, New York University (since 1964). His address is 229 S. Irving Street,
Ridgewood, New Jersey 07450.
KELVIN J. LANCASTER (birthdate: December 12, 1924) -- Trustee; Professor,
Department of Economics, Columbia University. His address is 35 Claremont
Avenue, New York, New York 10027.
HARRY VAN BENSCHOTEN (birthdate: February 18, 1928) -- Trustee; retired (since
1987); Corporate Vice President, Newmont Mining Corporation (prior to 1987);
Director, Canada Life Insurance Company of New York and Competitive
Technologies, Inc., a public company listed on the American Stock Exchange. His
address is 6581 Ridgewood Drive, Naples, Florida 33963.
TRUSTEES OF THE PORTFOLIOS
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 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.
OFFICERS OF THE TRUSTS AND PORTFOLIOS
Unless otherwise specified, each officer listed below holds the same position
with each Trust and each Portfolio.
RONALD M. PETNUCH -- (birthdate: February 27, 1960) -- President and Treasurer;
Senior Vice President; Federated Services Company ("FSC"); formerly, Director of
Proprietary Client Services, Federated Administrative Services ("FAS"), and
Associate Corporate Counsel, Federated Investors ("FI").
CHARLES L. DAVIS, JR. -- (birthdate: March 23, 1960) -- Vice President and
Assistant Treasurer; Vice
President, FAS.
JAY S. NEUMAN -- (birthdate: April 22, 1950) -- Secretary; Corporate
Counsel, FI.
Messrs. Petnuch, Davis and Neuman also hold similar positions for other
investment companies for which Edgewood or an affiliate serves as the principal
underwriter.
No person who is an officer or director of Bankers Trust is an officer or
Trustee of the Trusts or the Portfolios. No director, officer or employee of
Edgewood or any of its affiliates will receive any compensation from the Trusts
or the Portfolios for serving as an officer or Trustee of the Trusts or the
Portfolios.
Bankers Trust reimbursed the BT Investment Equity 500 Index Fund and Equity
500 Index Portfolio for a portion of its their Trustees fees for the period
above. See "Investment Adviser" and "Administrator" below.
As of April 1, 1998 the Trustees and officers of the Trusts and the Portfolios
owned in the aggregate less than 1% of the shares of any Fund or Trust (all
series taken together).
<TABLE>
<CAPTION>
TRUSTEE COMPENSATION TABLE
AGGREGATE AGGREGATE AGGREGATE TOTAL COMPENSATION
NAME OF PERSON, COMPENSATION COMPENSATION FROM COMPENSATION FROM FUND COMPLEX
POSITION FROM TRUST* PYRAMID TRUST** FROM PORTFOLIOS+ PAID TO TRUSTEES++
<S> <C> <C> <C> <C>
Martin J. Gruber,
Trustee of the Trust
and Pyramid Trust $13,125 $13,125 N/A $27,500
Harry Van Benschoten,
Trustee of the Trust
and Pyramid Trust $13,125 $13,125 N/A $27,500
Bruce E. Langton
Trustee of the Trust $13,125 N/A N/A $27,500
Kelvin J. Lancaster
Trustee of the
Pyramid Trust N/A $13,125 N/A $27,500
Richard J. Herring
Trustee of the Trust $13,125 N/A N/A $27,500
Charles P. Biggar,
Trustee of Portfolios N/A N/A $8,327 $27,500
S. Leland Dill,
Trustee of Portfolios N/A N/A $8,327 $27,500
Philip Saunders, Jr.,
Trustee of Portfolios N/A N/A $8,327 $27,500
</TABLE>
* The aggregate compensation is provided for the BT Advisor Funds which is
comprised of 4 funds. Information is furnished for the Trust's fiscal year ended
December 31, 1997.
** The aggregate compensation is provided for the BT Pyramid Mutual Funds which
is comprised of 6 funds. Information is furnished for the Trust's fiscal year
ended December 31, 1997.
+ The aggregate compensation is provided for the Equity 500 Index Portfolio and
BT Investment Portfolios. Information is furnished for the Trust's most recent
fiscal year ended December 31, 1997.
++ Aggregated information is furnished for the BT Family of Funds which consists
of the following: BT Investment Funds, BT Institutional Funds, BT Pyramid Mutual
Funds, BT Advisor Funds, BT Investment Portfolios, Cash Management Portfolio,
Treasury Money Portfolio, Tax Free Money Portfolio, NY Tax Free Money Portfolio,
International Equity Portfolio, Short Intermediate US Government Securities
Portfolio, Intermediate Tax Free Portfolio, Asset Management Portfolio, Equity
500 Index Portfolio, and Capital Appreciation Portfolio. The compensation is
provided for the calendar year ended December 31, 1997.
As of April 1, 1998, the following shareholders of record owned 5% or more of
the outstanding shares of the Fund: Bankers Trust Company as custodian for
401(k) Westinghouse Personal Investment, Jersey City, NJ, owned approximately
1,919,811 Shares (36.95%); Bankers Trust Company as trustee for Northrop Grumman
Essd Savings, Jersey City, NJ, owned approximately 533,460 Shares (10.27%);
Bankers Trust Company as custodian for Collins & Aikman Corp. 401(k), Jersey
City, NJ, owned approximately 352,808 Shares (6.79%); Bankers Trust Company as
custodian for 401(k) Framatome Technologies, Nashville, TN, owned approximately
340,181 Shares (6.55%); and Bankers Trust Company, custodian for Matsushita
Electric Corp. of America, Jersey City, NJ, owned approximately 286,894 Shares
(5.52%).
As of April 1, 1998, the following shareholders of record owned 5% or more of
the outstanding Advisor Class Shares of the Small Cap Index Fund: Bankers Trust
Company as trustee for Phillips Exeter Academy, Jersey City, NJ, owned
approximately 23,657 Shares (23.97%); Southwest Securities Inc. for the benefit
of KLM Properties Ltd., Dallas, TX, owned approximately 11,431 Shares (11.58%);
Bankers Trust Company as custodian for Gerard Sarnat, Portola Valley, CA, owned
approximately 6,311 Shares (6.39%); and Zachary Smith, San Francisco, CA, owned
approximately 5,394 Shares (5.46%).
As of April 1, 1998, the following shareholders of record owned 5% or more of
the outstanding Advisor Class Shares of the EAFE Equity Index Fund: Linsco for
the exclusive benefit of customers of LPL, San Diego, CA, owned approximately,
95,879 Shares (25.33%); Charles Schwab, San Francisco, CA, owned approximately
68,727 Shares (18.16%); and Bankers Trust Company as trustee for Phillips Exeter
Academy, Jersey City, NJ, owned approximately 56,952 Shares (15.05%).
As of April 1, 1998, there were no shareholders of record who owned 5% or
more of the outstanding Advisor Class Shares of the U.S. Bond Index Fund.
INVESTMENT ADVISER
Under the terms of each Portfolio's investment advisory agreement with Bankers
Trust (the "Advisory Agreement"), Bankers Trust manages the Portfolio subject to
the supervision and direction of the Board of Trustees of the Portfolio. Bankers
Trust will: (i) act in strict conformity with each Portfolio's Declaration of
Trust, the 1940 Act and the Investment Advisers Act of 1940, as the same may
from time to time be amended; (ii) manage each Portfolio in accordance with the
Portfolio's investment objectives, restrictions and policies; (iii) make
investment decisions for each Portfolio; and (iv) place purchase and sale orders
for securities and other financial instruments on behalf of each Portfolio.
Bankers Trust bears all expenses in connection with the performance of services
under each Advisory Agreement. The Trust and each Portfolio bears certain other
expenses incurred in its operation, including: taxes, interest, brokerage fees
and commissions, if any; fees of Trustees of the Trust or the Portfolio who are
not officers, directors or employees of Bankers Trust, Edgewood or any of their
affiliates; SEC fees and state Blue Sky qualification fees; charges of
custodians and transfer and dividend disbursing agents; certain insurance
premiums; outside auditing and legal expenses; costs of maintenance of corporate
existence; costs attributable to investor services, including, without
limitation, telephone and personnel expenses; costs of preparing and printing
prospectuses and statements of additional information for regulatory purposes
and for distribution to existing shareholders; costs of shareholders' reports
and meetings of shareholders, officers and Trustees of the Trust or the
Portfolio; and any extraordinary expenses.
For the fiscal years ended December 31, 1997, 1996, and 1995, Bankers Trust
earned $2,430,147, $1,505,963, and $770,530, and $428,346, respectively, as
compensation for investment advisory services provided to the Equity 500 Index
Portfolio. During the same periods, Bankers Trust reimbursed $1,739,490,
$870,024, and $418,814, respectively, to the Portfolio to cover expenses.
For the fiscal year ended December 31, 1997, and for the period from July 1,
1996 (commencement of operations) to December 31, 1996, Bankers Trust earned
$123,632 and $34,759, respectively, for investment advisory services provided to
the Small Cap Index Portfolio. During the same periods, Bankers Trust reimbursed
$107,835 and $26,968, respectively, to the Portfolio to cover expenses.
For the fiscal year ended December 31, 1997 and for the period from January 24,
1996 (commencement of operations) to December 31, 1996, Bankers Trust earned
$113,810 and $68,584, respectively, for investment advisory services provided to
the EAFE Equity Index Portfolio. During the same periods, Bankers Trust
reimbursed $28,070 and $30,591, respectively, to the Portfolio to cover
expenses.
For the period from June 30, 1997 (commencement of operations) to December 31,
1997, Bankers Trust earned $33,131 for investment advisory services provided to
U.S. Bond Index Portfolio. During the same period, Bankers Trust reimbursed
$39,527 to the Portfolio to cover expenses.
Bankers Trust may have deposit, loan and other commercial banking relationships
with the issuers of obligations which may be purchased on behalf of the
Portfolios, including outstanding loans to such issuers which could be repaid in
whole or in part with the proceeds of securities so purchased. Such affiliates
deal, trade and invest for their own accounts in such obligations and are among
the leading dealers of various types of such obligations. Bankers Trust has
informed the Portfolios that, in making its investment decisions, it does not
obtain or use material inside information in its possession or in the possession
of any of its affiliates. In making investment recommendations for the
Portfolios, Bankers Trust will not inquire or take into consideration whether an
issuer of securities proposed for purchase or sale by a Portfolio is a customer
of Bankers Trust, its parent or its subsidiaries or affiliates and, in dealing
with its customers, Bankers Trust, its parent, subsidiaries and affiliates will
not inquire or take into consideration whether securities of such customers are
held by any fund managed by Bankers Trust or any such affiliate.
The prospectus contains disclosure as to the amount of Bankers Trust's
investment advisory and administration and services fees, including waivers
thereof. Bankers Trust may not recoup any of its waived investment advisory or
administration and services fees. Such waivers by Bankers Trust shall stay in
effect for at least 12 months.
ADMINISTRATOR
Under the Administration and Services Agreements, Bankers Trust is obligated on
a continuous basis to provide such administrative services as the Board of
Trustees of the Trusts and the Portfolios reasonably deem necessary for the
proper administration of the Trusts or the Portfolios. Bankers Trust will:
generally assist in all aspects of each class of shares of each Funds' and
Portfolios' operations; supply and maintain office facilities (which may be in
Bankers Trust's own offices), statistical and research data, data processing
services, clerical, accounting, bookkeeping and recordkeeping services
(including without limitation the maintenance of such books and records as are
required under the 1940 Act and the rules thereunder, except as maintained by
other agents), internal auditing, executive and administrative services, and
stationery and office supplies; prepare reports to shareholders or investors;
prepare and file tax returns; supply financial information and supporting data
for reports to and filings with the SEC and various state Blue Sky authorities;
supply supporting documentation for meetings of the Board of Trustees; provide
monitoring reports and assistance regarding compliance with Declarations of
Trust, by-laws, investment objectives and policies and with Federal and state
securities laws; arrange for appropriate insurance coverage; calculate net asset
values, net income and realized capital gains or losses; and negotiate
arrangements with, and supervise and coordinate the activities of, agents and
others to supply services.
Pursuant to a sub-administration agreement (the "Sub-Administration Agreement"),
FSC performs such sub-administration duties for the Trusts and the Portfolios 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.
<PAGE>
For the fiscal years ended December 31, 1997, 1996, and 1995, Bankers Trust
earned $1,666,151, $1,049,314, and $686,078, respectively as compensation for
administrative and other services provided to BT Investment Equity 500 Index
Fund. During the same periods, Bankers Trust reimbursed $774,879, $595,135, and
$412,383, respectively, to BT Investment Equity 500 Index Fund to cover
expenses.
For the fiscal year ended December 31, 1997 and for the period from August 8,
1996 (commencement of operations) to December 31, 1996, Bankers Trust earned
$1,610 and $26, respectively, as compensation for administrative and other
services provided to Small Cap Index Fund Advisor Class Shares. During the same
periods, Bankers Trust reimbursed $2,551 and $2,322, respectively to Small Cap
Index Fund Advisor Class Shares to cover expenses.
For the fiscal year ended December 31, 1997 and for the period from June 21,
1996 (commencement of operations to December 31, 1996, Bankers Trust earned
$5,745 and $528, respectively, as compensation for administrative and other
services provided to EAFE Equity Index Fund Advisor Class Shares. During the
same periods, Bankers Trust reimbursed $5,151 and $2,792, respectively, to EAFE
Equity Index Fund Advisor Class Shares to cover expenses.
For the fiscal year ended December 31, 1997 and for the period from July 10,
1996 (commencement of operations) to December 31, 1996, Bankers Trust earned
$41,211 and $11,586, respectively, as compensation for administrative and other
services provided to the Small Cap Index Portfolio.
For the fiscal year ended December 31, 1997 and for the period from January 24,
1996 (commencement of operations) to December 31, 1996, Bankers Trust earned
$45,524 and $27,433, respectively, as compensation for administrative and other
services provided to the EAFE Equity Index Portfolio.
For the years ended December 31, 1997, 1996, and 1995, Bankers Trust earned
$1,215,073, $752,981, and $385,265, respectively, as compensation for
administrative and other services provided to the Equity 500 Index
Portfolio.
Bankers Trust has agreed that if in any fiscal year the aggregate expenses of
any Fund and its respective Portfolio (including fees pursuant to the Advisory
Agreement, but excluding interest, taxes, brokerage and, if permitted by the
relevant state securities commissions, extraordinary expenses) exceed the
expense limitation of any state having jurisdiction over a Fund or Class,
Bankers Trust will reimburse that Fund for the excess expense to the extent
required by state law. As of the date of this SAI, the most restrictive annual
expense limitation applicable to any Fund or Class is 2.50% of the Fund's or
Class' first $30 million of average annual net assets, 2.00% of the next $70
million of average annual net assets and 1.50% of the remaining average annual
net assets.
CUSTODIAN AND TRANSFER AGENT
Bankers Trust, 130 Liberty Street, (One Bankers Trust Plaza), New York, New York
10006, serves as Custodian for the Trusts and for the Portfolios pursuant to the
administration and services agreements. As Custodian, it holds the Funds' and
each Portfolio's assets. Bankers Trust also serves as transfer agent of the
Trusts and of each Portfolio pursuant to the respective administration and
services agreement. Under its transfer agency agreement with the Trusts, Bankers
Trust maintains the shareholder account records for each Class of shares of each
Fund, handles certain communications between shareholders and the Trusts and
causes to be distributed any dividends and distributions payable by the Trusts.
Bankers Trust may be reimbursed by the Funds or the Portfolios for its
out-of-pocket expenses. Bankers Trust will comply with the self-custodian
provisions of Rule 17f-2 under the 1940 Act.
USE OF NAME
The Trusts and Bankers Trust have agreed that each Trust may use "BT" as part of
its name for so long as Bankers Trust serves as investment adviser to the
Portfolios. The Trusts have acknowledged that the term "BT" is used by and is a
property right of certain subsidiaries of Bankers Trust and that those
subsidiaries and/or Bankers Trust may at any time permit others to use that
term.
Each Trust may be required, on 60 days' notice from Bankers Trust at any time,
to abandon use of the acronym "BT" as part of its name. If this were to occur,
the Trustees would select an appropriate new name for each Trust, but there
would be no other material effect on the Trusts, their shareholders or
activities.
BANKING REGULATORY MATTERS
Bankers Trust has been advised by its counsel that in its opinion Bankers Trust
may perform the services for the Portfolios contemplated by the Advisory
Agreements and other activities for the Funds and the Portfolios described in
the Prospectuses and this SAI without violation of the Glass-Steagall Act or
other applicable banking laws or regulations. However, counsel has pointed out
that future changes in either Federal or state statutes and regulations
concerning the permissible activities of banks or trust companies, as well as
future judicial or administrative decisions or interpretations of present and
future statutes and regulations, might prevent Bankers Trust from continuing to
perform those services for the Trusts and the Portfolios. State laws on this
issue may differ from the interpretations of relevant Federal law and banks and
financial institutions may be required to register as dealers pursuant to state
securities law. If the circumstances described above should change, the Boards
of Trustees would review the relationships with Bankers Trust and consider
taking all actions necessary in the circumstances.
COUNSEL AND INDEPENDENT ACCOUNTANTS
Willkie Farr & Gallagher, One Citicorp Center, 153 East 53rd Street, New York,
New York 10022-4669, serves as Counsel to the Trusts and each Portfolio. Coopers
& Lybrand L.L.P., 1100 Main Street, Suite 900, Kansas City, Missouri 64105 acts
as Independent Accountants of the Trusts and each Portfolio.
ORGANIZATION OF THE TRUSTS
Shares of each Trust do not have cumulative voting rights, which means that
holders of more than 50% of the shares voting for the election of Trustees can
elect all Trustees. Shares are transferable but have no preemptive, conversion
or subscription rights. Shareholders generally vote by Fund, except with respect
to the election of Trustees and the ratification of the selection of independent
accountants.
Massachusetts law provides that shareholders could under certain circumstances
be held personally liable for the obligations of each Trust. However, each
Trust's Declaration of Trust disclaims shareholder liability for acts or
obligations of the respective Trust and requires that notice of this disclaimer
be given in each agreement, obligation or instrument entered into or executed by
a Trust or a Trustee. The Declaration of Trust provides for indemnification from
each Trust's property for all losses and expenses of any shareholder held
personally liable for the obligations of each Trust. Thus, the risk of a
shareholder's incurring financial loss on account of shareholder liability is
limited to circumstances in which each Trust itself would be unable to meet its
obligations, a possibility that a Trust believes is remote. Upon payment of any
liability incurred by a Trust, the shareholder paying the liability will be
entitled to reimbursement from the general assets of the respective Trust. The
Trustees intend to conduct the operations of each Trust in a manner so as to
avoid, as far as possible, ultimate liability of the shareholders for
liabilities of that Trust.
TAXATION
TAXATION OF THE FUNDS
The Trust intends to qualify annually and to elect each Fund to be treated as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code").
As a regulated investment company, each Fund will not be subject to U.S. Federal
income tax on its investment company taxable income and net capital gains (the
excess of net long-term capital gains over net short-term capital losses), if
any, that it distributes to shareholders. The fund intends to distribute to its
shareholders, at least annually, substantially all of its investment company
taxable income and net capital gains, and therefore does not anticipate
incurring a Federal income tax liability.
DISTRIBUTIONS
Dividends paid out of the Fund's investment company taxable income will be
taxable to a U.S. shareholder as ordinary income. Distributions of net capital
gains, if any, designated as capital gain dividends are taxable as long-term
capital gains, regardless of how long the shareholder has held the Fund's
shares, and are not eligible for the dividends-received deduction. Shareholders
receiving distributions in the form of additional shares, rather than cash,
generally will have a cost basis in each such share equal to the net asset value
of a share of the Fund on the reinvestment date. Shareholders will be notified
annually as to the U.S. Federal tax status of distributions. Shareholders should
consult their own tax adviser concerning the application of federal, state and
local taxes to the distributions they receive from the Fund.
TAXATION OF THE PORTFOLIOS
The Portfolios are not subject to the Federal income taxation. Instead, the Fund
and other investors investing in a Portfolio must take into account, in
computing their Federal income tax liability, their share of the Portfolio's
income, gains, losses, deductions, credits and tax preference items, without
regard to whether they have received any cash distributions from the Portfolio.
BACKUP WITHHOLDING
A Fund may be required to withhold U.S. Federal income tax at the rate of 31% of
all taxable distributions payable to shareholders who fail to provide the Fund
with their correct taxpayer identification number or to make required
certifications, or who have been notified by the Internal Revenue Service that
they are subject to backup withholding. Corporate shareholders and certain other
shareholders specified in the Code generally are exempt from such backup
withholding. Backup withholding is not an additional tax. Any amounts withheld
may be credited against the shareholder's U.S. Federal income tax liability.
FOREIGN SHAREHOLDERS
The tax consequences to a foreign shareholder of an investment in a Fund may be
different from those described herein. Foreign shareholders are advised to
consult their own tax advisers with respect to the particular tax consequences
to them of an investment in a Fund.
OTHER TAXATION
The Trust is organized as a Massachusetts business trust and, under current law,
neither the Trust nor any Fund is liable for any income or franchise tax in the
Commonwealth of Massachusetts, provided that the Fund continues to qualify as a
regulated investment company under Subchapter M of the Code.
Each Portfolio is organized as a New York trust. Each Portfolio is not subject
to any income or franchise tax in the State of New York or the Commonwealth of
Massachusetts.
FOREIGN WITHHOLDING TAXES
Income received by a Portfolio from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries.
FINANCIAL STATEMENTS
The financial statements for the Funds and the Portfolios for the period ended
December 31, 1997, are incorporated herein by reference to the Funds' Annual
Reports dated December 31, 1997. A copy of a Fund's Annual Report may be
obtained without charge by contacting the Fund.
<PAGE>
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.
<PAGE>
DESCRIPTION OF S&P'S CORPORATE BOND RATINGS:
AAA - Debt rated AAA has the highest rating assigned by S&P to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.
AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher-rated issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to weakened capacity to pay interest and repay principal for debt
in this category than in higher-rated categories.
BB - Debt rate BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments.
B - Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB- rating.
CCC - Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal.
CC - Debt rated CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating.
C -The rating C is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC- debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed but debt service
payments are continued.
CI - The rating CI is reserved for income bonds on which no interest is being
paid.
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.
<PAGE>
INVESTMENT ADVISER OF EACH PORTFOLIO AND ADMINISTRATOR
BANKERS TRUST COMPANY
DISTRIBUTOR
EDGEWOOD SERVICES, INC.
CUSTODIAN AND TRANSFER AGENT
BANKERS TRUST COMPANY
INDEPENDENT ACCOUNTANTS
COOPERS & LYBRAND L.L.P.
COUNSEL
WILLKIE FARR & GALLAGHER
--------------------
No person has been authorized to give any information or to make any
representations other than those contained in the Trust's Prospectuses, its
Statements of Additional Information or the Trust's official sales literature in
connection with the offering of the Trust's shares and, if given or made, such
other information or representations must not be relied on as having been
authorized by the Trust. Neither the Prospectuses nor this SAI constitutes an
offer in any state in which, or to any person to whom, such offer may not
lawfully be made.
--------------------
Cusips:
05576L866
000000000
05576L858
05576L841
055847107
BT0466I(4/98)
BT ADVISOR FUNDS
U.S. BOND INDEX FUND
INSTITUTIONAL CLASS SHARES
PROSPECTUS
APRIL 30, 1998
BT Advisor Funds (the "Trust") is an open-end, management investment company
(mutual fund) which consists of several funds. The U.S. Bond Index Fund (the
"Fund") is a separate series of the Trust and offers two classes of shares. The
shares offered by this prospectus are the Institutional Class Shares (the
"Shares"). The Fund seeks to replicate as closely as possible the performance of
the Lehman Brothers Aggregate Bond Index before the deduction of the expenses
allocable to the Shares of the Fund and the U.S. Bond Index Portfolio (the
"Expenses"). There is no assurance, however, that the Fund will achieve its
stated objective.
Please read this Prospectus before investing, and keep it on file for future
reference. It contains important information, including how the Fund invests and
the services available to shareholders.
A Statement of Additional Information ("SAI") with the same date has been filed
with the Securities and Exchange Commission ("SEC"), and is incorporated herein
by reference. You may request a copy of the SAI or a paper copy of this
prospectus, if you have received your prospectus electronically, free of charge
by calling the Fund's Service Agent at 1-800-368-4031. The SAI, material
incorporated by reference into this document, and other information regarding
the Trust is maintained electronically with the SEC at Internet Web site
(http://www.sec.gov).
UNLIKE OTHER MUTUAL FUNDS, THE FUND SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY
INVESTING ALL OF ITS INVESTABLE ASSETS ("ASSETS") IN THE U.S. BOND INDEX
PORTFOLIO (THE "PORTFOLIO") WHICH IS A SEPARATE INVESTMENT COMPANY WITH AN
IDENTICAL INVESTMENT OBJECTIVE. SEE "SPECIAL INFORMATION CONCERNING
MASTER-FEEDER FUND STRUCTURE" HEREIN.
BANKERS TRUST COMPANY ("BANKERS TRUST") IS THE INVESTMENT ADVISER (THE
"ADVISER") OF THE PORTFOLIO. SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS
OF, OR GUARANTEED OR ENDORSED BY, BANKERS TRUST OR ANY OTHER BANKING OR
DEPOSITORY INSTITUTION. SHARES ARE NOT FEDERALLY GUARANTEED OR INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE U.S. GOVERNMENT, THE FEDERAL RESERVE
BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT RISK, INCLUDING THE
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
LIKE SHARES OF ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
EDGEWOOD SERVICES, INC.
5800 CORPORATE DRIVE O PITTSBURGH, PENNSYLVANIA O 15237-5829
<PAGE>
TABLE OF CONTENTS
The Fund 3
Who May Invest 3
Summary of Fund Expenses 4
Financial Highlights 6
Investment Objective and Policies 7
Risk Factors and Certain Securities and
Investment Practices 8
Net Asset Value 11
Purchase and Redemption of Shares 11
Dividends, Distributions and Taxes 14
Performance Information and Reports 16
Management of the Trust and Portfolio 16
Additional Information 19
<PAGE>
19
THE FUND
The U.S. Bond Index Fund seeks to replicate as closely as possible (before
deduction of expenses) the investment performance of the Lehman Brothers
Aggregate Bond Index (the "Aggregate Bond Index" or the "Index"), a broad
market-weighted index which encompasses U.S. Treasury and agency securities,
corporate investment grade bonds, international (dollar-denominated) investment
grade bonds, and mortgage-backed securities. The Fund will be invested primarily
in fixed income securities of the U.S. government or any agency thereof,
publicly issued fixed rate domestic debt of industrial, financial, and utility
corporations, and U.S. dollar denominated fixed income securities of foreign and
supranational entities issued publicly in the United States. The Fund will also
invest in mortgage pass-through securities issued by the Government National
Mortgage Association ("GNMA"), the Federal Home Loan Mortgage Corporation
("FHLMC"), and the Federal National Mortgage Association ("FNMA").
The Trust seeks to achieve the investment objective of the Fund by investing all
the Assets of the Fund in the Portfolio.
WHO MAY INVEST
Shares of the Fund are offered through this Prospectus primarily to
institutional investors. The Shares are generally available to investors who
invest at least $5 million in the Fund.
The Portfolio represents all major sectors of the investment grade fixed-income
securities markets. The Fund may be a suitable investment vehicle for those
investors seeking ownership in the "bond market" as a whole, without regard to
particular sectors. The Fund is also suitable for those investors with common
stock holdings who are seeking a complementary fixed-income investment to create
a more balanced asset mix.
The Fund is not in itself a balanced investment plan. Investors should consider
their investment objective and tolerance for risk when making an investment
decision. When investors sell their Shares, they may be worth more or less than
what they paid for them.
<PAGE>
SUMMARY OF FUND EXPENSES
Annual operating expenses are paid out of the assets of the Portfolio and the
Fund. The Portfolio pays an investment advisory fee and an administrative
services fee to Bankers Trust. The Fund incurs expenses such as maintaining
shareholder records and furnishing shareholder statements. The Fund must provide
financial reports.
The following table provides: (i) a summary of expenses relating to purchases
and sales of the Shares of the Fund and the annual operating expenses of the
Fund and expenses of the Portfolio, in the aggregate, as a percentage of average
daily net assets of the Fund; and (ii) an example illustrating the dollar cost
of such expenses on a $1,000 investment in the Fund. THE TRUSTEES OF THE TRUST
BELIEVE THAT THE EXPENSES OF THE FUND AND EXPENSES OF THE PORTFOLIO, IN THE
AGGREGATE, WILL BE LESS THAN OR APPROXIMATELY EQUAL TO THE EXPENSES WHICH THE
FUND WOULD INCUR IF THE TRUST RETAINED THE SERVICES OF AN INVESTMENT ADVISER AND
THE ASSETS OF THE FUND WERE INVESTED DIRECTLY IN THE TYPE OF SECURITIES BEING
HELD BY THE PORTFOLIO.
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge on Purchases
(as a percentage of offering price) None
Maximum Sales Charge on Reinvested Distributions None
Redemption Fee None
Exchange Fee None
Shareholder transaction expenses are charges paid when investors buy, sell,
exchange, or hold Shares of the Fund. See "Purchase and Redemption of Shares"
for an explanation of how and when these charges apply.
ANNUAL OPERATING EXPENSES
(as a percentage of daily net assets of the Fund)
Investment advisory fee (after reimbursements or waiver) 0.03%
12b-1 Fees None
Other expenses (after reimbursements or waivers) 0.12%
Total operating expenses (after reimbursements or waivers) 0.15%
EXAMPLE: 1 Year 3 Years 5 Years 10 Years
An investor would pay the following
expenses on a $1,000 investment,
assuming (1) 5% annual return and
(2) redemption at the end of each
time period: $2 $6 $8 $19
The expense table and the example above show the estimated costs and expenses
that an investor will bear directly or indirectly as a shareholder of the Fund.
Bankers Trust has voluntarily agreed to waive a portion of its investment
advisory fee with respect to the Portfolio. Without such waiver, the Portfolio's
investment advisory fee would be equal to 0.15%. The expense table and the
example reflect a voluntary undertaking by Bankers Trust to waive or reimburse
expenses such that the total operating expenses will not exceed 0.15% of the
Fund's average net assets annually. In the absence of this undertaking for the
fiscal year ending December 31, 1997, the total operating expenses would have
been approximately 0.86% of the Fund's Institutional Class Shares average net
assets annually. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
Moreover, while the example assumes a 5% annual return, actual performance will
vary and may result in a return greater or less than 5%.
The Fund is distributed by Edgewood Services, Inc. ("Edgewood," or the
"Distributor") to customers of Bankers Trust or to customers of another bank or
a dealer or other institution that has a sub-shareholder servicing agreement
with Bankers Trust (along with Bankers Trust, a "Service Agent"). Some Service
Agents may impose certain conditions on their customers in addition to or
different from those imposed by the Fund and may charge their customers a direct
fee for their services. Each Service Agent has agreed to transmit to
shareholders who are its customers appropriate disclosures of any fees that it
may charge them directly.
CURRENTLY, THE FUND HAS ISSUED TWO CLASSES OF SHARES EACH OFFERED IN A SEPARATE
PROSPECTUS. BECAUSE THE EXPENSES VARY BETWEEN THE CLASSES, PERFORMANCE WILL VARY
WITH RESPECT TO EACH CLASS. ADDITIONAL INFORMATION CONCERNING THE FUND'S OTHER
CLASS OF SHARES IS AVAILABLE FROM BANKERS TRUST, AS ADMINISTRATOR, AT
1-800-368-4031.
For more information about the Fund's and the Portfolio's expenses see
"Management of the Trust and Portfolio" herein.
<PAGE>
FINANCIAL HIGHLIGHTS
The following table shows the selected data for a share outstanding, total
investment return, ratios to average net assets and other supplemental data of
the U.S. Bond Index Fund for the period indicated. The U.S. Bond Index Fund's
Annual Report has been audited by Coopers & Lybrand L.L.P., the Fund's
independent accountants, whose report thereon appears in the Fund's Annual
Report which is incorporated by reference in the Trusts' SAI.
<PAGE>
<TABLE>
<CAPTION>
Institutional Class Shares Advisor Class Shares
For the period For the Period
June 30, 1997* through June 30 1997* through
December 31, 1996 December 31, 1996
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, Beginning of Period $10.00 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.33 0.32
Net Realized and Unrealized Gain
on Investment Transactions 0.32 0.29
Total from Investment Operations 0.65 0.61
DISTRIBUTIONS TO SHAREHOLDERS
Net Investment Income (0.32) (0.31)
Net Realized Gain from Investment
Transactions (0.04)+ ) (0.04)
TOTAL DISTRIBUTIONS (0.36) (0.35)
NET ASSET VALUE, END OF PERIOD $10.29 $10.26
TOTAL INVESTMENT RETURN 6.52% 6.15%
SUPPLEMENTAL DATA AND RATIOS:
Net Assets, End of
Period (000s omitted) $8,119 $242
Ratios to Average Net Assets:
Net Investment Income $6.32%** 6.31%**
Expenses, including expenses of the
U.S. Bond Index Portfolio 0.15%** 0.35%**
Decrease Reflected in Above Expense Ration Due to Absorption of
Expenses by Bankers Trust 0.71%** 14.53%*
* Commencement of Operations
** Annualized.
</TABLE>
Further information about the Fund's performance is contained in the Fund's
Annual Report, dated December 31, 1997, which can be obtained free of charge
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The U.S. Bond Index Fund seeks to replicate as closely as possible (before
deduction of expenses) the investment performance of the Lehman Brothers
Aggregate Bond Index.
The Trust seeks to achieve the investment objective of the Fund by investing all
of its Assets in the Portfolio, which has the same investment objective as the
Fund.
The Trust is intended to be a long-term investment vehicle and is not designated
to provide investors with a means of speculating on short-term market movements.
Investors who engage in excessive account activity generate additional costs
which are borne by all the Trust's shareholders. In order to minimize such
costs, the Trust has adopted the following policies. The Trust reserves the
right to reject any purchase request (including exchange purchases from other BT
Advisor Funds) that is reasonably deemed to be disruptive to efficient portfolio
management, either because of the timing of the investment or previous excessive
trading by the investor. Additionally, the Trust has adopted exchange privilege
limitations as described in the section "Exchange Limitations" herein. Finally,
the Trust reserves the right to suspend the offering of its shares.
Since the investment characteristics of the Fund will correspond directly to
those of the Portfolio, the following is a discussion of the various investments
of and techniques employed by the Portfolio. Additional information about the
investment policies of the Portfolio appears in "Risk Factors and Certain
Securities and Investment Practices" in this Prospectus and in the Fund's SAI.
There can be no assurance that the investment objective of either the Fund or
the Portfolio will be achieved.
U.S. BOND INDEX PORTFOLIO
The Portfolio is not managed according to traditional methods of "active"
investment management, which involve the buying and selling of securities based
upon economic, financial and market analysis and investment judgment. Instead,
the Portfolio, utilizing a "passive" or "indexing" investment approach, attempts
to replicate the investment performance of the index through statistical
procedures.
The Portfolio seeks to replicate as closely as possible (before deduction of
Expenses) the investment performance of the Aggregate Bond Index, a broad market
weighted index which encompasses four major classes of investment grade
fixed-income securities in the United States: U.S. Treasury and agency
securities, corporate bonds, international (dollar-denominated) bonds, and
mortgage-backed securities, with maturities greater than one year.
The value of the Portfolio's investments varies based on many factors. The value
of bonds fluctuates based on changes in domestic or foreign interest rates, the
credit quality of the issuer, market conditions, and other economic and
political news. In general, bond prices rise when interest rates fall, and vice
versa. This effect is usually more pronounced for longer-term securities.
Lower-quality securities offer higher yields, but also carry more risk.
When investors sell their Shares, they may be worth more or less than what they
paid for them. See "Risk Factors and Certain Securities and Investment
Practices" herein for more information.
As of December 31, 1997, the major classes of fixed-income securities
represented the following proportions of the Index's total market value.
AGGREGATE
BOND INDEX
U.S. Treasury and agency securities 49%
Corporate bonds 16%
International (dollar-denominated) bonds 4%
Mortgage-backed securities 30%
Asset Backed Securities 1%
Dollar-weighted average maturity (Years) 8.8
The U.S. Bond Index Portfolio will be unable to hold all of the individual
issues which comprise the Index because of the large number of securities
involved. Instead, the Portfolio will hold a representative sample of the
securities in the Index, selecting one or two issues to represent entire
"classes" or types of securities in the Index. The Portfolio will be constructed
so as to match as closely as possible the composition of the Index by investing
in fixed-income securities approximating their relative proportion of the
Index's total market value.
At the broadest level, the U.S. Bond Index Portfolio will seek to hold
securities and other investments which reflect the weighting of the major asset
classes in the Index. These classes include U.S. Treasury and agency securities,
corporate bonds, and mortgage-backed securities. For example, if U.S. Treasury
and agency securities represent approximately 51% of the Index's interest rate
risk, then approximately 51% of the Portfolio's interest rate risk will come
from such securities and other investments. Similarly, if corporate bonds
represent 20% of the interest rate risk of the Index, then they will represent
approximately 20% of the interest rate risk of the Portfolio. Such a sampling
technique is expected to be an effective means of substantially replicating the
income and capital returns provided by the Index before deduction of Fund and
Portfolio expenses.
The Portfolio may, from time to time, substitute one type of investment grade
bond for another. For instance, a Portfolio may hold more short-term corporate
bonds (and, in turn, hold fewer short U.S. Treasury bonds) than represented in
the Index so as to increase income. This corporate substitution strategy will
entail the assumption of additional credit risk; however, substantial
diversification within the corporate sector should moderate issue-specific
credit risk. Overall, credit risk is expected to be very low for the Portfolio.
Fixed-income securities will be primarily of investment grade quality - - i.e.,
those rated at least Baa by Moody's Investors Service, Inc. ("Moody's") or BBB-
by Standard & Poor's ("S&P"). Securities rated Baa or BBB possess some
speculative characteristics.
The Portfolio may invest in U.S. Treasury bills, notes and bonds and other
"full faith and credit" obligations of the U.S. government and in U.S.
government agency securities, which are debt obligations issued or guaranteed by
agencies or instrumentalities of the U.S. government ("U.S. Government
Securities"). Such "agency" securities may not be backed by the "full faith and
credit" of the U.S. government. Such U.S. government agencies may include the
Farm Credit Banks, the Resolution Trust Corporation and the GNMA. Even though
they all carry top (AAA) credit ratings, "agency" obligations are not explicitly
guaranteed by the U.S. government and so are perceived as somewhat riskier than
comparable Treasury bonds.
As a mutual fund investing primarily in fixed-income securities, the
Portfolio is subject to interest rate, income, call and credit risks. Since the
Portfolio also invests in mortgage-backed securities, it is also subject to
prepayment risk. See "Risk Factors and Certain Securities and Investment
Practices."
For more information about the historical performance of the Aggregate Bond
Index, see the SAI.
ADDITIONAL INVESTMENT LIMITATIONS
Over time, the correlation between the performance of the Fund and the Index is
expected to be 0.95 or higher before deduction of Expenses of the Fund and
expenses of the Portfolio. A correlation of 1.00 would indicate perfect
correlation, which would be achieved when the net asset value of the Fund,
including the value of its dividend and any capital gain distributions,
increases or decreases in exact proportion to changes in the Index. The Fund's
ability to track its Index may be affected by, among other things, transaction
costs, administration and other expenses incurred by the Fund or the Portfolio,
changes in either the composition of the Index or the assets of the Portfolio,
and the timing and amount of Portfolio investor contributions and withdrawals,
if any. In the unlikely event that a high correlation is not achieved, the
Trust's Board of Trustees will consider alternatives. Because the Portfolio
seeks to track the Index, Bankers Trust will not attempt to judge the merits of
any particular stock as an investment.
Under normal circumstances, the Portfolio will invest at least 80% of its assets
in the securities of its Index.
As a diversified fund, no more than 5% of the assets of the Portfolio may be
invested in the securities of one issuer (other than U.S. Government
Securities), except that up to 25% of the Portfolio's assets may be invested
without regard to this limitation. The Portfolio will not invest more than 25%
of its assets in the securities of issuers in any one industry. These are
fundamental investment policies of the Portfolio which may not be changed
without investor approval. No more than 15% of the Portfolio's net assets may be
invested in illiquid or not readily marketable securities (including repurchase
agreements and time deposits maturing in more than seven days). Additional
investment policies of the Portfolio are contained in the SAI.
The Portfolio may maintain up to 25% of its assets in short-term debt securities
and money market instruments to meet redemption requests or to facilitate
investment in the securities of the Index. Securities index futures contracts
and related options, warrants, convertible securities and swap agreements may be
used for several reasons: to simulate full investment in the underlying Index
while retaining a cash balance for fund management purposes, to facilitate
trading, or to reduce transaction costs or to seek higher investment returns
when a futures contract, option, warrant, convertible security or swap agreement
is priced more attractively than the underlying equity security or Index. These
instruments may be considered derivatives. See "Risk Factors and Certain
Securities and Investment Practices" herein.
The use of derivatives for non-hedging purposes may be considered speculative.
While each of these securities can be used as leveraged investments, the
Portfolio may not use them to leverage its net assets. The Portfolio will not
invest in such instruments as part of a temporary defensive strategy (such as
altering the aggregate maturity of the Portfolio) to protect the Portfolio
against potential market declines.
The Portfolio may lend its investment securities and purchase securities on a
when-issued and a delayed delivery basis. The Portfolio may also invest in
mortgage-related and other asset-backed securities. See "Risk Factors and
Certain Securities and Investment Practices" herein and in the SAI for more
information about the investment practices of the Portfolio.
RISK FACTORS AND CERTAIN SECURITIES AND INVESTMENT PRACTICES
The following pages contain more detailed information about types of instruments
in which the Portfolio may invest and strategies Bankers Trust may employ in
pursuit of the Portfolio's investment objective. A summary of risks and
restrictions associated with these instrument types and investment practices is
included as well.
Bankers Trust may not buy all of these instruments or use all of these
techniques to the full extent permitted unless it believes that doing so will
help the Portfolio achieve its goal. Holdings and recent investment strategies
are described in the financial reports of the Fund and the Portfolio, which are
sent to Fund shareholders twice a year. For a free SAI or financial report, call
your Service Agent or Bankers Trust.
FIXED INCOME SECURITY RISK
Investors in the Fund are exposed to four types of risk from fixed income
securities: (1) Interest rate risk is the potential for fluctuations in bond
prices due to changing interest rates; (2) Income risk is the potential for a
decline in a Portfolio's income due to falling market interest rates; (3) Credit
risk is the possibility that a bond issuer will fail to make timely payments of
either interest or principal to the Portfolio; and (4) Prepayment risk or call
risk is the likelihood that, during periods of falling interest rates,
securities with high stated interest rates will be prepaid (or "called") prior
to maturity, requiring the Portfolio to invest the proceeds at generally lower
interest rates.
SPECIAL INFORMATION CONCERNING MASTER-FEEDER FUND STRUCTURE
Unlike other open-end management investment companies (mutual funds) which
directly acquire and manage their own portfolio securities, the Fund seeks to
achieve its investment objective by investing all of its Assets in the
Portfolio, a separate registered investment company with the same investment
objectives as the Fund. Therefore, an investor's interest in the Portfolio's
securities is indirect, like investments in other investment companies and
pooled investment vehicles. In addition to selling a beneficial interest to the
Fund, the Portfolio may sell beneficial interests to other mutual funds or
institutional investors. Such investors will invest in the Portfolio on the same
terms and conditions and will pay a proportionate share of the Portfolio's
expenses. However, the other investors investing in the Portfolio are not
required to sell their shares at the same public offering price as the Fund due
to variations in sales commissions and other operating expenses. Therefore,
investors in the Fund should be aware that these differences may result in
differences in returns experienced by investors in the different funds that
invest in the Portfolio. Such differences in returns are also present in other
mutual fund structures. Information concerning other holders of interests in the
Portfolio is available from Bankers Trust, as the Administrator, at
1-800-368-4031.
The master-feeder fund structure is relatively complex, so shareholders should
carefully consider this investment approach.
Smaller funds investing in the Portfolio may be materially affected by the
actions of larger funds investing in the Portfolio. For example, if a large fund
withdraws from the Portfolio, the remaining funds may experience higher pro rata
operating expenses, thereby producing lower returns (however, this possibility
exists as well for traditionally structured funds which have large institutional
investors). Additionally, the Portfolio may become less diverse, resulting in
increased portfolio risk. Also, funds with a greater pro rata ownership in the
Portfolio could have effective voting control of the operations of the
Portfolio. Except as permitted by the SEC, whenever the Trust is requested to
vote on matters pertaining to the Portfolio, the Trust will hold a meeting of
shareholders of the Fund and will cast all of its votes in the same proportion
as the votes of the Fund's shareholders. Fund shareholders who do not vote will
not affect the Trust's votes at the Portfolio meeting. The percentage of the
Trust's votes representing Fund shareholders not voting will be voted by the
Trustees or officers of the Trust in the same proportion as the Fund
shareholders who do, in fact, vote. Certain changes in the Portfolio's
investment objectives, policies or restrictions may require the Fund to withdraw
its interest in the Portfolio. Any such withdrawal could result in a
distribution "in kind" of portfolio securities (as opposed to a cash
distribution from the Portfolio). If securities are distributed, the Fund could
incur brokerage, tax or other charges in converting the securities to cash. In
addition, the distribution in kind may result in a less diversified portfolio of
investments or adversely affect the liquidity of the Fund. Notwithstanding the
above, there are other means for meeting redemption requests, such as borrowing.
The Fund may withdraw its investment from the Portfolio at any time, if the
Board of Trustees of the Trust determines that it is in the best interests of
the shareholders of the Fund to do so. Upon any such withdrawal, the Board of
Trustees of the Trust would consider what action might be taken, including the
investment of all the Assets of the Fund in another pooled investment entity
having the same investment objectives as the Fund or the retaining of an
investment adviser to manage the Fund's Assets in accordance with the investment
policies described herein with respect to the corresponding Portfolio.
The Fund's investment objective is not a fundamental policy and may be changed
upon notice to but without the approval of the Fund's shareholders. If there is
a change in the Fund's investment objective, the Fund's shareholders should
consider whether the Fund remains an appropriate investment in light of their
then-current needs. The investment objective of the Portfolio is also not a
fundamental policy. Shareholders of the Fund will receive 30 days prior written
notice with respect to any change in the investment objective of the Fund or the
Portfolio. See "Risk Factors and Certain Securities and Investment Practices" in
the SAI for a description of the fundamental policies of the Portfolio that
cannot be changed without approval by "the vote of a majority of the outstanding
voting securities" (as defined in the Investment Company Act of 1940, as amended
(the "1940 Act")) of the Portfolio.
For descriptions of the investment objective, policies and restrictions of the
Portfolio, see "The Fund in Detail" herein and "Risk Factors and Certain
Securities and Investment Practices" herein and in the SAI. For descriptions of
the management and expenses of the Trust and the Portfolio, see "Management of
the Trust and Portfolio" herein and in the SAI.
PORTFOLIO TURNOVER
The frequency of Portfolio transactions-the Portfolio's portfolio turnover
rate-will vary from year to year depending on market conditions and the
Portfolio's cash flows. The Portfolio's annual portfolio turnover rate is not
expected to exceed 100%. The portfolio turnover rate for the Portfolio for the
period from June 30, 1997 (commencement of operations) to December 31, 1997, was
79%.
NET ASSET VALUE
The Fund is open for business each day the New York Stock Exchange, Inc. (the
"NYSE") is open( a "Valuation Day"). The Fund's NAV is calculated as of the
close of regular trading on the NYSE, currently 4:00 p.m. Eastern time
("Valuation Time).
<PAGE>
The Fund's NAV per share is the value of a single Share. The NAV per share of
the Fund is computed by dividing the value of the Fund's Assets (i.e., the value
of its investment in the Portfolio and other assets), less all liabilities,
allocable to the Institutional Class Shares by the total number of its Shares
outstanding. The Portfolio's securities and other assets are valued primarily on
the basis of market quotations or, if quotations are not readily available, by
Bankers Trust pursuant to procedures adopted by the Portfolio's Board of
Trustees. These procedures require Bankers Trust to value such a security at the
same value as an equivalent security which is readily marketable and, in making
such comparisons, to consider all relevant factors under applicable guidelines
of the SEC.
Under procedures adopted by the Board, a NAV for a Fund later determined to have
been inaccurate for any reason will be recalculated. Purchases and redemptions
made at NAV determined to have been inaccurate will be adjusted, although in
certain circumstances, such as where the difference between the original NAV and
the recalculated NAV divided by the recalculated NAV is 0.005 (1/2 of 1%) or
less or shareholder transactions are otherwise insubstantially affected, further
action is not required.
PURCHASE AND REDEMPTION OF SHARES
HOW TO BUY SHARES
The Trust accepts purchase orders for shares of the Fund at the NAV per share
next determined after the order is received on each Valuation Day. See "Net
Asset Value" herein. Shares of the Fund may be available through Investment
Professionals, such as broker/dealers and investment advisers (including Service
Agents).
Purchase orders for shares of the Fund (including those purchased through a
Service Agent) that are transmitted to the Trust's Transfer Agent (the "Transfer
Agent"), prior to the Valuation Time on any Valuation Day will be effective at
that day's Valuation Time. The Trust and Transfer Agent reserve the right to
reject any purchase order.
Shares must be purchased in accordance with procedures established by the
Transfer Agent and each Service Agent. It is the responsibility of each Service
Agent to transmit to the Transfer Agent purchase and redemption orders and to
transmit to Bankers Trust as the Trust's custodian (the "Custodian") purchase
payments by the following business day (trade date + 1) after an order for
shares is placed. A shareholder must settle with the Service Agent for his or
her entitlement to an effective purchase or redemption order as of a particular
time. Because Bankers Trust is the Custodian and Transfer Agent of the Trust,
funds may be transferred directly from or to a customer's account held with
Bankers Trust to settle transactions with the Fund without incurring the
additional costs or delays associated with the wiring of Federal funds.
Certificates for shares will not be issued. Each shareholder's account will be
maintained by a Service Agent or Transfer Agent.
If orders are placed through an Investment Professional, it is the
responsibility of the Investment Professional to transmit the order to buy
shares of each class to the Transfer Agent before 4:00 p.m. Eastern time.
The Transfer Agent must receive payment within one business day after an order
for shares is placed; otherwise, the purchase order may be canceled and the
investor could be held liable for resulting fees and/or losses.
MINIMUM INVESTMENTS
TO OPEN AN ACCOUNT $5 MILLION
TO ADD TO AN ACCOUNT $100,000
MINIMUM BALANCE $1 MILLION
The Fund and its service providers reserve the right to, from time to time, at
their discretion, waive or reduce the investment minimums. Shares of the Fund
may be offered to employees of Bankers Trust and their spouses and minor
children without regard to the minimum initial investment requirements.
IF YOU ARE NEW TO BT ADVISOR FUNDS, complete and sign an account application and
mail it along with your check to the address listed below. If there is no
account application accompanying this Prospectus, call the BT Service Center at
1-800-368-4031.
BT Service Center
P.O. Box 419210
Kansas City, MO 64141-6210
Overnight mailings:
BT Service Center
210 West 10th Street, 8th Floor
Kansas City, MO 64105-1716
IF YOU ALREADY HAVE MONEY INVESTED IN A FUND IN THE BT FAMILY OF FUNDS, you can:
o Mail an account application with a check,
o Wire money into your account,
o Open an account by exchanging from another fund in the BT Family of
Funds, or
o Contact your Service Agent or Investment Professional.
If you are investing through a tax-sheltered retirement plan, such as an IRA,
for the first time, you will need a special application. Contact your Investment
Professional for more information and a retirement account application.
ADDITIONAL INFORMATION ABOUT BUYING SHARES
TO OPEN AN ACCOUNT TO ADD TO AN ACCOUNT
BY WIRE
Call the BT Service Center at Call your Investment Professional or wire
1-800-368-4031 to receive additional investment to:
wire instructions for account
establishment.
ROUTING NO.: 021001033
ATTN: Bankers Trust/IFTC Deposit
DDA NO.: 00-226-296
FBO: (Account name)
(Account number)
CREDIT: U.S. Bond Index Fund - 511
Specify the complete name of the Fund of
your choice, and include your account num-
ber and your name.
BY PHONE
Contact your Service Agent, Contact your Service Agent,
Investment Professional, or call Investment Professional, or call
BT's Service Center at 1-800-368-4031. BT's Service Center at
1-800-368-4031.
If you are an existing shareholder, If you are an existing shareholder,you may
you may exchange from another BT exchange from another BT account
account with the same registration, with the same registration, including,
including, name, address, and name, address, and taxpayer ID number
taxpayer ID number
BY MAIL
Complete and sign the account appli- Make your check payable to the complete
cation. Make your check payable to name of the Fund of your choice. Indicate
the complete name of the Fund of your Fund account number on your check
your choice. Mail to the appropriate and mail to the address printed on your
address indicated on the application. account statement.
<PAGE>
HOW TO SELL SHARES
You can arrange to take money out of your Fund account at any time by selling
(redeeming) some or all of your shares. Your shares shall be sold at the next
NAV calculated after an order is received by the Transfer Agent. Redemption
requests should be transmitted by customers in accordance with procedures
established by the Transfer Agent and the Shareholder's Service Agent.
Redemption requests for shares of the Fund received by the Service Agent and
transmitted to the Transfer Agent prior to the Valuation Time on each Valuation
Day will be effective at that day's Valuation Time and the redemption proceeds
normally will be delivered to the shareholder's account the next day, but in any
event within seven calendar days following receipt of the request.
Service Agents may allow redemptions or exchanges by telephone and may disclaim
liability for following instructions communicated by telephone that the Service
Agent reasonably believes to be genuine. The Service Agent must provide the
investor with an opportunity to choose whether or not to utilize the telephone
redemption or exchange privilege. The Transfer Agent and the Service Agent must
employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. If the Shareholder Servicing Agent does not do so, it may
be liable for any losses due to unauthorized or fraudulent instructions. Such
procedures may include, among others, requiring some form of personal
identification prior to acting upon instructions received by telephone,
providing written confirmation of such transactions and/or tape recording of
telephone instructions.
Redemption orders are processed without charge by the Trust. A Service Agent may
on at least 30 days' notice involuntarily redeem a shareholder's account with
the Fund having a balance below the minimum, but not if an account is below the
minimum due to a change in market value. See "Minimum Investments" herein for
minimum balance amounts.
TO SELL SHARES IN A RETIREMENT ACCOUNT, your request must be made in writing,
except for exchanges to other eligible funds in the BT Family of Funds, which
can be requested by phone or in writing. For information on retirement
distributions, contact your Service Agent or call the BT Service Center at
1-800-368-4031.
TO SELL SHARES BY BANK WIRE you will need to sign up for these services in
advance when completing your account application.
CERTAIN REQUESTS MUST INCLUDE A SIGNATURE GUARANTEE to protect you and Bankers
Trust from fraud. Redemption requests in writing must include a signature
guarantee if any of the following situations apply:
o Your account registration has changed within the last 30 days,
o The check is being mailed to a different address than the one on your
account (record address),
o The check is being made payable to someone other than the account owner,
o The redemption proceeds are being transferred to a BT account with a
different registration, or
o You wish to have redemption proceeds wired to a non-predesignated bank
account.
A signature guarantee is also required if you change the pre-designated bank
information for receiving redemption proceeds on your account.
You should be able to obtain a signature guarantee from a bank, broker, dealer,
credit union (if authorized under state law), securities exchange or
association, clearing agency, or savings association. A notary public cannot
provide a signature guarantee.
ADDITIONAL INFORMATION ABOUT SELLING SHARES
BY WIRE - You must sign up for the wire feature before using it. To verify that
it is in place, call 1-800-368-4031. Minimum wire: $1,000. Your wire redemption
request must be received by the Transfer Agent before 4:00 p.m. Eastern time for
money to be wired on the next business day.
IN WRITING - Write a signed "letter of instruction" with your name, the Fund's
name and Fund's number, your Fund account number, the dollar amount or number of
Shares to be redeemed, and mail to one of the following addresses:
BT Service Center
P.O. Box 419210
Kansas City, MO 64141-6210
Overnight mailings:
BT Service Center
210 West 10th Street, 8th Floor
Kansas City, MO 64105-1716
For Trust accounts, the trustee must sign the letter indicating capacity as
trustee. If the trustee's name is not on the account registration, provide a
copy of the trust document certified within the last 60 days.
For a Business or Organization account, at least one person authorized by
corporate resolution to act on the account must sign the letter.
Unless otherwise instructed, the Transfer Agent will send a check to the account
address of record. The Trust reserves the right to close investor accounts via
30 day notice in writing if the Fund account balance falls below the Fund
minimums.
EXCHANGE PRIVILEGE
Shareholders may exchange their shares for shares of certain other funds in the
BT Family of Funds registered in their state. The Fund reserves the right to
terminate or modify the exchange privilege in the future. To make an exchange,
follow the procedures indicated in "How to Buy Shares" and "How to Sell Shares"
herein. Before making an exchange, please note the following:
o Call your Service Agent for information and a prospectus. Read the prospectus
for relevant information.
o Complete and sign an application, taking care to register your new account in
the same name, address and taxpayer identification number as your existing
account(s).
o Each exchange represents the sale of shares of one fund and the purchase
of shares of another, which may produce a gain or loss for tax purposes.
Your Service Agent will receive a written confirmation of each exchange
transaction.
o Because excessive trading can hurt Fund performance and shareholders, the
Fund reserves the right to temporarily or permanently terminate the
exchange privilege of any investor who makes more than four exchanges out
of the Fund per calendar year. Accounts under common ownership or control,
including accounts with the same taxpayer identification number, will be
counted together for purposes of the four exchange limit.
o The Fund reserves the right to refuse exchange purchases by any person or
group if, in Bankers Trust's judgment, the Fund would be unable to invest
the money effectively in accordance with its investment objective and
policies, or would otherwise potentially be adversely affected.
o Exchanges may be restricted or refused if the Fund receives or anticipates
simultaneous orders affecting significant portions of the Fund's assets.
In particular, a pattern of exchanges that coincide with a "market timing"
strategy may be disruptive to the Fund.
INFORMATION SERVICES
Statements and reports that your Investment Professional or the Transfer Agent
may send to you include the following:
o Confirmation statements (after every transaction that affects your account
balance, including distributions or your account registration)
o Account statements (monthly)
o Financial reports (every six months)
To reduce expenses, only one copy of most financial reports will be mailed, even
if you have more than one account in the Fund. Call your Investment Professional
or the BT Service Center at 1-800-368-4031 if you need additional copies of
financial reports.
DIVIDENDS, DISTRIBUTIONS, AND TAXES
DISTRIBUTIONS. The Fund distributes substantially all of its net income and
capital gains to shareholders each year. Income dividends are declared daily and
paid monthly. Any net capital gains are distributed annually.
The Fund intends to qualify as a regulated investment company, as defined in
the Internal Revenue Code of 1986, as amended (the "Code"). Provided the Fund
meets the requirements imposed by the Code, the Fund will not pay any Federal
income or excise taxes. Dividends paid by the Fund from its taxable net
investment income and distribution by the Fund of its net realized short-term
capital gains are taxable to shareholders as ordinary income, whether received
in cash or reinvested in additional shares of the Fund. The Funds dividends and
distributions will not qualify for the dividends-received deduction for
corporations.
DISTRIBUTION OPTIONS. When you open an account, specify on your account
application how you want to receive distributions. The Trust offers four
options:
1. REINVESTMENT OPTION. Your dividend and capital gain distributions will be
automatically reinvested in additional Shares of the Fund. If you do not
indicate a choice on your application you will be assigned this option.
2. INCOME-EARNED OPTION. Your capital gain distributions will be automatically
reinvested in additional Shares of the Fund, but you will be sent a check for
each dividend distribution.
3. CASH OPTION. You will be sent a check for your dividend and capital gain
distributions.
4. AUTOMATIC DIVIDENDS PROGRAM. Your dividend and capital gain distributions be
automatically invested in Shares of another fund in the BT Family of Funds as
long as the minimums for that account are met.
If you select distribution option 2 or 3 and the U.S. Postal Service cannot
deliver your checks, or if your checks remain uncashed for six months, those
checks will be reinvested in your account at the current NAV and your election
may be converted to the Reinvestment Option. You may change distribution option
at anytime by notifying the Transfer Agent in writing.
For retirement accounts, all distributions are automatically reinvested. When
you are over 59 1/2 years old, you can receive distributions in cash. If
distributions from a retirement account for any taxable year following the year
in which the participant reaches age 70 1/2 are less than the "minimum required
distribution" for that taxable year, an excise tax equal to 50% of the
deficiency may be imposed by the Internal Revenue Service (the "IRS"). The
administrator, trustee or custodian of such a retirement account will be
responsible for reporting distributions from such accounts to the IRS.
When the Fund deducts a distribution from its NAV, the reinvestment price is the
Fund's NAV at the close of business that day. Distribution checks will be mailed
within seven days, or longer for a December ex-dividend date.
TAXES. As with any investment, you should consider how an investment in the
Fund could affect you. Below are some of the Fund's tax implications. If your
account is not a tax-deferred retirement account beware of these tax
implications.
TAXES ON DISTRIBUTIONS. Distributions from the Fund are subject to federal
income tax and may also be subject to state or local taxes. Annual Statements as
to the federal tax status of distributions, and distributions that are
attributable to state and local income and personal taxes, if applicable, will
be mailed to shareholders shortly after the end of the year. If living outside
the United States, your distributions from the Fund could also be taxed by the
country in which you reside.
For federal tax purposes, income and short-term capital gain distributions from
the Fund are taxed as dividends; long-term capital gain distributions are taxed
as long-term capital gains.
<PAGE>
Mutual fund dividends from U.S. government securities are generally free from
state and local income taxes. However, particular states may limit this benefit,
and some types of securities, such as repurchase agreements and some
agency-backed securities, may not qualify for the benefit. In addition, some
states may impose intangible property taxes. You should consult your own tax
adviser for details and up-to-date information on the tax laws in your state.
Distributions are taxable when they are paid, whether you take them in cash or
reinvest them. However, distributions declared in December and paid in January
are taxable as if they were paid on December 31.
Every January, the Transfer Agent will send the IRS a statement showing the
taxable distributions paid to you in the previous year.
TAXES ON TRANSACTIONS. Your redemptions, including exchanges, are subject to
capital gains tax. A capital gain or loss is the difference between the cost of
your Shares and the price you receive when you sell them.
Whenever you sell Shares of the Fund, the Transfer Agent will send you or your
Service Agent a confirmation statement showing how many Shares you sold and at
what price. You also receive a consolidated transaction statement at least
quarterly. However, it is up to you or your tax preparer to determine whether
this sale resulted in a capital gain and, if so, the amount of tax to be paid.
BE SURE TO KEEP YOUR REGULAR ACCOUNT STATEMENTS; the information they contain
will be essential in calculating the amount of your capital gains.
"BUYING A DIVIDEND." If you buy Shares just before the Fund deducts a capital
gain distribution or dividend distribution, as applicable, from its NAV, you
will pay the full price for the Shares and then receive a portion of the price
back in the form of a taxable distribution.
There are tax requirements that all Funds must follow in order to avoid federal
taxation. In its effort to adhere to these requirements, the Fund may have to
limit its investment activity in some types of instruments.
PERFORMANCE INFORMATION AND REPORTS
The Portfolio's recent strategies and holdings, and the Fund's performance, is
detailed twice a year in the Fund's financial reports, which are sent to Fund
shareholders.
For current Fund performance or a free copy of the Fund's financial report,
please contact your Service Agent or Bankers Trust.
Mutual fund performance is commonly measured as total return and/or yield. The
Fund's performance is affected by the expenses of the Fund.
EXPLANATION OF TERMS
TOTAL RETURN is the change in value of an investment in the Fund over a given
period, assuming reinvestment of any dividends and capital gains. A cumulative
total return reflects actual performance over a stated period of time. An
average annual total return is a hypothetical rate of return that, if achieved
annually, would have produced the same cumulative total return if performance
had been constant over the entire period. Average annual total return
calculations smooth out variations in performance; they are not the same as
actual year-by-year results. Average annual total returns covering periods of
less than one year assume that performance will remain constant for the rest of
the year.
YIELD refers to the income generated by an investment in a Fund over a given
period of time, expressed as an annual percentage rate. Yields are calculated
according to a standard that is required for all stock and bond funds. Because
this differs from other accounting methods, the quoted yield may not equal the
income actually paid to shareholders.
Performance information may include comparisons of the Fund's investment results
to various unmanaged indices or results of other mutual funds or investment or
savings vehicles. From time to time, Fund rankings may be quoted from various
sources, such as Lipper Analytical Services, Inc., Value Line and Morningstar,
Inc.
<PAGE>
Unlike some bank deposits or other investments which pay a fixed yield for a
stated period of time, the total return of the Fund will vary depending upon
interest rates, the current market value of the securities held by the Portfolio
and changes in the expenses of the Fund or Portfolio. In addition, during
certain periods for which total return may be provided, Bankers Trust may have
voluntarily agreed to waive portions of their fees, or reimburse certain
operating expenses of the Fund or the Portfolio, on a month-to-month basis. Such
waivers will have the effect of increasing the Fund's net income (and therefore
its yield and total return) during the period such waivers are in effect.
TOTAL RETURNS AND YIELDS ARE BASED ON PAST RESULTS AND ARE NOT AN INDICATION OF
FUTURE PERFORMANCE.
MANAGEMENT OF THE TRUST AND PORTFOLIO
BOARD OF TRUSTEES
The Trust and Portfolio are each governed by a Board of Trustees which is
responsible for protecting the interests of investors. A majority of the
Trustees who are not "interested persons" (as defined in the 1940 Act) of the
Trust or the Portfolio, as the case may be, have adopted written procedures
reasonably appropriate to deal with potential conflicts of interest arising from
the fact that some of the same individuals are Trustees of the Trust and the
Portfolios, up to and including creating separate boards of trustees. See
"Management of the Trust and the Portfolios" in the SAI for more information
with respect to the Trustees and officers of the Trust and the Portfolio.
INVESTMENT ADVISER
The Trust has not retained the services of an investment adviser since the Trust
seeks to achieve the investment objective of the Funds by investing all the
Assets of the Fund in the Portfolio. The Portfolio has retained the services of
Bankers Trust as investment adviser.
BANKERS TRUST COMPANY AND ITS AFFILIATES
Bankers Trust Company, a New York banking corporation with principal offices at
130 Liberty Street (One Bankers Trust Plaza) New York, New York 10006, is a
wholly owned subsidiary of Bankers Trust Corporation. Bankers Trust conducts a
variety of general banking and trust activities and is a major wholesale
supplier of financial services to the international and domestic institutional
market.
As of December 31, 1997, Bankers Trust Corporation was the seventh largest bank
holding company in the United States with total assets of over $100 billion.
Bankers Trust is dedicated to servicing the needs of corporations, governments,
financial institutions and private clients through a global network of over 90
offices in more than 50 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 over $300 billion in assets under
management globally.
Bankers Trust, subject to the supervision and direction of the Board of Trustees
of the Portfolio, manages the Portfolio in accordance with the Portfolio's
investment objective and stated investment policies, makes investment decisions
for the Portfolio, places orders to purchase and sell securities and other
financial instruments on behalf of the Portfolio and employs professional
investment managers and securities analysts who provide research services to the
Portfolio. Bankers Trust may utilize the expertise of any of its world-wide
subsidiaries and affiliates to assist it in its role as investment adviser. All
orders for investment transactions on behalf of the Portfolio are placed by
Bankers Trust with broker-dealers and other financial intermediaries that it
selects, including those affiliated with Bankers Trust. A Bankers Trust
affiliate will be used in connection with a purchase or sale of an investment
for the Portfolio only if Bankers Trust believes that the affiliate's charge for
the transaction does not exceed usual and customary levels. The Portfolio will
not invest in obligations for which Bankers Trust or any of its affiliates is
the ultimate obligor or accepting bank. The Portfolio may, however, invest in
the obligations of correspondents and customers of Bankers Trust.
The Investment Advisory Agreement provides for the Portfolio to pay Bankers
Trust a fee from the Portfolio, accrued daily and paid monthly, equal on an
annual basis to 0.15% of the average daily net assets of the Portfolio for its
then-current fiscal year.
Bankers Trust has been advised by its counsel that, in counsel's opinion,
Bankers Trust currently may perform the services for the Trust and the Portfolio
described in this Prospectus and the SAI without violation of the Glass-Steagall
Act or other applicable banking laws or regulations. State laws on this issue
may differ from the interpretations of relevant Federal law, and banks and
financial institutions may be required to register as dealers pursuant to state
securities law.
PORTFOLIO MANAGER
Louis R. D'Arienzo, Vice President of Bankers Trust, has been responsible for
the day-to-day management of the U.S. Bond Index Portfolio since its
commencement of operations. Mr. D'Arienzo has been employed by Bankers Trust
since 1981 and has twelve years trading and investment experience in fixed
income securities.
ADMINISTRATOR
Under its Administration and Services Agreement with the Trust, Bankers Trust
calculates the net asset value of the Fund and generally assists the Board of
Trustees of the Trust in all aspects of the administration and operation of the
Fund. The Administration and Services Agreement provides for the Trust to pay
Bankers Trust a fee, accrued daily and paid monthly equal on an annual basis to
0.20% of the average daily net assets of the Fund, attributable to the Shares,
for its then-current fiscal year.
Under an Administration and Services Agreement with the Portfolio, Bankers Trust
calculates the value of the assets of the Portfolio and generally assists the
Board of Trustees in all aspects of the administration and operation of the
Portfolio. The Administration and Services Agreement provides for the Portfolio
to pay Bankers Trust a fee, accrued daily and paid monthly, equal on an annual
basis to 0.05% of the Portfolio's average daily net assets for its then-current
fiscal year. Under the Administration and Services Agreement, Bankers Trust may
delegate one or more of its responsibilities to others, including affiliates of
Edgewood, at Bankers Trust's expense.
DISTRIBUTOR
Edgewood Services, Inc. is the principal distributor for Shares of the
Fund. In addition, Edgewood and its affiliates provide the Trust with office
facilities and currently provide administration and distribution services for
other registered investment companies. The principal business address of
Edgewood and its affiliates is 5800 Corporate Drive, Pittsburgh, Pennsylvania
15237-5849.
CUSTODIAN AND TRANSFER AGENT
Bankers Trust acts as custodian of the assets of the Trust and Portfolio and
serves as the transfer agent (the "Transfer Agent") for the Trust and Portfolio
under the Administration and Services Agreement with the Trust and Portfolio.
ORGANIZATION OF THE FUND AND TRUST
The Fund is a mutual fund: an investment that pools shareholders' money and
invests it toward a specified goal. The Fund is a separate diversified series of
BT Advisor Funds, a Massachusetts business trust. The Fund offers two classes of
Shares of beneficial interest, Institutional Class Shares and Advisor Class
Shares. The Portfolio is a separate diversified series of BT Investment
Portfolios, a New York master trust fund. The Trust and BT Investment Portfolios
reserve the right to add additional series in the future. The Trust also
reserves the right to issue additional classes of Shares of the Fund.
The Trust or the Portfolio may hold special meetings and mail proxy materials.
These meetings may be called to elect or remove trustees, change fundamental
policies, approve Portfolio's investment advisory agreement, or for other
purposes. Shareholders not attending these meetings are encouraged to vote by
proxy. The Trust's Transfer Agent will mail proxy materials in advance,
including a voting card and information about the proposals to be voted on.
<PAGE>
When matters are submitted for shareholder vote, shareholders of the Fund will
have one vote for each full share held and proportionate, fractional votes for
fractional shares held. A separate vote of the Fund or classes is required on
any matter affecting only the Fund or class on which shareholders are entitled
to vote. Shareholders of the Fund or class are not entitled to vote on Trust
matters that do not affect the Fund or class, respectively, and do not require a
separate vote of the Fund or class. All series of the Trust and all classes will
vote together on certain matters, such as electing trustees or approving
independent public auditors. There normally will be no meetings of shareholders
for the purpose of electing Trustees unless and until such time as less than a
majority of Trustees holding office have been elected by shareholders, at which
time the Trustees then in office will call a shareholders' meeting for the
election of Trustees. Any Trustee may be removed from office upon the vote of
shareholders holding at least two-thirds of that Trust's outstanding shares at a
meeting called for that purpose. The Trustees are required to call such a
meeting upon the written request of shareholders holding at least 10% of that
Trust's outstanding shares. The Trust will also assist shareholders in
communicating with one another as provided for in the 1940 Act. As of April 1,
1998, Baptist Health Systems, Inc., Birmingham, Alabama, owned approximately
60.54% of the Fund, and, therefore, may, for certain purposes, be deemed to
control the Fund and be able to affect the outcome of certain matters as
presented for a vote of shareholders.
Each series of the Trust will vote separately on any matter involving the
Portfolio. Shareholders of all of the series of the Trust will, however, vote
together to elect Trustees of the Trust and for certain other matters. Under
certain circumstances, the shareholders of one or more series could control the
outcome of these votes. The series of BT Investment Portfolios will vote
together or separately on matters in the same manner, and in the same
circumstances, as do the series of the Trust. As with the Trust, the investors
in one or more series of BT Investment Portfolios could control the outcome of
these votes.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a business trust may,
under certain circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the Trust itself was unable to meet its
obligations.
The Declaration of Trust of BT Investment Portfolios provides that the Fund and
other entities investing in the Portfolio (e.g., other investment companies,
insurance company separate accounts and common and commingled trust funds) will
each be liable for all obligations of the Portfolio. However, the risk of the
Fund incurring financial loss on account of such liability is limited to
circumstances in which both inadequate insurance existed and the Portfolio
itself was unable to meet its obligations. Accordingly, the Trustees of the
Trust believe that neither the Fund nor its shareholders will be adversely
affected by reason of the Fund's investing in the Portfolio. No series of BT
Investment Portfolios has any preference over any other series.
ADDITIONAL INFORMATION
SHORT-TERM INVESTMENTS. The Portfolio may invest in certain short-term fixed
income securities. Such securities may be used to invest uncommitted cash
balances, to maintain liquidity to meet shareholder redemptions or to serve as
collateral for the obligations underlying the Portfolio's investment in
securities index futures or related options or warrants. These securities
include: obligations issued or guaranteed by the U.S. government or any of its
agencies or instrumentalities or by any of the states, repurchase agreements,
time deposits, certificates of deposit, bankers' acceptances, commercial paper,
and shares of money market funds (see "Investment Company Securities" herein).
U.S. GOVERNMENT SECURITIES. Some U.S. Government Securities, such as Treasury
bills, notes and bonds, are supported by the full faith and credit of the United
States; others, such as those of the FNMA, are supported by the right of the
issuer to borrow from the Treasury; others, such as those of the FNMA, are
supported by the discretionary authority of the U.S. Government to purchase the
agency's obligations; and still others, such as those of the Student Loan
Marketing Association, are supported only by the credit of the
instrumentality.
SECURITIES LENDING. The Portfolio is permitted to lend up to 30% of the total
value of its securities. These loans must be secured continuously be cash or
securities issued or guaranteed by the United States government, its agencies or
instrumentalities or by a letter of credit at least equal to the market value of
the securities loaned plus accrued income. By lending its securities, the
Portfolio may increase its income by continuing to receive income on the loaned
securities as well as by the opportunity to receive interest on the collateral.
During the term of the loan, a Portfolio continues to bear the risk of
fluctuations in the price of the loaned securities. In lending securities to
brokers, dealers and other organizations, the Portfolio is subject to risks
which, like those associated with other extensions of credit, include delays in
receiving additional collateral, in recovery should the borrower fail
financially and possible loss of the collateral. Upon receipt of appropriate
regulatory approval, cash collateral may be invested in a money market fund
managed by Bankers Trust (or its affiliate) and Bankers Trust may serve as the
Portfolio's lending agent and may share in revenue received from securities
lending transactions as compensation for this service.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. Delivery of and payment
for these securities may take place as long as a month or more after the date of
the purchase commitment. The value of these securities is subject to market
fluctuation during this period and no income accrues to the Portfolio until
settlement takes place. The Portfolio segregates with the custodian liquid
securities in an amount at least equal to these commitments.
MORTGAGE-RELATED SECURITIES. As part of its effort to replicate the investment
performance of its Index, the Portfolio may invest in mortgage-backed
securities. Mortgage-backed securities represent an interest in an underlying
pool of mortgages. Unlike ordinary fixed-income securities, which generally pay
a fixed rate of interest and return principal upon maturity, mortgage-backed
securities repay both interest income and principal as part of their periodic
payments. Because the mortgages underlying mortgage-backed certificates can be
prepaid at any time by homeowners or corporate borrowers, mortgage-backed
securities give rise to certain unique "pre-payment" risks. See "Risk Factors
and Certain Securities and Investment Practices."
The Portfolio may purchase mortgage-backed securities issued by the GNMA, the
FHLMC, the FNMA, and the Federal Housing Authority ("FHA"). GNMA securities are
guaranteed by the U.S. government as to the timely payment of principal and
interest; securities from other Government-sponsored entities are generally not
secured by an explicit pledge of the U.S. government. The Portfolio may also
invest in conventional mortgage securities, which are packaged by private
corporations and are not guaranteed by the U.S. government. Mortgage securities
that are guaranteed by the U.S. government are guaranteed only as to the timely
payment of principal and interest. The market value of such securities is not
guaranteed and may fluctuate.
DERIVATIVES. The Portfolio may invest in various instruments that are commonly
known as "derivatives." Generally, a derivative is a financial arrangement, the
value of which is based on, or "derived" from, a traditional security, asset, or
market index. Some "derivatives" such as mortgage-related and other asset-backed
securities are in many respects like any other investment, although they may be
more volatile or less liquid than more traditional debt securities. There are,
in fact, many different types of derivatives and many different ways to use
them. There are a range of risks associated with those uses. Futures and options
are commonly used for traditional hedging purposes to attempt to protect a fund
from exposure to changing interest rates, securities prices, or currency
exchange rates and as a low cost method of gaining exposure to a particular
securities market without investing directly in those securities. Derivatives
will not be used to increase portfolio risk above the level that could be
achieved using only traditional investment securities or to acquire exposure to
changes in the value of assets or indices that by themselves would not be
purchased for the Portfolio.
SECURITIES INDEX FUTURES AND RELATED OPTIONS. The Portfolio may enter into
securities index futures contracts and related options provided that not more
than 5% of its assets are required as a margin deposit for futures contracts or
options and provided that not more than 20% of the Portfolio's assets are
invested in futures and options at any time. When the Portfolio has cash from
new investments in the Portfolio or holds a portion of its assets in money
market instruments, it may enter into index futures or options to attempt to
increase its exposure to the market. Strategies the Portfolio could use to
accomplish this include purchasing futures contracts, writing put options, and
purchasing call options. When the Portfolio wishes to sell securities, because
of shareholder redemptions or otherwise, it may use index futures or options to
hedge against market risk until the sale can be completed. These strategies
could include selling futures contracts, writing call options, and purchasing
put options.
SWAP AGREEMENTS. The Portfolio may enter into swap agreements only to the extent
that obligations under such agreements represent not more than 10% of the
Portfolio's total assets. Swap agreements are contracts between parties in which
one party agrees to make payments to the other party based on the change in
market value of a specified index or asset. In return, the other party agrees to
make payments to the first party based on the return of a different specified
index or asset.
Although swap agreements entail the risk that a party will default on its
payment obligations thereunder, the Portfolio will minimize this risk by
entering into agreements that mark to market no less frequently than quarterly.
Swap agreements also bear the risk that the Portfolio will not be able to meet
its obligation to the counterparty. This risk will be mitigated by investing the
Portfolio in the specific asset for which it is obligated to pay a return.
WARRANTS. The Portfolio's investment in warrants will not exceed more than 5% of
its assets (2% with respect to warrants not listed on the New York or American
Stock Exchanges). Warrants are instruments which entitle the holder to buy
underlying equity securities at a specific price for a specific period of time.
A warrant tends to be more volatile than its underlying securities and ceases to
have value if it is not exercised prior to its expiration date. In addition,
changes in the value of a warrant do not necessarily correspond to changes in
the value of its underlying securities.
CONVERTIBLE SECURITIES. The Portfolio may invest in convertible securities which
are a bond or preferred stock which may be converted at a stated price within a
specific period of time into a specified number of shares of common stock of the
same or different issuer. Convertible securities are senior to common stock in a
corporation's capital structure, but usually are subordinated to non-convertible
debt securities. While providing a fixed income stream -- generally higher in
yield than in the income derived from a common stock but lower than that
afforded by a non-convertible debt security -- a convertible security also
affords an investor the opportunity, through its conversion feature, to
participate in the capital appreciation of common stock into which it is
convertible.
In general, the market value of a convertible security is the higher of its
investment value (its value as a fixed income security) or its conversion value
(the value of the underlying shares of common stock if the security is
converted). As a fixed income security, the market value of a convertible
security generally increases when interest rates decline and generally decreases
when interest rates rise; however, the price of a convertible security generally
increases as the market value of the underlying stock increases, and generally
decreases as the market value of the underlying stock declines. Investments in
convertible securities generally entail less risk than investments in the common
stock of the same issuer.
FURTHER RISKS ASSOCIATED WITH THE USE OF FUTURES CONTRACTS, OPTIONS, WARRANTS,
CONVERTIBLE SECURITIES AND SWAP AGREEMENTS. The risk of loss associated with
futures contracts in some strategies can be substantial due to both the low
margin deposits required and the extremely high degree of leverage involved in
futures pricing. As a result, a relatively small price movement in a futures
contract may result in an immediate and substantial loss or gain. However, the
Portfolio will not use futures contracts, options, warrants, convertible
securities and swap agreements for speculative purposes or to leverage their net
assets. Accordingly, the primary risks associated with the use of futures
contracts, options, warrants, convertible securities and swap agreements by the
Portfolio are: (i) imperfect correlation between the change in market value of
the securities held by the Portfolio and the prices of futures contracts,
options, warrants, convertible securities and swap agreements; and (ii) possible
lack of a liquid secondary market for a futures contract and the resulting
inability to close a futures position prior to its maturity date. The risk of
imperfect correlation will be minimized by investing only in those contracts
whose behavior is expected to resemble that of the Portfolio's underlying
securities. The risk that the Portfolio will be unable to close out a futures
position will be minimized by entering into stock transactions on an exchange
with an active and liquid secondary market. However options, warrants,
convertible securities and swap agreements purchased or sold over-the-counter
may be less liquid than exchange-traded securities. Illiquid securities, in
general, may not represent more than 15% of the net assets of the Portfolio.
ASSET COVERAGE. To assure that the Portfolio's use of futures and related
options, as well as when-issued and delayed delivery securities, interest rate
swaps and foreign currency forward futures and related options transactions are
not used to achieve excessive investment leverage, the Portfolio will cover such
transactions, as required under applicable interpretations of the SEC, either by
owning the underlying securities, entering into an off-setting transaction, or
by segregating with the Portfolio's custodian liquid securities in an amount at
all times equal to or exceeding the Portfolio's commitment with respect to these
instruments or contracts.
<PAGE>
BT ADVISOR FUNDS
U.S. BOND INDEX FUND
INSTITUTIONAL CLASS SHARES
INVESTMENT ADVISER OF THE PORTFOLIO AND ADMINISTRATOR
BANKERS TRUST COMPANY
130 Liberty Street
(One Bankers Trust Plaza)
New York, NY 10006
DISTRIBUTOR
EDGEWOOD SERVICES, INC.
5800 Corporate Drive
Pittsburgh, PA 15237-5829
CUSTODIAN AND TRANSFER AGENT
BANKERS TRUST COMPANY
130 Liberty Street
(One Bankers Trust Plaza)
New York, NY 10006
INDEPENDENT ACCOUNTANTS
COOPERS & LYBRAND L.L.P.
1100 Main Street, Suite 900
Kansas City, MO 64105
COUNSEL
WILLKIE FARR & GALLAGHER
153 East 53rd Street
New York, NY 10022
No person has been authorized to give any information or to make any
representations other than those contained in the Trusts' Prospectuses, the
corresponding SAIs or the Trusts' official sales literature in connection with
the offering of the Trust's Shares and, if given or made, such other information
or representations must not be relied on as having been authorized by a Trust.
This Prospectus does not constitute an offer in any state in which, or to any
person to whom, such offer may not lawfully be made.
Cusip #05576L700
STA513300 (4/98)
BT ADVISOR FUNDS
SMALL CAP INDEX FUND
INSTITUTIONAL CLASS SHARES
PROSPECTUS
APRIL 30, 1998
BT Advisor Funds (the "Trust") is an open-end, management investment company
(mutual fund) which consists of several funds. The Small Cap Index Fund (the
"Fund") is a separate series of the Trust and offers two classes of shares. The
shares offered by this prospectus are the Institutional Class Shares (the
"Shares"). The Fund seeks to replicate as closely as possible the performance of
the Russell 2000 Small Stock Index before the deduction of the expenses
allocable to the Shares of the Fund and the Small Cap Index Portfolio (the
"Expenses"). There is no assurance, however, that the Fund will achieve its
stated objective.
Please read this Prospectus before investing, and keep it on file for future
reference. It contains important information, including how the Fund invests and
the services available to shareholders.
A Statement of Additional Information ("SAI") with the same date has been filed
with the Securities and Exchange Commission ("SEC"), and is incorporated herein
by reference. You may request a copy of the SAI or a paper copy of this
prospectus, if you have received your prospectus electronically, free of charge
by calling the Fund's Service Agent at 1-800-368-4031. The SAI, material
incorporated by reference into this document, and other information regarding
the Trust is maintained electronically with the SEC at Internet Web site
(http://www.sec.gov).
UNLIKE OTHER OPEN-END MANAGEMENT INVESTMENT COMPANIES (MUTUAL FUNDS), THE FUND
SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY INVESTING ALL OF ITS INVESTABLE
ASSETS ("ASSETS") IN THE SMALL CAP INDEX PORTFOLIO (THE "PORTFOLIO") WHICH IS A
SEPARATE INVESTMENT COMPANY WITH AN IDENTICAL INVESTMENT OBJECTIVE. SEE "SPECIAL
INFORMATION CONCERNING MASTER-FEEDER FUND STRUCTURE" HEREIN.
BANKERS TRUST COMPANY ("BANKERS TRUST") IS THE INVESTMENT ADVISER (THE
"ADVISER") OF THE PORTFOLIO. SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS
OF, OR GUARANTEED OR ENDORSED BY, BANKERS TRUST OR ANY OTHER BANKING OR
DEPOSITORY INSTITUTION. SHARES ARE NOT FEDERALLY GUARANTEED OR INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE U.S. GOVERNMENT, THE FEDERAL RESERVE
BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT RISK, INCLUDING THE
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
LIKE SHARES OF ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
EDGEWOOD SERVICES, INC.
5800 CORPORATE DRIVE O PITTSBURGH, PENNSYLVANIA O 15237-5829
<PAGE>
TABLE OF CONTENTS
The Fund 3
Who May Invest 3
Summary of Fund Expenses 4
Financial Highlights 6
Investment Objective and Policies 7
Risk Factors and Certain Securities and
Investment Practices 8
Net Asset Value 10
Purchase and Redemption of Shares 11
Dividends, Distributions and Taxes 15
Performance Information and Reports 16
Management of the Trust and Portfolio 17
Additional Information 19
<PAGE>
25
THE FUND
The Small Cap Index Fund seeks to replicate as closely as possible (before
deduction of Expenses) the total return of the Russell 2000 Small Stock Index
(the "Russell 2000" or the "Index"), an index consisting of 2,000
small-capitalization common stocks. The Fund will include the common stock of
one or more companies included in the Russell 2000 Index, on the basis of
computer-generated statistical data, that are deemed representative of the
industry diversification of the entire Russell 2000 Index.
The Trust seeks to achieve the investment objective of the Fund by investing all
the Assets of the Fund in the Portfolio.
WHO MAY INVEST
Shares of the Fund are offered through this Prospectus primarily to
institutional investors. The Shares are generally available to investors who
invest at least $5 million in the Fund.
The Fund may be appropriate for investors who are willing to ride out domestic
stock market fluctuations in pursuit of potentially higher long- term returns.
The Portfolio invests for growth and does not pursue income. Over time, stocks,
although more volatile, have shown greater growth potential than other types of
securities. In the shorter term, however, stock prices can fluctuate
dramatically in response to market factors.
The Fund is not in itself a balanced investment plan. Investors should consider
their investment objective and tolerance for risk when making an investment
decision. When investors sell their Fund Shares, they may be worth more or less
than what they paid for them.
<PAGE>
SUMMARY OF FUND EXPENSES
Annual operating expenses are paid out of the assets of the Portfolio and Fund.
The Portfolio pays an investment advisory fee and an administrative services fee
to Bankers Trust. The Fund incurs expenses such as maintaining shareholder
records and furnishing shareholder statements. The Fund must provide financial
reports.
The following table provides: (i) a summary of expenses relating to purchases
and sales of the Shares of the Fund and the annual operating expenses of the
Fund and expenses of the Portfolio, in the aggregate, as a percentage of average
daily net assets of the Fund; and (ii) an example illustrating the dollar cost
of such expenses on a $1,000 investment in the Fund. THE TRUSTEES OF THE TRUST
BELIEVE THAT THE EXPENSES OF THE FUND AND EXPENSES OF THE PORTFOLIO, IN THE
AGGREGATE, WILL BE LESS THAN OR APPROXIMATELY EQUAL TO THE EXPENSES WHICH THE
FUND WOULD INCUR IF THE TRUST RETAINED THE SERVICES OF AN INVESTMENT ADVISER AND
THE ASSETS OF THE FUND WERE INVESTED DIRECTLY IN THE TYPE OF SECURITIES BEING
HELD BY THE PORTFOLIO.
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge on Purchases
(as a percentage of offering price) None*
Maximum Sales Charge on Reinvested Distributions None*
Redemption Fee None
Exchange Fee None*
Shareholder transaction expenses are charges paid when investors buy, sell,
exchange, or hold Shares of the Fund. See "Purchase and Redemption of Shares"
for an explanation of how and when these charges apply.
* A TRANSACTION FEE OF 0.25% IS DEDUCTED FROM PURCHASES, REDEMPTIONS AND
EXCHANGES INTO AND OUT OF THE FUND. THESE TRANSACTION FEES ARE PAID TO THE FUND
AND ARE DEDUCTED AUTOMATICALLY FROM THE AMOUNT INVESTED, EXCHANGED OR REDEEMED.
THE FEE APPLIES TO ALL REDEMPTIONS AND AN INITIAL INVESTMENT IN THE FUND AND ALL
SUBSEQUENT PURCHASES (INCLUDING PURCHASES MADE BY EXCHANGE FROM ANOTHER BT
FUND), BUT NOT TO REINVESTED DIVIDEND OR CAPITAL GAIN DISTRIBUTIONS.
THE PURPOSE OF THE 0.25% TRANSACTION FEE IS TO ALLOCATE TRANSACTION COSTS
ASSOCIATED WITH PURCHASES, REDEMPTIONS AND EXCHANGES TO INVESTORS MAKING THOSE
PURCHASES, REDEMPTIONS AND EXCHANGES, THUS INSULATING EXISTING SHAREHOLDERS FROM
THOSE TRANSACTION COSTS. THESE COSTS INCLUDE: (1) BROKERAGE COSTS; AND (2) THE
EFFECT OF THE "BID-ASK" SPREAD IN SMALL AND MEDIUM SIZED COMPANY STOCK MARKETS.
SINCE THE INVESTORS, NOT THE FUND, BEAR THESE COSTS, THE FUND IS EXPECTED TO BE
ABLE TO TRACK ITS BENCHMARK INDEX MORE CLOSELY.
ANNUAL OPERATING EXPENSES
(as a percentage of daily net assets of
the Fund-Institutional Class Shares
Investment advisory fee (after reimbursements or waiver) 0.07%
12b-1 Fees None
Other expenses (after reimbursements or waivers) 0.18%
Total operating expenses (after reimbursements or waivers) 0.25%
EXAMPLE: 1 Year 3 Years 5 Years 10 Years
An investor would pay the
following expenses on a $1,000
investment, assuming (1) 5% annual
return and (2) redemption
at the end of each time period: $5 $11 $17 $35
The expense table and the example above show the costs and expenses that an
investor will bear directly or indirectly as a shareholder of the Fund. Bankers
Trust has voluntarily agreed to waive a portion of its investment advisory fee
with respect to the Portfolio. Without such waiver, the Portfolio's investment
advisory fee would be equal to 0.15%. The expense table and the example reflect
a voluntary undertaking by Bankers Trust to waive or reimburse expenses such
that the total operating expenses will not exceed 0.25% of the Fund's
Institutional Class Shares average net assets annually. In the absence of this
undertaking, for the fiscal year ended December 31, 1997, the total operating
expenses would have been approximately 0.57% of the Fund's-Institutional Class
Shares average net assets annually. THE EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN. Moreover, while each example assumes a 5% annual return,
actual performance will vary and may result in a return greater or less than 5%.
The Fund is distributed by Edgewood Services, Inc. ("Edgewood" or the
"Distributor") to customers of Bankers Trust or to customers of another bank or
a dealer or other institution that has a sub-shareholder servicing agreement
with Bankers Trust (along with Bankers Trust, a "Service Agent"). Some Service
Agents may impose certain conditions on their customers in addition to or
different from those imposed by the Fund and may charge their customers a direct
fee for their services. Each Service Agent has agreed to transmit to
shareholders who are its customers appropriate disclosures of any fees that it
may charge them directly.
CURRENTLY, THE FUND HAS ISSUED TWO CLASSES OF SHARES, EACH OFFERED BY A SEPARATE
PROSPECTUS. BECAUSE THE EXPENSES VARY BETWEEN THE CLASSES, PERFORMANCE WILL VARY
WITH RESPECT TO EACH CLASS. ADDITIONAL INFORMATION CONCERNING THE FUND'S OTHER
CLASS OF SHARES IS AVAILABLE FROM BANKERS TRUST, AS ADMINISTRATOR, AT
1-800-368-4031.
For more information about the Fund's and the Portfolio's expenses see
"Management of the Trust and the Portfolio" herein.
<PAGE>
FINANCIAL HIGHLIGHTS
The following table shows the selected data for a share outstanding, total
investment return, ratios to average net assets and other supplemental data of
the Small Cap Index Fund for the periods indicated. The Small Cap Index Fund's
Annual Report has been audited by Coopers & Lybrand L.L.P., the Fund's
independent accountants, whose report thereon appears in the Fund's Annual
Report. The Fund's Annual Report is incorporated by reference.
<TABLE>
<CAPTION>
Institutional Class Shares Advisor Class Shares
For the period For the Period
July 10, 1996 August 8, 1996
For the For the
(Commencement (Commencement
of Operations) of Operations)
December 31, 1997 December 31, 1996 December 31, 1997 December 31, 1996
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, Beginning of Period $10.90 $10.00 $11.04 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.23 0.04 0.08 0.02
Net Realized and Unrealized Gain
on Investment Transactions 2.21 0.90 2.63 1.06
Total from Investment Operations 2.44 0.94 2.71 1.08
DISTRIBUTIONS TO SHAREHOLDERS
Net Investment Income (0.21) (0.04) (0.06) (0.04)
Net Realized Gain from
Investment Transactions (2.00) (0.00)+ (2.00) (0.00)+
TOTAL DISTRIBUTIONS (2.21) (0.04) (2.06) (0.04)
NET ASSET VALUE, END OF PERIOD $11.13 $10.90 $11.69 $11.04
TOTAL INVESTMENT RETURN 23.00% 9.47% 25.11% 10.87%
SUPPLEMENTAL DATA AND RATIOS:
Net Assets, End of
Period (000s omitted) $38,312 $61,558 $1.334 $77
Ratios to Average Net Assets:
Net Investment Income 1.35% $1.71%* 1.13% 1.61%*
Expenses, including expenses of the
EAFE Equity Index Portfolio 0.25% 0.25%* 0.45% 0.45%*
Decrease Reflected in Above Expense Ration Due to Absorption of
Expenses by Bankers Trust 0.32% 0.62%* 0.53% 22.69%*
+Less than $0.01
* Annualized
</TABLE>
Further information about the Fund's performance is contained in the Fund's
Annual Report, dated December 31, 19976, which can be obtained free of charge.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund seeks to replicate as closely as possible (before deduction of
Expenses) the total return of the Russell 2000 Small Stock Index.
The Trust seeks to achieve the investment objective of the Fund by investing all
of its Assets in the Portfolio, which has the same investment objective as the
Fund. Since the investment characteristics of the Fund will correspond directly
to those of the Portfolio, the following is a discussion of the various
investments of and techniques employed by the Portfolio. Additional information
about the investment policies of the Portfolio appears in "Risk Factors and
Certain Securities and Investment Practices" herein and in the Fund's SAI. There
can be no assurance that the investment objective of either the Fund or the
Portfolio will be achieved.
The Trust is intended to be a long-term investment vehicle and is not designated
to provide investors with a means of speculating on short-term market movements.
Investors who engage in excessive account activity generate additional costs
which are borne by all the Trust's shareholders. In order to minimize such
costs, the Trust has adopted the following policies. The Trust reserves the
right to reject any purchase request (including exchange purchases from other BT
Advisor Funds) that is reasonably deemed to be disruptive to efficient portfolio
management, either because of the timing of the investment or previous excessive
trading by the investor. Additionally, the Trust has adopted exchange privilege
limitations as described in the section "Exchange Limitations." Finally, the
Trust reserves the right to suspend the offering of its shares.
SMALL CAP INDEX PORTFOLIO
The Portfolio is not managed according to traditional methods of "active"
investment management, which involve the buying and selling of securities based
upon economic, financial and market analysis and investment judgment. Instead,
the Portfolio, utilizing a "passive" or "indexing" investment approach, attempts
to replicate the investment performance of the Index through statistical
procedures. The Portfolio seeks to replicate as closely as possible (before
deduction of Expenses) the total return of the Russell 2000.
The Russell 2000 is composed of approximately 2,000 small-capitalization common
stocks. A company's stock market capitalization is the total market value of its
floating outstanding shares. As of December 31, 1997, the average stock market
capitalization of the Russell 2000 was $440 million and the weighted average
stock market capitalization of the Russell 2000 was $640 million.
The Portfolio is neither sponsored by nor affiliated with the Frank Russell
Company. Frank Russell's only relationship to the Portfolio is the licensing of
the use of the Russell 2000. Frank Russell Company is the owner of the
trademarks and copyrights relating to the Russell indices.
The Portfolio invests in a statistically selected sample of the approximately
2,000 stocks included in the Russell 2000. The stocks of the Russell 2000 to be
included in the Portfolio will be selected utilizing a statistical sampling
technique known as "optimization." This process selects stocks for the Portfolio
so that various industry weightings, market capitalizations and fundamental
characteristics (e.g. price-to-book, price-to-earnings, debt-to-asset ratios,
and dividend yields) closely approximate those of the Russell 2000. For
instance, if 10% of the capitalization of the Russell 2000 consists of utility
companies with relatively small capitalizations, then the Portfolio is
constructed so that approximately 10% of the Portfolio's assets are invested in
the stocks of utility companies with relatively small capitalizations. The
stocks held by the Portfolio are weighted to make the Portfolio's aggregate
investment characteristics similar to those of the Russell 2000 as a whole.
For more information about the historical performance of the Russell 2000, see
the SAI.
The value of the Portfolio's investments varies based on many factors.
Stock values fluctuate, sometimes dramatically, in response to the activities of
individual companies and general market and economic conditions. Over time,
however, stocks have shown greater long-term growth potential than other types
of securities.
When investors sell their Shares, they may be worth more or less than what they
paid for them. See "Risk Factors and Certain Securities and Investment
Practices" herein for more information.
Over time, the correlation between the performance of the Fund and the Index is
expected to be 0.95 or higher before deduction of Expenses of the Fund and
expenses of the Portfolio. A correlation of 1.00 would indicate perfect
correlation, which would be achieved when the net asset value of the Fund,
including the value of its dividend and any capital gain distributions,
increases or decreases in exact proportion to changes in the Index. The Fund's
ability to track its Index may be affected by, among other things, transaction
costs, administration and other expenses incurred by the Fund or the Portfolio,
changes in either the composition of the Index or the assets of the Portfolio,
and the timing and amount of Portfolio investor contributions and withdrawals,
if any. In the unlikely event that a high correlation is not achieved, the
Trust's Board of Trustees will consider alternatives. Because the Portfolio
seeks to track the Index, Bankers Trust will not attempt to judge the merits of
any particular stock as an investment.
Under normal circumstances, the Portfolio will invest at least 80% of its assets
in the securities of the Index.
ADDITIONAL INVESTMENT LIMITATIONS
As a diversified fund, no more than 5% of the assets of the Portfolio may be
invested in the securities of one issuer (other than U.S. government
securities), except that up to 25% of the Portfolio's assets may be invested
without regard to this limitation. The Portfolio will not invest more than 25%
of its assets in the securities of issuers in any one industry. These are
fundamental investment policies of the Portfolio which may not be changed
without investor approval. No more than 15% of the Portfolio's net assets may be
invested in illiquid or not readily marketable securities (including repurchase
agreements and time deposits maturing in more than seven days). Additional
investment policies of the Portfolio are contained in the SAI.
The Portfolio may maintain up to 25% of its assets in short-term debt securities
and money market instruments to meet redemption requests or to facilitate
investment in the securities of the Index. Securities index futures contracts
and related options, warrants, convertible securities and swap agreements may be
used for several reasons: to simulate full investment in the underlying Index
while retaining a cash balance for fund management purposes, to facilitate
trading, or to reduce transaction costs or to seek higher investment returns
when a futures contract, option, warrant, convertible security or swap agreement
is priced more attractively than the underlying equity security or Index. These
instruments may be considered derivatives. See "Risk Factors and Certain
Securities and Investment Practices" herein.
The use of derivatives for non-hedging purposes may be considered speculative.
While each of these securities can be used as leveraged investments, the
Portfolio may not use them to leverage its net assets. The Portfolio will not
invest in such instruments as part of a temporary defensive strategy (such as
altering the aggregate maturity of the Portfolio) to protect the Portfolio
against potential market declines.
The Portfolio may lend its investment securities and purchase securities on a
when-issued and a delayed delivery basis. See "Risk Factors and Certain
Securities and Investment Practices" herein and in the SAI for more information
about the investment practices of the Portfolio.
RISK FACTORS AND CERTAIN SECURITIES AND INVESTMENT PRACTICES
The following pages contain more detailed information about types of instruments
in which the Portfolio may invest and strategies Bankers Trust may employ in
pursuit of the Portfolio's investment objective. A summary of risks and
restrictions associated with these instrument types and investment practices is
included as well.
Bankers Trust may not buy all of these instruments or use all of these
techniques to the full extent permitted unless it believes that doing so will
help the Portfolio achieve its goal. Holdings and recent investment strategies
are described in the financial reports of the Fund and the Portfolio, which are
sent to Fund shareholders twice a year. For a free SAI or financial report, call
your Service Agent or Bankers Trust.
MARKET RISK
As a mutual fund investing primarily in common stocks, this Portfolio is subject
to market risk -- i.e., the possibility that common stock prices will decline
over short or even extended periods. The U.S. and foreign stock markets tend to
be cyclical, with periods when stock prices generally rise and periods when
prices generally decline.
<PAGE>
RISKS OF INVESTING IN MEDIUM- AND SMALL-CAPITALIZATION STOCKS
Historically, medium- and small-capitalization stocks have been more volatile in
price than the larger-capitalization stocks included in the Standard & Poor's
500 Composite Stock Price Index (the "S&P 500"). Among the reasons for the
greater price volatility of these securities are the less certain growth
prospects of smaller firms, the lower degree of liquidity in the markets for
such stocks, and the greater sensitivity of medium- and small-size companies to
changing economic conditions. In addition to exhibiting greater volatility,
medium-- and small-size company stocks may fluctuate independently of larger
company stocks. Medium- and small-size company stocks may decline in price as
large company stocks rise, or rise in prices as large company stocks decline.
SPECIAL INFORMATION CONCERNING MASTER-FEEDER FUND STRUCTURE
Unlike other open-end management investment companies (mutual funds) which
directly acquire and manage their own portfolio securities, the Fund seeks to
achieve its investment objective by investing all of its Assets in the
Portfolio, a separate registered investment company with the same investment
objectives as the Fund. Therefore, an investor's interest in the Portfolio's
securities is indirect, like investments in other investment companies and
pooled investment vehicles. In addition to selling a beneficial interest to the
Fund, the Portfolio may sell beneficial interests to other mutual funds or
institutional investors. Such investors will invest in the Portfolio on the same
terms and conditions and will pay a proportionate share of the Portfolio's
expenses. However, the other investors investing in the Portfolio are not
required to sell their shares at the same public offering price as the Fund due
to variations in sales commissions and other operating expenses. Therefore,
investors in the Fund should be aware that these differences may result in
differences in returns experienced by investors in the different funds that
invest in the Portfolio. Such differences in returns are also present in other
mutual fund structures. Information concerning other holders of interests in the
Portfolio is available from Bankers Trust, as the Administrator, at
1-800-368-4031.
The master-feeder fund structure has been developed relatively recently, so
shareholders should carefully consider this investment approach.
Smaller funds investing in the Portfolio may be materially affected by the
actions of larger funds investing in the Portfolio. For example, if a large fund
withdraws from the Portfolio, the remaining funds may experience higher pro rata
operating expenses, thereby producing lower returns (however, this possibility
exists as well for traditionally structured funds which have large institutional
investors). Additionally, the Portfolio may become less diverse, resulting in
increased portfolio risk. Also, funds with a greater pro rata ownership in the
Portfolio could have effective voting control of the operations of the
Portfolio. Except as permitted by the SEC, whenever the Trust is requested to
vote on matters pertaining to a Portfolio, the Trust will hold a meeting of
shareholders of the Fund and will cast all of its votes in the same proportion
as the votes of the Fund's shareholders. Fund shareholders who do not vote will
not affect a Trust's votes at the Portfolio meeting. The percentage of the
Trust's votes representing Fund shareholders not voting will be voted by the
Trustees or officers of the Trust in the same proportion as the Fund
shareholders who do, in fact, vote. Certain changes in the Portfolio's
investment objectives, policies or restrictions may require the Fund to withdraw
its interest in the Portfolio. Any such withdrawal could result in a
distribution "in kind" of portfolio securities (as opposed to a cash
distribution from the Portfolio). If securities are distributed, the Fund could
incur brokerage, tax or other charges in converting the securities to cash. In
addition, the distribution in kind may result in a less diversified portfolio of
investments or adversely affect the liquidity of the Fund. Notwithstanding the
above, there are other means for meeting redemption requests, such as borrowing.
The Fund may withdraw its investment from the Portfolio at any time, if the
Board of Trustees of the Trust determines that it is in the best interests of
the shareholders of the Fund to do so. Upon any such withdrawal, the Board of
Trustees of the Trust would consider what action might be taken, including the
investment of all the Assets of the Fund in another pooled investment entity
having the same investment objectives as the Fund or the retaining of an
investment adviser to manage the Fund's Assets in accordance with the investment
policies described herein with respect to the Portfolio.
The Fund's investment objective is not a fundamental policy and may be changed
upon notice to, but without the approval of, the Fund's shareholders.
If there is a change in the Fund's investment objective, the Fund's shareholders
should consider whether the Fund remains an appropriate investment in light of
their then-current needs. The investment objective of the Portfolio is also not
a fundamental policy. Shareholders of the Fund will receive 30 days prior
written notice with respect to any change in the investment objective of the
Fund or the Portfolio. See "Risk Factors and Certain Securities and Investment
Practices" in the SAI for a description of the fundamental policies of the
Portfolio that cannot be changed without approval by "the vote of a majority of
the outstanding voting securities" (as defined in the Investment Company Act of
1940, as amended (the "1940 Act") of the Portfolio.
For descriptions of the investment objective, policies and restrictions of the
Portfolio, see "The Fund in Detail" herein and "Risk Factors and Certain
Securities and Investment Practices" herein and in the SAI. For descriptions of
the management and expenses of the Trust and the Portfolio, see "Management of
the Trust and the Portfolio" herein and in the SAI.
PORTFOLIO TURNOVER
The frequency of Portfolio transactions-the Portfolio's portfolio turnover
rate-will vary from year to year depending on market conditions and the
Portfolio's cash flows. The Portfolio's annual portfolio turnover rate is not
expected to exceed 100%. The portfolio turnover rates of the Portfolio for the
fiscal year ended December 31, 1997 and for the period from July 1, 1996
(Commencement of Operations) to December 31, 1996, were 88% and 16%,
respectively.
NET ASSET VALUE
The Fund is open for business each day the New York Stock Exchange, Inc. (the
"NYSE") is open (a "Valuation Day"). The Fund's net asset value ("NAV") is
calculated as of the close of regular trading on the NYSE, currently 4:00 p.m.
Eastern time ("Valuation Time").
The Fund's NAV per share is the value of a single Share. The NAV per share of
the Fund is computed by dividing the value of the Fund's Assets (i.e., the value
of its investment in the Portfolio and other assets), less all liabilities,
allocable to the Institutional Class Shares by the total number of its Shares
outstanding. The Portfolio's securities and other assets are valued primarily on
the basis of market quotations or, if quotations are not readily available, by
Bankers Trust pursuant to procedures adopted by the Portfolio's Board of
Trustees. These procedures require Bankers Trust to value such a security at the
same value as an equivalent security which is readily marketable and, in making
such comparisons, to consider all relevant factors under applicable guidelines
of the SEC.
Under procedures adopted by the Board, a NAV for the Fund later determined to
have been inaccurate for any reason will be recalculated. Purchases and
redemptions made at NAV determined to have been inaccurate will be adjusted,
although in certain circumstances, such as where the difference between the
original NAV and the recalculated NAV divided by the recalculated NAV is 0.005
(1/2 of 1%) or less or shareholder transactions are otherwise insubstantially
affected, further action is not required.
PURCHASE AND REDEMPTION OF SHARES
HOW TO BUY SHARES
The Trust accepts purchase orders for shares of the Fund at the NAV per share
next determined after the order is received on each Valuation Day. See "Net
Asset Value" herein. Shares of the Fund may be available through Investment
Professionals, such as broker/dealers and investment advisers (including Service
Agents).
Purchase orders for shares of the Fund (including those purchased through a
Service Agent) that are transmitted to the Trust's Transfer Agent (the "Transfer
Agent"), prior to the Valuation Time on any Valuation Day will be effective at
that day's Valuation Time. The Trust and Transfer Agent reserve the right to
reject any purchase order.
Shares must be purchased in accordance with procedures established by the
Transfer Agent and each Service Agent. It is the responsibility of each Service
Agent to transmit to the Transfer Agent purchase and redemption orders and to
transmit to Bankers Trust as the Trust's custodian (the "Custodian") purchase
payments by the following business day (trade date + 1) after an order for
shares is placed. A shareholder must settle with the Service Agent for his or
her entitlement to an effective purchase or redemption order as of a particular
time. Because Bankers Trust is the Custodian and Transfer Agent of the Trust,
funds may be transferred directly from or to a customer's account held with
Bankers Trust to settle transactions with the Fund without incurring the
additional costs or delays associated with the wiring of federal funds.
Certificates for shares will not be issued. Each shareholder's account will be
maintained by a Service Agent or Transfer Agent.
If orders are placed through an Investment Professional, it is the
responsibility of the Investment Professional to transmit the order to buy
shares of each class to the Transfer Agent before 4:00 p.m. Eastern time.
The Transfer Agent must receive payment within one business day after an order
for shares is placed; otherwise, the purchase order may be canceled and the
investor could be held liable for resulting fees and/or losses.
MINIMUM INVESTMENTS
TO OPEN AN ACCOUNT $5 MILLION
TO ADD TO AN ACCOUNT $100,000
MINIMUM BALANCE $1 MILLION
The Fund and its service providers reserve the right to, from time to time, at
their discretion, waive or reduce the investment minimums. Shares of the Fund
may be offered to employees of Bankers Trust and their spouses and minor
children without regard to the minimum initial investment requirements.
IF YOU ARE NEW TO BT ADVISOR FUNDS, complete and sign an account application and
mail it along with your check to the address listed below. If there is no
account application accompanying this Prospectus, call the BT Service Center at
1-800-368-4031.
BT Service Center
P.O. Box 419210
Kansas City, MO 64141-6210
Overnight mailings:
BT Service Center
210 West 10th Street, 8th Floor
Kansas City, MO 64105-1716
IF YOU ALREADY HAVE MONEY INVESTED IN A FUND IN THE BT FAMILY OF FUNDS, you can:
o Mail an account application with a check,
o Wire money into your account,
o Open an account by exchanging from another fund in the BT Family of
Funds, or
o Contact your Service Agent or Investment Professional.
If you are investing through a tax-sheltered retirement plan, such as an IRA,
for the first time, you will need a special application. Contact your Investment
Professional for more information and a retirement account application.
ADDITIONAL INFORMATION ABOUT BUYING SHARES
TO OPEN AN ACCOUNT TO ADD TO AN ACCOUNT
BY WIRE
Call the BT Service Center at Call your Investment Professional or wire
1-800-368-4031 to receive additional investment to:
wire instructions for account
establishment.
<PAGE>
OUTING NO.: 021001033
ATTN: Bankers Trust/IFTC Deposit
DDA NO.: 00-226-296
FBO: (Account name)
(Account number)
CREDIT: Small Cap Index Fund - 513
Specify the complete name of the Fund of
your choice, and include your account num-
ber and your name.
BY PHONE
Contact your Service Agent, Contact your Service Agent,
Investment Professional, or call Investment Professional, or call
BT's Service Center at 1-800-368-4031. BT's Service Center at 1-800-368-4031.
If you are an existing shareholder, If you are an existing shareholder, you may
you may exchange from another BT exchange from another BT account
account with the same registration, with the same registration, including,
including, name, address, and name, address, and taxpayer ID number
taxpayer ID number
BY MAIL
Complete and sign the account appli- Make your check payable to the complete
cation. Make your check payable to name of the Fund of your choice. Indicate
the complete name of the Fund of your Fund account number on your check
your choice. Mail to the appropriate and mail to the address printed on your
address indicated on the application. account statement.
HOW TO SELL SHARES
You can arrange to take money out of your Fund account at any time by selling
(redeeming) some or all of your shares. Your shares shall be sold at the next
NAV calculated after an order is received by the Transfer Agent. Redemption
requests should be transmitted by customers in accordance with procedures
established by the Transfer Agent and the Shareholder's Service Agent.
Redemption requests for shares of the Fund received by the Service Agent and
transmitted to the Transfer Agent prior to the Valuation Time on each Valuation
Day will be effective at that day's Valuation Time and the redemption proceeds
normally will be delivered to the shareholder's account the next day, but in any
event within seven calendar days following receipt of the request.
Service Agents may allow redemptions or exchanges by telephone and may disclaim
liability for following instructions communicated by telephone that the Service
Agent reasonably believes to be genuine. The Service Agent must provide the
investor with an opportunity to choose whether or not to utilize the telephone
redemption or exchange privilege. The Transfer Agent and the Service Agent must
employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. If the Shareholder Servicing Agent does not do so, it may
be liable for any losses due to unauthorized or fraudulent instructions. Such
procedures may include, among others, requiring some form of personal
identification prior to acting upon instructions received by telephone,
providing written confirmation of such transactions and/or tape recording of
telephone instructions.
Redemption orders are processed without charge by the Trust. A Service Agent may
on at least 30 days' notice involuntarily redeem a shareholder's account with
the Fund having a balance below the minimum, but not if an account is below the
minimum due to a change in market value. See "Minimum Investments" herein for
minimum balance amounts.
TO SELL SHARES IN A RETIREMENT ACCOUNT, your request must be made in writing,
except for exchanges to other eligible funds in the BT Family of Funds, which
can be requested by phone or in writing. For information on retirement
distributions, contact your Service Agent or call the BT Service Center at
1-800-368-4031.
IF YOU ARE SELLING SOME BUT NOT ALL OF YOUR NON-RETIREMENT ACCOUNT SHARES, leave
at least $1,000 worth of shares in the account to keep it open.
TO SELL SHARES BY BANK WIRE you will need to sign up for these services in
advance when completing your account application.
CERTAIN REQUESTS MUST INCLUDE A SIGNATURE GUARANTEE to protect you and Bankers
Trust from fraud. Redemption requests in writing must include a signature
guarantee if any of the following situations apply:
o Your account registration has changed within the last 30 days,
o The check is being mailed to a different address than the one on your
account (record address),
o The check is being made payable to someone other than the account owner,
o The redemption proceeds are being transferred to a BT account with a
different registration, or
o You wish to have redemption proceeds wired to a non-predesignated bank
account.
A signature guarantee is also required if you change the pre-designated bank
information for receiving redemption proceeds on your account.
You should be able to obtain a signature guarantee from a bank, broker, dealer,
credit union (if authorized under state law), securities exchange or
association, clearing agency, or savings association. A notary public cannot
provide a signature guarantee.
ADDITIONAL INFORMATION ABOUT SELLING SHARES
BY WIRE - You must sign up for the wire feature before using it. To verify that
it is in place, call 1-800-368-4031. Minimum wire: $1,000. Your wire redemption
request must be received by the Transfer Agent before 4:00 p.m. Eastern time for
money to be wired on the next business day.
IN WRITING - Write a signed "letter of instruction" with your name, the Fund's
name and Fund's number, your Fund account number, the dollar amount or number of
Shares to be redeemed, and mail to one of the following addresses:
BT Service Center
P.O. Box 419210
Kansas City, MO 64141-6210
Overnight mailings:
BT Service Center
210 West 10th Street, 8th Floor
Kansas City, MO 64105-1716
For Trust accounts, the trustee must sign the letter indicating capacity as
trustee. If the trustee's name is not on the account registration, provide a
copy of the trust document certified within the last 60 days.
For a Business or Organization account, at least one person authorized by
corporate resolution to act on the account must sign the letter.
Unless otherwise instructed, the Transfer Agent will send a check to the account
address of record. The Trust reserves the right to close investor accounts via
30 day notice in writing if the Fund account balance falls below the Fund
minimums.
INVESTOR SERVICES
BT Advisor Funds provide a variety of services to help you manage your account.
INFORMATION SERVICES
Statements and reports that your Investment Professional or the Transfer Agent
may send to you include the following:
o Confirmation statements (after every transaction that affects your account
balance, including distributions or your account registration)
o Account statements (monthly)
o Financial reports (every six months)
To reduce expenses, only one copy of most financial reports will be mailed, even
if you have more than one account in the Fund. Call your Investment Professional
or the BT Service Center at 1-800-368-4031 if you need additional copies of
financial reports.
EXCHANGE PRIVILEGE
Shareholders may exchange their shares for shares of certain other funds in the
BT Family of Funds registered in their state. The Fund reserves the right to
terminate or modify the exchange privilege in the future. To make an exchange,
follow the procedures indicated in "How to Buy Shares" and "How to Sell Shares"
herein. Before making an exchange, please note the following:
o Call your Service Agent for information and a prospectus. Read the prospectus
for relevant information.
o Complete and sign an application, taking care to register your new account in
the same name, address and taxpayer identification number as your existing
account(s).
o Each exchange represents the sale of shares of one fund and the purchase
of shares of another, which may produce a gain or loss for tax purposes.
Your Service Agent will receive a written confirmation of each exchange
transaction.
Note that exchanges out of a Fund may be limited to four per calendar year and
that they may have tax consequences to you.
SYSTEMATIC PROGRAMS
TO MOVE MONEY FROM YOUR BANK ACCOUNT TO BT ADVISOR FUNDS
MINIMUM MINIMUM FREQUENCY SETTING UP OR CHANGING
INITIAL SUBSEQUENT
$1,000 $100 Monthly, bimonthly, For a new account, complete
the appropriate section
quarterly or semi- on the application.
annually
For existing accounts, call your Investment
Professional for an application.
To change the amount or frequency of your
investment, contact your Investment
Professional directly or call
1-800-368-4031.
Call at least 10 business days prior to your next
scheduled investment date.
SYSTEMATIC WITHDRAWAL PROGRAM lets you set up periodic redemptions from your
account.
MINIMUM FREQUENCY SETTING UP OR CHANGING
$100 Monthly, quarterly, semi-annually or To establish, call your
Investment Professional or call
annually 1-800-368-4031 after your account is
open. The accounts from which the
withdrawals be processed must have a
minimum balance of $10,000, other
than retirement accounts subject to
required minimum distributions.
TAX-SAVING RETIREMENT PLANS
Retirement plans offer significant tax savings and are available to individuals,
partnerships, small businesses, corporations, nonprofit organizations and other
institutions. Contact Bankers Trust for further information. Bankers Trust can
set up your new account in the Fund under a number of several tax-savings or
tax-deferred plans. Minimums may differ from those listed elsewhere in this
Prospectus.
o INDIVIDUAL RETIREMENT ACCOUNTS (IRAS): personal savings plans that offer tax
advantages for individuals to set aside money for retirement and allow new
contributions of $2,000 per tax year.
o ROLLOVER IRAS: tax-deferred retirement accounts that retain the special tax
advantages of lump sum distributions from qualified retirement plans and
transferred IRA accounts.
DIVIDENDS, DISTRIBUTIONS, AND TAXES
DISTRIBUTIONS. The Fund distributes substantially all of its net income and
capital gains to shareholders each year. The Fund distributes capital gains
annually. Normally, income dividends for the Fund are distributed annually.
The Fund intends to qualify as a regulated investment company, as defined in the
Internal Revenue Code of 1986, as amended (the "Code"). Provided the Fund meets
the requirements imposed by the Code, the Fund will not pay any Federal income
or excise taxes. Dividends paid by the Fund from its taxable net investment
income and distribution by the Fund of its net realized short-term capital gains
are taxable to shareholders as ordinary income, whether received in cash or
reinvested in additional shares of the Fund. The Funds dividends and
distributions will not qualify for the dividends-received deduction for
corporations.
DISTRIBUTION OPTIONS. When you open an account, specify on your account
application how you want to receive distributions. The Trust offers four
options:
1. REINVESTMENT OPTION. Your dividend and capital gain distributions will be
automatically reinvested in additional Shares of the Fund. If you do not
indicate a choice on your application you will be assigned this option.
2. INCOME-EARNED OPTION. Your capital gain distributions will be automatically
reinvested in additional Shares of the Fund, but you will be sent a check for
each dividend distribution.
3. CASH OPTION. You will be sent a check for your dividend and capital gain
distributions.
4. AUTOMATIC DIVIDENDS PROGRAM. Your dividend and capital gain distributions be
automatically invested in Shares of another fund in the BT Family of Funds as
long as the minimums for that account are met.
If you select distribution option 2 or 3 and the U.S. Postal Service cannot
deliver your checks, or if your checks remain uncashed for six months, those
checks will be reinvested in your account at the current NAV and your election
may be converted to the Reinvestment Option. You may change distribution option
at anytime by notifying the Transfer Agent in writing.
FOR RETIREMENT ACCOUNTS, all distributions are automatically reinvested. When
you are over 59 1/2 years old, you can receive distributions in cash. If
distributions from a retirement account for any taxable year following the year
in which the participant reaches age 70 1/2 are less than the "minimum required
distribution" for that taxable year, an excise tax equal to 50% of the
deficiency may be imposed by the Internal Revenue Service (the "IRS"). The
administrator, trustee or custodian of such a retirement account will be
responsible for reporting distributions from such accounts to the IRS.
When the Fund deducts a distribution from its NAV, the reinvestment price is the
Fund's NAV at the close of business that day. Distribution checks will be mailed
within seven days, or longer for a December ex-dividend date.
TAXES. As with any investment, you should consider how an investment in the
Fund could affect you. Below are some of the Fund's tax implications. If your
account is not a tax-deferred retirement account beware of these tax
implications.
TAXES ON DISTRIBUTIONS. Distributions from the Fund are subject to federal
income tax and may also be subject to state or local taxes. Annual Statements as
to the federal tax status of distributions, and distributions that are
attributable to state and local income and personal taxes, if applicable, will
be mailed to shareholders shortly after the end of the year. If living outside
the United States, your distributions from the Fund could also be taxed by the
country in which you reside.
For federal tax purposes, income and short-term capital gain distributions from
the Fund are taxed as dividends; long-term capital gain distributions are taxed
as long-term capital gains.
Mutual fund dividends from U.S. government securities are generally free from
state and local income taxes. However, particular states may limit this benefit,
and some types of securities, such as repurchase agreements and some
agency-backed securities, may not qualify for the benefit. In addition, some
states may impose intangible property taxes. You should consult your own tax
adviser for details and up-to-date information on the tax laws in your state.
Distributions are taxable when they are paid, whether you take them in cash or
reinvest them. However, distributions declared in December and paid in January
are taxable as if they were paid on December 31.
Every January, the Transfer Agent will send the IRS a statement showing the
taxable distributions paid to you in the previous year.
TAXES ON TRANSACTIONS. Your redemptions, including exchanges, are subject to
capital gains tax. A capital gain or loss is the difference between the cost of
your Shares and the price you receive when you sell them. Whenever you sell
Shares of the Fund, the Transfer Agent will send you or your Service Agent a
confirmation statement showing how many Shares you sold and at what price. You
also receive a consolidated transaction statement at least quarterly. However,
it is up to you or your tax preparer to determine whether this sale resulted in
a capital gain and, if so, the amount of tax to be paid. BE SURE TO KEEP YOUR
REGULAR ACCOUNT STATEMENTS; the information they contain will be essential in
calculating the amount of your capital gains.
"BUYING A DIVIDEND." If you buy Shares just before the Fund deducts a capital
gain distribution or dividend distribution, as applicable, from its NAV, you
will pay the full price for the Shares and then receive a portion of the price
back in the form of a taxable distribution.
There are tax requirements that all Funds must follow in order to avoid federal
taxation. In its effort to adhere to these requirements, the Fund may have to
limit its investment activity in some types of instruments.
PERFORMANCE INFORMATION AND REPORTS
The Portfolio's recent strategies and holdings, and the Fund's performance, is
detailed twice a year in the Fund's financial reports, which are sent to all
Fund shareholders.
For current Fund performance or a free copy of the Fund's financial report,
please contact your Service Agent or Bankers Trust.
Mutual fund performance is commonly measured as total return and/or yield. The
Fund's performance is affected by the expenses of the Fund.
EXPLANATION OF TERMS
Total return is the change in value of an investment in the Fund over a given
period, assuming reinvestment of any dividends and capital gains. A cumulative
total return reflects actual performance over a stated period of time. An
average annual total return is a hypothetical rate of return that, if achieved
annually, would have produced the same cumulative total return if performance
had been constant over the entire period. Average annual total return
calculations smooth out variations in performance; they are not the same as
actual year-by-year results. Average annual total returns covering periods of
less than one year assume that performance will remain constant for the rest of
the year.
For the one-year period ended December 31, 1997, the total return for the
Institutional Class Shares of the Fund was 23.00%.
For the period from July 10, 1996 (commencement of operations) to December 31,
1997, the cumulative total return for the Institutional Class Shares of the Fund
was 34.65%.
Yield refers to the income generated by an investment in a Fund over a given
period of time, expressed as an annual percentage rate. Yields are calculated
according to a standard that is required for all stock and bond funds. Because
this differs from other accounting methods, the quoted yield may not equal the
income actually paid to shareholders.
Performance information may include comparisons of the Fund's investment results
to various unmanaged indices or results of other mutual funds or investment or
savings vehicles. From time to time, Fund rankings may be quoted from various
sources, such as Lipper Analytical Services, Inc., Value Line and Morningstar,
Inc.
Unlike some bank deposits or other investments which pay a fixed yield for a
stated period of time, the total return of the Fund will vary depending upon
interest rates, the current market value of the securities held by the Portfolio
and changes in the expenses of the Fund or Portfolio. In addition, during
certain periods for which total return may be provided, Bankers Trust may have
voluntarily agreed to waive portions of its fees, or reimburse certain operating
expenses of the Fund or the Portfolio, on a month-to-month basis. Such waivers
will have the effect of increasing the Fund's net income (and therefore its
yield and total return) during the period such waivers are in effect.
TOTAL RETURNS AND YIELDS ARE BASED ON PAST RESULTS AND ARE NOT AN INDICATION OF
FUTURE PERFORMANCE.
MANAGEMENT OF THE TRUST AND THE PORTFOLIO
BOARD OF TRUSTEES
The Trust and the Portfolio is governed by a Board of Trustees which is
responsible for protecting the interests of investors. A majority of the
Trustees who are not "interested persons" (as defined in the 1940 Act) of the
Trust or the Portfolio, as the case may be, have adopted written procedures
reasonably appropriate to deal with potential conflicts of interest arising from
the fact that the same individuals are Trustees of the Trust and the Portfolio,
up to and including creating separate boards of trustees. See "Management of the
Trust and the Portfolio" in the SAI for more information with respect to the
Trustees and officers of the Trust and the Portfolio.
INVESTMENT ADVISER
The Trust has not retained the services of an investment adviser since the Trust
seeks to achieve the investment objective of the Fund by investing all the
Assets of the Fund in the Portfolio. The Portfolio has retained the services of
Bankers Trust as investment adviser.
BANKERS TRUST COMPANY AND ITS AFFILIATES
Bankers Trust Company, a New York banking corporation with principal offices at
130 Liberty Street (One Bankers Trust Plaza), New York, New York 10006, is a
wholly owned subsidiary of Bankers Trust Corporation. Bankers Trust conducts a
variety of general banking and trust activities and is a major wholesale
supplier of financial services to the international and domestic institutional
market.
As of December 31, 1997, Bankers Trust Corporation was the seventh largest bank
holding company in the United States with total assets of over $100 billion.
Bankers Trust is dedicated to servicing the needs of corporations, governments,
financial institutions and private clients through a global network of over 90
offices in more than 50 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 over $300 billion in assets under
management globally. Of that total, approximately $148 billion are in U.S.
equity index assets alone.
Bankers Trust has more than 50 years of experience managing retirement assets
for the nation's largest corporations and institutions. In the past, these
clients have been serviced through separate account and commingled fund
structures. Now, the BT Family of Funds brings Bankers Trust's extensive
investment management expertise -- once available to only the largest
institutions in the U.S. -- to individual investors. Bankers Trust's officers
have had extensive experience in managing investment portfolios having
objectives similar to those of the Portfolio.
Bankers Trust, subject to the supervision and direction of the Board of Trustees
of the Portfolio, manages the Portfolio in accordance with the Portfolio's
investment objective and stated investment policies, makes investment decisions
for the Portfolio, places orders to purchase and sell securities and other
financial instruments on behalf of the Portfolio and employs professional
investment managers and securities analysts who provide research services to the
Portfolio. Bankers Trust may utilize the expertise of any of its world wide
subsidiaries and affiliates to assist it in its role as investment adviser. All
orders for investment transactions on behalf of the Portfolio are placed by
Bankers Trust with broker-dealers and other financial intermediaries that it
selects, including those affiliated with Bankers Trust. A Bankers Trust
affiliate will be used in connection with a purchase or sale of an investment
for the Portfolio only if Bankers Trust believes that the affiliate's charge for
the transaction does not exceed usual and customary levels. The Portfolio will
not invest in obligations for which Bankers Trust or any of its affiliates is
the ultimate obligor or accepting bank. The Portfolio may, however, invest in
the obligations of correspondents and customers of Bankers Trust.
The Investment Advisory Agreement provides for the Portfolio to pay Bankers
Trust a fee, accrued daily and paid monthly, equal on an annual basis to 0.15%
of the average daily net assets of the Portfolio for its then-current fiscal
year.
Bankers Trust has been advised by its counsel that, in counsel's opinion,
Bankers Trust currently may perform the services for the Trust and the Portfolio
described in this Prospectus and the SAI without violation of the Glass-Steagall
Act or other applicable banking laws or regulations. State laws on this issue
may differ from the interpretations of relevant Federal law, and banks and
financial institutions may be required to register as dealers pursuant to state
securities law.
Bankers Trust investment personnel may invest in securities for their own
account pursuant to a code of ethics that establishes procedures for personal
investing and restricts certain transactions.
PORTFOLIO MANAGER
Frank Salerno, Managing Director of Bankers Trust, is responsible for the
management of the Portfolio. Mr. Salerno oversees administration, management and
trading of international and domestic equity index strategies. He has been
employed by Bankers Trust since 1981 and has managed the Portfolio's assets
since the Portfolio commenced operations.
ADMINISTRATOR
Under its Administration and Services Agreement with the Trust, Bankers Trust
calculates the net asset value of the Fund and generally assists the Board of
Trustees of the Trust in all aspects of the administration and operation of the
Fund. The Administration and Services Agreement provides for the Trust to pay
Bankers Trust a fee, accrued daily and paid monthly equal on an annual basis to
0.20% of the average daily net assets of the Fund, attributable to the Class,
for its then-current fiscal year.
Under an Administration and Services Agreement with the Portfolio, Bankers Trust
calculates the value of the assets of the Portfolio and generally assists the
Board of Trustees in all aspects of the administration and operation of the
Portfolio. The Administration and Services Agreement provides for the Portfolio
to pay Bankers Trust a fee, accrued daily and paid monthly, equal on an annual
basis to 0.05% of the Portfolio's average daily net assets for its then-current
fiscal year. Under the Administration and Services Agreement, Bankers Trust may
delegate one or more of its responsibilities to others, including affiliates of
Edgewood, at Bankers Trust's expense.
DISTRIBUTOR
Edgewood Services, Inc. is the principal distributor for the Shares of the Fund.
In addition, Edgewood and its affiliates provide the Trust with office
facilities, and currently provide administration and distribution services for
other registered investment companies. The principal business address of
Edgewood and its affiliates is 5800 Corporate Drive, Pittsburgh, Pennsylvania
15237-5829.
CUSTODIAN AND TRANSFER AGENT
Bankers Trust acts as custodian of the assets of the Trust and the Portfolio and
serves as the transfer agent (the "Transfer Agent") for the Trust and the
Portfolio under the Administration and Services Agreement with the Trust and the
Portfolio.
<PAGE>
ORGANIZATION OF THE FUND AND TRUST
The Fund is a mutual fund: an investment that pools shareholders' money and
invests it toward a specified goal. The Fund is a separate diversified series of
BT Advisor Funds, a Massachusetts business trust. The Fund offers two classes of
Shares of beneficial interest, Institutional Class Shares and Advisor Class
Shares. The Portfolio is a separate diversified series of BT Investment
Portfolios, a New York master trust fund. The Trust and BT Investment Portfolios
reserves the right to add additional series in the future. The Trust also
reserves the right to issue additional classes of Shares of the Fund.
The Trust or the Portfolio may hold special meetings and mail proxy materials.
These meetings may be called to elect or remove trustees, change fundamental
policies, approve Portfolio's investment advisory agreement, or for other
purposes. Shareholders not attending these meetings are encouraged to vote by
proxy. The Trust's Transfer Agent will mail proxy materials in advance,
including a voting card and information about the proposals to be voted on.
When matters are submitted for shareholder vote, shareholders of the Fund will
have one vote for each full share held and proportionate, fractional votes for
fractional shares held. A separate vote of the Fund or classes is required on
any matter affecting only the Fund or class on which shareholders are entitled
to vote. Shareholders of the Fund or class are not entitled to vote on Trust
matters that do not affect the Fund or class, respectively, and do not require a
separate vote of the Fund or class. All series of the Trust and all classes will
vote together on certain matters, such as electing trustees or approving
independent public auditors. There normally will be no meetings of shareholders
for the purpose of electing Trustees unless and until such time as less than a
majority of Trustees holding office have been elected by shareholders, at which
time the Trustees then in office will call a shareholders' meeting for the
election of Trustees. Any Trustee may be removed from office upon the vote of
shareholders holding at least two-thirds of that Trust's outstanding shares at a
meeting called for that purpose. The Trustees are required to call such a
meeting upon the written request of shareholders holding at least 10% of that
Trust's outstanding shares. The Trust will also assist shareholders in
communicating with one another as provided for in the 1940 Act. As of April 1,
1998, MERCK & Co. Inc., Whitehouse Station, New Jersey, and Miami Valley
Equipment, Inc., Dayton, Ohio, owned approximately 34.02% and 30.65%,
respectively, of the Fund, and, therefore, may, for certain purposes, be deemed
to control the Fund and be able to affect the outcome of certain matters as
presented for a vote of shareholders.
Each series of the Trust will vote separately on any matter involving the
Portfolio. Shareholders of all of the series of the Trust will, however, vote
together to elect Trustees of the Trust and for certain other matters. Under
certain circumstances, the shareholders of one or more series could control the
outcome of these votes. The series of BT Investment Portfolios will vote
together or separately on matters in the same manner, and in the same
circumstances, as do the series of the Trust. As with the Trust, the investors
in one or more series of BT Investment Portfolios could control the outcome of
these votes.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a business trust may,
under certain circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the Trust itself was unable to meet its
obligations.
The Declaration of Trust of BT Investment Portfolios provides that the Fund and
other entities investing in the Portfolio (e.g., other investment companies,
insurance company separate accounts and common and commingled trust funds) will
each be liable for all obligations of the Portfolio. However, the risk of the
Fund incurring financial loss on account of such liability is limited to
circumstances in which both inadequate insurance existed and the Portfolio
itself was unable to meet its obligations. Accordingly, the Trustees of the
Trust believe that neither the Fund nor its shareholders will be adversely
affected by reason of the Fund's investing in the Portfolio. No series of BT
Investment Portfolios has any preference over any other series.
<PAGE>
ADDITIONAL INFORMATION
SHORT-TERM INVESTMENTS. The Portfolio may invest in certain short-term fixed
income securities. Such securities may be used to invest uncommitted cash
balances, to maintain liquidity to meet shareholder redemptions or to serve as
collateral for the obligations underlying the Portfolio's investment in
securities index futures or related options or warrants. These securities
include: obligations issued or guaranteed by the U.S. government or any of its
agencies or instrumentalities ("U.S. Government Securities') or by any of the
states, repurchase agreements, time deposits, certificates of deposit, bankers'
acceptances and commercial paper.
U.S. GOVERNMENT SECURITIES. Some U.S. Government Securities, such as Treasury
bills, notes and bonds, are supported by the full faith and credit of the United
States; others, such as those of the Federal Home Loan Banks, are supported by
the right of the issuer to borrow from the Treasury; others, such as those of
the Federal National Mortgage Association, are supported by the discretionary
authority of the U.S. government to purchase the agency's obligations; and still
others, such as those of the Student Loan Marketing Association, are supported
only by the credit of the instrumentality.
SECURITIES LENDING. The Portfolio is permitted to lend up to 30% of the total
value of its securities. These loans must be secured continuously be cash or
securities issued or guaranteed by the United States government, its agencies or
instrumentalities or by a letter of credit at least equal to the market value of
the securities loaned plus accrued income. By lending its securities, the
Portfolio may increase its income by continuing to receive income on the loaned
securities as well as by the opportunity to receive interest on the collateral.
During the term of the loan, a Portfolio continues to bear the risk of
fluctuations in the price of the loaned securities. In lending securities to
brokers, dealers and other organizations, the Portfolio is subject to risks
which, like those associated with other extensions of credit, include delays in
receiving additional collateral, in recovery should the borrower fail
financially and possible loss of the collateral. Upon receipt of appropriate
regulatory approval, cash collateral may be invested in a money market fund
managed by Bankers Trust (or its affiliate) and Bankers Trust may serve as the
Portfolio's lending agent and may share in revenue received from securities
lending transactions as compensation for this service.
WHEN ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. Delivery of and payment
for these securities may take place as long as a month or more after the date of
the purchase commitment. The value of these securities is subject to market
fluctuation during this period and no income accrues to the Portfolio until
settlement takes place. The Portfolio segregates with the Custodian a liquid
securities in an amount at least equal to these commitments.
DERIVATIVES. The Portfolio may invest in various instruments that are commonly
known as "derivatives." Generally, a derivative is a financial arrangement, the
value of which is based on, or "derived" from, a traditional security, asset, or
market index. Some "derivatives" such as mortgage-related and other asset-backed
securities are in many respects like any other investment, although they may be
more volatile or less liquid than more traditional debt securities. There are,
in fact, many different types of derivatives and many different ways to use
them. There are a range of risks associated with those uses. Futures and options
are commonly used for traditional hedging purposes to attempt to protect a fund
from exposure to changing interest rates, securities prices, or currency
exchange rates and as a low cost method of gaining exposure to a particular
securities market without investing directly in those securities. Derivatives
will not be used to increase portfolio risk above the level that could be
achieved using only traditional investment securities or to acquire exposure to
changes in the value of assets or indices that by themselves would not be
purchased for the Portfolio.
SECURITIES INDEX FUTURES AND RELATED OPTIONS. The Portfolio may enter into
securities index futures contracts and related options provided that not more
than 5% of its assets are required as a margin deposit for futures contracts or
options and provided that not more than 20% of the Portfolio's assets are
invested in futures and options at any time. When the Portfolio has cash from
new investments in the Portfolio or holds a portion of its assets in money
market instruments, it may enter into index futures or options to attempt to
increase its exposure to the market. Strategies the Portfolio could use to
accomplish this include purchasing futures contracts, writing put options, and
purchasing call options. When the Portfolio wishes to sell securities, because
of shareholder redemptions or otherwise, it may use index futures or options to
hedge against market risk until the sale can be completed. These strategies
could include selling futures contracts, writing call options, and purchasing
put options.
SWAP AGREEMENTS. The Portfolio may enter into swap agreements only to the extent
that obligations under such agreements represent not more than 10% of the
Portfolio's total assets. Swap agreements are contracts between parties in which
one party agrees to make payments to the other party based on the change in
market value of a specified index or asset. In return, the other party agrees to
make payments to the first party based on the return of a different specified
index or asset.
Although swap agreements entail the risk that a party will default on its
payment obligations thereunder, the Portfolio will minimize this risk by
entering into agreements that mark to market no less frequently than quarterly.
Swap agreements also bear the risk that the Portfolio will not be able to meet
its obligation to the counterparty. This risk will be mitigated by investing the
Portfolio in the specific asset for which it is obligated to pay a return.
WARRANTS. The Portfolio's investment in warrants will not exceed more than 5% of
its assets (2% with respect to warrants not listed on the New York or American
Stock Exchanges). Warrants are instruments which entitle the holder to buy
underlying equity securities at a specific price for a specific period of time.
A warrant tends to be more volatile than its underlying securities and ceases to
have value if it is not exercised prior to its expiration date. In addition,
changes in the value of a warrant do not necessarily correspond to changes in
the value of its underlying securities.
CONVERTIBLE SECURITIES. The Portfolio may invest in convertible securities which
are a bond or preferred stock which may be converted at a stated price within a
specific period of time into a specified number of shares of common stock of the
same or different issuer. Convertible securities are senior to common stock in a
corporation's capital structure, but usually are subordinated to non-convertible
debt securities. While providing a fixed income stream -- generally higher in
yield than in the income derived from a common stock but lower than that
afforded by a non-convertible debt security -- a convertible security also
affords an investor the opportunity, through its conversion feature, to
participate in the capital appreciation of common stock into which it is
convertible.
In general, the market value of a convertible security is the higher of its
investment value (its value as a fixed income security) or its conversion value
(the value of the underlying shares of common stock if the security is
converted). As a fixed income security, the market value of a convertible
security generally increases when interest rates decline and generally decreases
when interest rates rise; however, the price of a convertible security generally
increases as the market value of the underlying stock increases, and generally
decreases as the market value of the underlying stock declines. Investments in
convertible securities generally entail less risk than investments in the common
stock of the same issuer.
FURTHER RISKS ASSOCIATED WITH THE USE OF FUTURES CONTRACTS, OPTIONS, WARRANTS,
CONVERTIBLE SECURITIES AND SWAP AGREEMENTS. The risk of loss associated with
futures contracts in some strategies can be substantial due to both the low
margin deposits required and the extremely high degree of leverage involved in
futures pricing. As a result, a relatively small price movement in a futures
contract may result in an immediate and substantial loss or gain. However, the
Portfolio will not use futures contracts, options, warrants, convertible
securities and swap agreements for speculative purposes or to leverage their net
assets. Accordingly, the primary risks associated with the use of futures
contracts, options, warrants, convertible securities and swap agreements by the
Portfolio are: (i) imperfect correlation between the change in market value of
the securities held by the Portfolio and the prices of futures contracts,
options, warrants, convertible securities and swap agreements; and (ii) possible
lack of a liquid secondary market for a futures contract and the resulting
inability to close a futures position prior to its maturity date. The risk of
imperfect correlation will be minimized by investing only in those contracts
whose behavior is expected to resemble that of the Portfolio's underlying
securities. The risk that the Portfolio will be unable to close out a futures
position will be minimized by entering into stock transactions on an exchange
with an active and liquid secondary market. However options, warrants,
convertible securities and swap agreements purchased or sold over-the-counter
may be less liquid than exchange-traded securities. Illiquid securities, in
general, may not represent more than 15% of the net assets of the Portfolio.
ASSET COVERAGE. To assure that the Portfolio's use of futures and related
options, as well as when-issued and delayed delivery securities, interest rate
swaps and foreign currency forward futures and related options transactions are
not used to achieve excessive investment leverage, the Portfolio will cover such
transactions, as required under applicable interpretations of the SEC, either by
owning the underlying securities, entering into an off-setting transaction, or
by segregating with the Portfolio's Custodian liquid securities in an amount at
all times equal to or exceeding the Portfolio's commitment with respect to these
instruments or contracts.
<PAGE>
BT ADVISOR FUNDS
SMALL CAP INDEX FUND
INSTITUTIONAL CLASS SHARES
INVESTMENT ADVISER OF THE PORTFOLIO AND ADMINISTRATOR
BANKERS TRUST COMPANY
130 Liberty Street
(One Bankers Trust Plaza)
New York, NY 10006
DISTRIBUTOR
EDGEWOOD SERVICES, INC.
5800 Corporate Drive
Pittsburgh, PA 15237-5829
CUSTODIAN AND TRANSFER AGENT
BANKERS TRUST COMPANY
130 Liberty Street
(One Bankers Trust Plaza)
New York, NY 10006
INDEPENDENT ACCOUNTANTS
COOPERS & LYBRAND L.L.P.
1100 Main Street, Suite 900
Kansas City, MO 64105
COUNSEL
WILLKIE FARR & GALLAGHER
153 East 53rd Street
New York, NY 10022
No person has been authorized to give any information or to make any
representations other than those contained in the Trusts' Prospectuses, the
corresponding SAIs or the Trusts' official sales literature in connection with
the offering of the Trust's Shares and, if given or made, such other information
or representations must not be relied on as having been authorized by a Trust.
This Prospectus does not constitute an offer in any state in which, or to any
person to whom, such offer may not lawfully be made.
Cusip #05576L882
STA513300 (4/98)
BT ADVISOR FUNDS
EAFE(R) EQUITY INDEX FUND*
INSTITUTIONAL CLASS SHARES
PROSPECTUS
APRIL 30, 1998
BT Advisor Funds (the "Trust") is an open-end, management investment company
(mutual fund) which consists of several funds. The diversified fund listed above
(the "Fund") is a separate series of the Trust and offers two classes of shares.
The shares offered by this prospectus are the Institutional Class Shares (the
"Shares"). The Fund seeks to replicate as closely as possible the performance of
a selected market index before the deduction of the expenses, allocable to the
Shares of the Fund and the Portfolio (the "Expenses"). There is no assurance,
however, that the Fund will achieve its stated objective.
Please read this Prospectus before investing, and keep it on file for future
reference. It contains important information, including how the Fund invests and
the services available to shareholders.
A Statement of Additional Information ("SAI") with the same date has been filed
with the Securities and Exchange Commission ("SEC") and is incorporated herein
by reference. You may request a free copy of the SAI or a paper copy of this
prospectus, if you have received your prospectus electronically, free of charge
by calling the Trust's Service Agent at 1-800-368-4031. The SAI, material
incorporated by reference into this document, and other information regarding
the Trust is maintained electronically with the SEC at Internet Web site
(http://www.sec.gov).
UNLIKE OTHER MUTUAL FUNDS, THE FUND SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY
INVESTING ALL OF ITS INVESTABLE ASSETS ("ASSETS") IN THE EAFE(R) EQUITY INDEX
PORTFOLIO (THE "PORTFOLIO") WHICH IS A SEPARATE INVESTMENT COMPANY WITH AN
IDENTICAL INVESTMENT OBJECTIVE. SEE "SPECIAL INFORMATION CONCERNING
MASTER-FEEDER FUND STRUCTURE" HEREIN.
BANKERS TRUST COMPANY ("BANKERS TRUST") IS THE INVESTMENT ADVISER (THE
"ADVISER") OF THE PORTFOLIO. SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS
OF, OR GUARANTEED OR ENDORSED BY, BANKERS TRUST OR ANY OTHER BANKING OR
DEPOSITORY INSTITUTION. SHARES ARE NOT FEDERALLY GUARANTEED OR INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE U.S. GOVERNMENT, THE FEDERAL RESERVE
BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT RISK, INCLUDING THE
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
LIKE SHARES OF ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
*THE EAFE(R) INDEX IS THE EXCLUSIVE PROPERTY OF MORGAN STANLEY. MORGAN STANLEY
CAPITAL INTERNATIONAL IS A SERVICE OF MORGAN STANLEY AND HAS BEEN LICENSED FOR
USE BY BANKERS TRUST COMPANY.
EDGEWOOD SERVICES, INC.
CLEARING OPERATIONS O P.O. BOX 897 O PITTSBURGH, PENNSYLVANIA O 15230-0897
<PAGE>
TABLE OF CONTENTS
The Fund 3
Who May Invest 3
Summary of Fund Expenses 4
Financial Highlights 6
Investment Objective and Policies 7
Risk Factors and Certain Securities and
Investment Practices 9
Special Information Concerning Master-Feeder
Fund Structure 10
Net Asset Value 11
Purchase and Redemption of Shares 12
Dividends, Distributions and Taxes 16
Performance Information and Reports 18
Management of the Trust and Portfolio 19
Additional Information 21
<PAGE>
25
THE FUND
The Portfolio seeks to replicate as closely as possible (before deduction of
Expenses) the total return of the Morgan Stanley Capital International Europe,
Australia, Far East (EAFE) Index with net dividends (the "EAFE Index" or the
"Index"), a capitalization-weighted index containing approximately 1,100 equity
securities of companies located outside the United States. The Portfolio will be
invested primarily in equity securities of business enterprises organized and
domiciled outside of the United States or for which the principal trading market
is outside the United States. Statistical methods will be employed to replicate
the Index by buying most of the relevant Index securities. Securities purchased
for the Portfolio will generally, but not necessarily, be traded on a foreign
securities exchange.
The Trust seeks to achieve the investment objective of the Fund by investing all
the Assets of the Fund in the Portfolio.
WHO MAY INVEST
Shares of the Fund are offered through this Prospectus primarily to
institutional investors. The Shares are generally available to investors who
invest at least $5 million in the Fund.
The Fund may be appropriate for investors who want to pursue their investment
goals in markets outside of the United States. By including international
investments in their portfolio, investors can achieve an extra level of
diversification and also participate in opportunities around the world. However,
there are additional risks involved with international investing. The
performance of international funds depends upon currency values, the political
and regulatory environment, and overall economic factors in the countries in
which the Portfolio invests.
The Fund is not in itself a balanced investment plan. Investors should consider
their investment objective and tolerance for risk when making an investment
decision. When investors sell their Shares, they may be worth more or less than
what they paid for them.
<PAGE>
SUMMARY OF FUND EXPENSES
Annual operating expenses are paid out of the assets of the Portfolio and Fund.
The Portfolio pays an investment advisory fee and an administrative services fee
to Bankers Trust. The Fund incurs expenses such as maintaining shareholder
records and furnishing shareholder statements. The Fund must provide financial
reports.
The following table provides: (i) a summary of expenses relating to purchases
and sales of the Shares of the Fund and the annual operating expenses of the
Fund and expenses of the Portfolio, in the aggregate, as a percentage of average
daily net assets of the Fund; and (ii) an example illustrating the dollar cost
of such expenses on a $1,000 investment in the Fund. THE TRUSTEES OF THE TRUST
BELIEVE THAT THE EXPENSES OF THE FUND AND EXPENSES OF THE PORTFOLIO, IN THE
AGGREGATE, WILL BE LESS THAN OR APPROXIMATELY EQUAL TO THE EXPENSES WHICH THE
FUND WOULD INCUR IF THE TRUST RETAINED THE SERVICES OF AN INVESTMENT ADVISER AND
THE ASSETS OF THE FUND WERE INVESTED DIRECTLY IN THE TYPE OF SECURITIES BEING
HELD BY THE PORTFOLIO.
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge on Purchases
(as a percentage of offering price) None*
Maximum Sales Charge on Reinvested Distributions None
Redemption Fee None*
Exchange Fee None
Shareholder transaction expenses are charges paid when investors buy, sell,
exchange, or hold Shares of the Fund. See "Purchase and Redemption of Shares"
herein for an explanation of how and when these charges apply.
* A TRANSACTION FEE OF 0.25% IS DEDUCTED FROM PURCHASES, REDEMPTIONS AND
EXCHANGES INTO AND OUT OF THE FUND. THESE TRANSACTION FEES ARE PAID TO THE FUND
AND ARE DEDUCTED AUTOMATICALLY FROM THE AMOUNT INVESTED, EXCHANGED OR REDEEMED.
THE FEE APPLIES TO ALL REDEMPTIONS AND AN INITIAL INVESTMENT IN THE FUND AND ALL
SUBSEQUENT PURCHASES (INCLUDING PURCHASES MADE BY EXCHANGE FROM ANOTHER BT
FUND), BUT NOT TO REINVESTED DIVIDEND OR CAPITAL GAIN DISTRIBUTIONS.
THE PURPOSE OF THE 0.25% TRANSACTION FEE IS TO ALLOCATE TRANSACTION COSTS
ASSOCIATED WITH PURCHASES, REDEMPTIONS AND EXCHANGES TO INVESTORS MAKING THOSE
PURCHASES, REDEMPTIONS AND EXCHANGES, THUS INSULATING EXISTING SHAREHOLDERS FROM
THOSE TRANSACTION COSTS. THESE COSTS INCLUDE: (1) BROKERAGE COSTS; (2) THE
EFFECT OF THE "BID-ASK" SPREAD IN INTERNATIONAL MARKETS; AND (3) TAXES IN SOME
COUNTRIES. SINCE THE INVESTORS, NOT THE FUND, BEARS THESE COSTS, THE FUND IS
EXPECTED TO BE ABLE TO TRACK ITS BENCHMARK INDEX MORE CLOSELY.
ANNUAL OPERATING EXPENSES
(as a percentage of daily net assets of the Fund-Institutional Class Shares)
Investment advisory fee (after reimbursements or waivers) 0.14%
12b-1 fees None
Other expenses (after reimbursements or waivers) 0.26%
Total operating expenses (after reimbursements or waivers) 0.40%
Example: 1 Year 3 Years 5 Years 10 Years
An investor would pay the following
expenses on a $1,000
investment, assuming (1) 5% annual
return and (2) redemption
at the end of each time period: $7 $16 $25 $54
The expense table and the example above show the costs and expenses that an
investor will bear directly or indirectly as a shareholder of the Fund. Bankers
Trust has voluntarily agreed to waive a portion of its investment advisory fee
with respect to the Portfolio. Without such waiver, the Portfolio's investment
advisory fee would be equal to 0.25%. The expense table and the example reflect
a voluntary undertaking by Bankers Trust to waive or reimburse expenses such
that the total operating expenses would not exceed 0.40% of the Fund's
Institutional Class Shares average net assets annually. In the absence of this
undertaking, for the fiscal year ended December 31, 1997, the total operating
expenses would have been approximately 0.73% of the Fund's Institutional Class
Shares average net assets annually. THE EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN. Moreover, while each example assumes a 5% annual return,
actual performance will vary and may result in a return greater or less than 5%.
The Fund is distributed by Edgewood Services, Inc. ("Edgewood," or the
"Distributor") to customers of Bankers Trust or to customers of another bank or
a dealer or other institution that has a sub-shareholder servicing agreement
with Bankers Trust (along with Bankers Trust, a "Service Agent"). Some Service
Agents may impose certain conditions on their customers in addition to or
different from those imposed by the Fund and may charge their customers a direct
fee for their services. Each Service Agent has agreed to transmit to
shareholders who are its customers appropriate disclosures of any fees that it
may charge them directly.
CURRENTLY, THE FUND HAS ISSUED TWO CLASSES OF SHARES EACH OFFERED BY SEPARATE
PROSPECTUS. BECAUSE THE EXPENSES VARY BETWEEN THE CLASSES, PERFORMANCE WILL VARY
WITH RESPECT TO EACH CLASS. ADDITIONAL INFORMATION CONCERNING THE FUND'S OTHER
CLASS OF SHARES IS AVAILABLE FROM BANKERS TRUST, AS ADMINISTRATOR, AT
1-800-368-4031.
For more information about the Fund's and the Portfolio's expenses see
"Management of the Trust and the Portfolio" herein.
<PAGE>
FINANCIAL HIGHLIGHTS
The following table shows the selected data for a share outstanding, total
investment return, ratios to average net assets and other supplemental data of
the EAFE Equity Index Fund for the periods indicated. The EAFE Equity Index
Fund's Annual Report has been audited by Coopers & Lybrand L.L.P., the Fund's
independent accountants, whose report thereon appears in the Fund's Annual
Report which is incorporated by reference in the Trusts' SAI.
<PAGE>
FINANCIAL HIGHLIGHTS--CONTINUED
<TABLE>
<CAPTION>
Institutional Class Shares Advisor Class Shares
For the period For the Period
January 24, 1996 June 21, 1996
For the (Commencement For the (Commencement
year ended of Operations) to year ended of Operations) to
December 31, 1997 December 31, 1996 December 31,1997 December 31, 1996
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, Beginning of Period $10.62 $10.00 $10.14 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.23 0.12 0.05 0.02
Net Realized and Unrealized Gain
on Investment Transactions (0.02) 0.60 0.13 0.12
Total from Investment Operations 0.21 0.72 0.18 0.14
DISTRIBUTIONS TO SHAREHOLDERS
Net Investment Income (0.24) (0.08) (0.08) (0.00)+
Net Realized Gain from
Investment Transactions (0.61) (0.02) (0.61) (0.00)+
TOTAL DISTRIBUTIONS (0.85) (0.10) (0.69) (0.00)+
NET ASSET VALUE, END OF PERIOD $9.98 $10.62 $9.63 $10.14
TOTAL INVESTMENT RETURN 2.11% 7.22% 1.89% 1.57%
SUPPLEMENTAL DATA AND RATIOS:
Net Assets, End of
Period (000s omitted) $35,509 $39,667 $3,212 $717
Ratios to Average Net Assets:
Net Investment Income 1.70% $1.64%* 1.17% 0.67%*
Expenses, including expenses of the
EAFE Equity Index Portfolio 0.40% 0.40%* 0.65% 0.65%*
Decrease Reflected in Above Expense
Ration Due to Absorption of
Expenses by Bankers Trust 0.33% 0.48%* 0.33% 1.70%**
</TABLE>
Per share amounts for all years have been restated to reflect 1:6 reverse stock
split effective September 4, 1997.
Further information about the Fund's performance is contained in the Fund's
Annual Report, dated December 31, 19976, which can be obtained free of charge.
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The Fund seeks to replicate as closely as possible the performance of the EAFE
Index before the deduction of the Expenses.
The Trust seeks to achieve the investment objective of the Fund by investing all
of its Assets in the corresponding Portfolio, which has the same investment
objective as the Fund. There can be no assurance that the investment objective
of either the Fund or the Portfolio will be achieved. The investment objective
of the Fund and Portfolio is not a fundamental policy and may be changed upon
notice to but without the approval of the Fund's shareholders of the Portfolio's
investors, respectively. See "Special Information Concerning Master-Feeder Fund
Structure" herein.
The Trust is intended to be a long-term investment vehicle and is not designated
to provide investors with a means of speculating on short-term market movements.
Investors who engage in excessive account activity generate additional costs
which are borne by all the Trust's shareholders. In order to minimize such
costs, the Trust has adopted the following policies. The Trust reserves the
right to reject any purchase request (including exchange purchases from other BT
Advisor Funds portfolios) that is reasonably deemed to be disruptive to
efficient portfolio management, either because of the timing of the investment
or previous excessive trading by the investor. Additionally, the Trust has
adopted exchange privilege limitations as described in the section "exchange
Limitations" herein. Finally, the Trust reserves the right to suspend the
offering of its shares.
Since the investment characteristics of the Fund will correspond directly to
those of the Portfolio, the following is a discussion of the various investments
of and techniques employed by the Portfolio. Additional information about the
investment policies of the Portfolio appears in "Risk Factors and Certain
Securities and Investment Practices `' herein and in the SAI.
EAFE(R) EQUITY INDEX PORTFOLIO
The Portfolio seeks to replicate as closely as possible (before deduction of
Expenses) the total return of the EAFE Index. The Portfolio attempts to achieve
this objective by investing in a statistically selected sample of the equity
securities included in the EAFE Index.
The Portfolio is not managed according to traditional methods of "active"
investment management, which involve the buying and selling of securities based
upon economic, financial and market analysis and investment judgment. Instead,
the Portfolio, utilizes a "passive" or "indexing" investment approach and
attempts to duplicate the investment performance of the EAFE Index through
statistical procedures. There is no assurance that the Portfolio will achieve
its investment objective.
Inclusion of a security in the EAFE Index in no way implies an opinion by Morgan
Stanley as to its attractiveness as an investment. Neither the Fund nor the
Portfolio is sponsored or affiliated with Morgan Stanley.
The EAFE Index is a capitalization-weighted index containing approximately 1,100
equity securities of companies located outside the United States. The countries
currently included in the EAFE Index are Australia, Austria, Belgium, Denmark,
Finland, France, Germany, Hong Kong, Ireland, Italy, Japan, Malaysia, The
Netherlands, New Zealand, Norway, Singapore, Spain, Sweden, Switzerland and
United Kingdom.
The Portfolio is constructed to have aggregate investment characteristics
similar to those of the EAFE Index. The Portfolio invests in a statistically
selected sample of the securities included in the EAFE Index, although not all
companies within a country will be represented in the Portfolio at the same
time. Stocks are selected for inclusion in the Portfolio based on country of
origin, market capitalization, yield, volatility and industry sector. Bankers
Trust will manage the Portfolio using advanced statistical techniques to
determine which stocks are to be purchased or sold to replicate the EAFE Index.
From time to time, adjustments may be made in the Portfolio because of changes
in the composition of the EAFE Index, but such changes should be infrequent.
This Fund is not sponsored, endorsed, sold or promoted by Morgan Stanley. Morgan
Stanley makes no representation or warranty, express or implied, to the owners
of this Fund or any member of the public regarding the advisability of investing
in securities generally or in this Fund particularly or the ability of the EAFE
Index to track general stock market performance. Morgan Stanley is the licensor
of certain trademarks, service marks and trade names of Morgan Stanley and of
the EAFE Index which is determined, composed and calculated by Morgan Stanley
without regard to the issuer of this Fund or this Fund itself. Morgan Stanley
has no obligation to take the needs of the issuer of this Fund or the owners of
this Fund into consideration in determining, composing or calculating the EAFE
Index. Inclusion of a security in the EAFE Index in no way implies an opinion by
Morgan Stanley as to its attractiveness as an investment. Morgan Stanley is not
responsible for and has not participated in the determination of the timing of,
prices at, or quantities of this Fund to be issued or in the determination or
calculation of the equation by which this Fund is redeemable for cash. Morgan
Stanley has no obligation or liability to owners of this Fund in connection with
the administration, marketing or trading of this Fund. This Fund is neither
sponsored by nor affiliated with Morgan Stanley.
ALTHOUGH MORGAN STANLEY SHALL OBTAIN INFORMATION FOR INCLUSION IN OR FOR USE IN
THE CALCULATION OF THE INDEXES FROM SOURCES WHICH MORGAN STANLEY CONSIDERS
RELIABLE, MORGAN STANLEY DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS
OF THE INDICES OR ANY DATA INCLUDED THEREIN. MORGAN STANLEY MAKES NO WARRANTY,
EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE, LICENSEE'S
CUSTOMERS AND COUNTERPARTIES, OWNERS OF THE PRODUCTS, OR ANY OTHER PERSON OR
ENTITY FROM THE USE OF THE INDICES OR ANY DATA INCLUDED THEREIN IN CONNECTION
WITH THE RIGHTS LICENSED HEREUNDER OR FOR ANY OTHER USE. MORGAN STANLEY MAKES NO
EXPRESS OR IMPLIED WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE INDICES
OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT
SHALL MORGAN STANLEY HAVE ANY LIABILITY FOR ANY DIRECT, INDIRECT, SPECIAL,
PUNITIVE, CONSEQUENTIAL OR ANY OTHER DAMAGES (INCLUDING LOST PROFITS) EVEN IF
NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
For more information about the performance of the EAFE Index see the SAI.
The value of the Portfolio's investments varies based on many factors. Stock
values fluctuate, sometimes dramatically, in response to the activities of
individual companies and general market and economic conditions. Over time,
however, stocks have shown greater long-term growth potential than other types
of securities.
Because many foreign investments are denominated in foreign currencies, changes
in the value of these currencies can significantly affect the Fund's share
price. General economic factors in the various world markets can also impact the
value of an investor's investment. When an investor sells their Shares, they may
be worth more or less than what they paid for them. See "Risk Factors and
Certain Securities and Investment Practices`' herein for more information.
ADDITIONAL INVESTMENT LIMITATIONS
Over time, the correlation between the performance of the Fund, before the
deduction of Expenses, and the respective Index is expected to be 0.95 or higher
before deduction of Expenses. A correlation of 1.00 would indicate perfect
correlation, which would be achieved when the net asset value of the Fund,
including the value of its dividend and any capital gain distributions,
increases or decreases in exact proportion to changes in the Index. The Fund's
ability to track the Index may be affected by, among other things, transaction
costs, administration and other expenses incurred by the Fund or the Portfolio,
changes in either the composition of the Index or the assets of the Portfolio,
and the timing and amount of Portfolio investor contributions and withdrawals,
if any. In the unlikely event that a high correlation is not achieved, the
Trust's Board of Trustees will consider alternatives. Because the Portfolio
seeks to track the respective index, Bankers Trust will not attempt to judge the
merits of any particular stock as an investment.
Under normal circumstances, the Portfolio will invest at least 80% of its assets
in the securities of its Index.
As a diversified fund, no more than 5% of the assets of the Portfolio may be
invested in the securities of one issuer (other than U.S. Government
Securities), except that up to 25% of the Portfolio's assets may be invested
without regard to this limitation. The Portfolio will not invest more than 25%
of its assets in the securities of issuers in any one industry. These are
fundamental investment policies of the Portfolio which may not be changed
without investor approval. No more than 15% of the Portfolio's net assets may be
invested in illiquid or not readily marketable securities (including repurchase
agreements and time deposits maturing in more than seven days). Additional
investment policies of the Portfolio are contained in the SAI.
The Portfolio may maintain up to 25% of its assets in short-term debt securities
and money market instruments to meet redemption requests or to facilitate
investment in the securities of the Index. Securities index futures contracts
and related options, warrants, convertible securities and swap agreements may be
used for several reasons: to simulate full investment in the underlying Index
while retaining a cash balance for fund management purposes, to facilitate
trading, or to reduce transaction costs or to seek higher investment returns
when a futures contract, option, warrant, convertible security or swap agreement
is priced more attractively than the underlying equity security or Index. These
instruments may be considered derivatives. See "Risk Factors and Certain
Securities and Investment Practices `' herein.
The use of derivatives for non-hedging purposes may be considered speculative.
While each of these securities can be used as leveraged investments, the
Portfolio may not use them to leverage its net assets. The Portfolio will not
invest in such instruments as part of a temporary defensive strategy (such as
altering the aggregate maturity of the Portfolio) to protect the Portfolio
against potential market declines.
The Portfolio may lend its investment securities and purchase securities on a
when-issued and a delayed delivery basis. The Portfolio may engage in foreign
currency forward and futures transactions for the purpose of enhancing portfolio
returns or hedging against foreign exchange risk arising from the Portfolio's
investment or anticipated investment in securities denominated in foreign
currencies. See "Risk Factors and Certain Securities and Investment Practices `'
herein and in the SAI for more information about the investment practices of the
Portfolio.
RISK FACTORS AND CERTAIN SECURITIES AND INVESTMENT PRACTICES
The following pages contain more detailed information about types of instruments
in which the Portfolio may invest and strategies Bankers Trust may employ in
pursuit of the Portfolio's investment objective. A summary of risks and
restrictions associated with these instrument types and investment practices is
included as well.
Bankers Trust may not buy all of these instruments or use all of these
techniques to the full extent permitted unless it believes that doing so will
help the Portfolio achieve its goal. Holdings and recent investment strategies
are described in the financial reports of the Fund and the Portfolio, which are
sent to Fund shareholders twice a year. For a free SAI or financial report, call
your Service Agent or Bankers Trust.
MARKET RISK
As a mutual fund investing primarily in common stocks, this Portfolio is subject
to market risk -- i.e., the possibility that common stock prices will decline
over short or even extended periods. The U.S. and foreign stock markets tend to
be cyclical, with periods when stock prices generally rise and periods when
prices generally decline.
RISKS OF INVESTING IN 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 foreign investments may be adversely affected
by changes in political or social conditions, diplomatic relations, confiscatory
taxation, expropriation, nationalization, limitation on the removal of funds or
assets, or imposition of (or change in) exchange control or tax regulations in
foreign countries. In addition, changes in government administrations or
economic or monetary policies in the United States or abroad could result in
appreciation or depreciation of portfolio securities and could favorably or
unfavorably affect the Portfolio's operations. Furthermore, the economies of
individual foreign nations may differ from the U.S. economy, whether favorably
or unfavorably, in areas such as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments position; it may also be more difficult to obtain and enforce a
judgment against a foreign issuer. In general, less information is publicly
available with respect to foreign issuers than is available with respect to U.S.
companies. Most foreign companies are also not subject to the uniform accounting
and financial reporting requirements applicable to issuers in the United States.
Any foreign investments made by the Portfolio must be made in compliance with
U.S. and foreign currency restrictions and tax laws restricting the amounts and
types of foreign investments.
Because foreign securities generally are denominated and pay dividends or
interest in foreign currencies, the value of the net assets of the Portfolio as
measured in U.S. dollars will be affected favorably or unfavorably by changes in
exchange rates. In order to protect against uncertainty in the level of future
foreign currency exchange rates, the Portfolio is also authorized to enter into
certain foreign currency exchange transactions. Furthermore, the Portfolio's
foreign investments may be less liquid and their prices may be more volatile
than comparable investments in securities of U.S. companies. The settlement
periods for foreign securities, which are often longer than those for securities
of U.S. issuers, may affect portfolio liquidity. Finally, there may be generally
less government supervision and regulation of securities exchanges, brokers and
issuers in foreign countries than in the United States.
SPECIAL INFORMATION CONCERNING MASTER-FEEDER FUND STRUCTURE
Unlike other open-end management investment companies (mutual funds) which
directly acquire and manage their own portfolio securities, the Fund seeks to
achieve its investment objective by investing all of its Assets in the
Portfolio, a separate registered investment company with the same investment
objectives as the Fund. Therefore, an investor's interest in the Portfolio's
securities is indirect, like investments in other investment companies and
pooled investment vehicles. In addition to selling a beneficial interest to the
Fund, the Portfolio may sell beneficial interests to other mutual funds or
institutional investors. Such investors will invest in the Portfolio on the same
terms and conditions and will pay a proportionate share of the Portfolio's
expenses. However, the other investors investing in the Portfolio are not
required to sell their shares at the same public offering price as the Fund due
to variations in sales commissions and other operating expenses. Therefore,
investors in the Fund should be aware that these differences may result in
differences in returns experienced by investors in the different funds that
invest in the Portfolio. Such differences in returns are also present in other
mutual fund structures. Information concerning other holders of interests in the
Portfolio is available from Bankers Trust, as the Administrator, at
1-800-368-4031.
The master-feeder fund structure is relatively complex, so shareholders
should carefully consider this investment approach.
Smaller funds investing in the Portfolio may be materially affected by the
actions of larger funds investing in the Portfolio. For example, if a large fund
withdraws from the Portfolio, the remaining funds may experience higher pro rata
operating expenses, thereby producing lower returns (however, this possibility
exists as well for traditionally structured funds which have large institutional
investors). Additionally, the Portfolio may become less diverse, resulting in
increased portfolio risk. Also, funds with a greater pro rata ownership in the
Portfolio could have effective voting control of the operations of the
Portfolio. Except as permitted by the SEC, whenever the Trust is requested to
vote on matters pertaining to the Portfolio, the Trust will hold a meeting of
shareholders of the Fund and will cast all of its votes in the same proportion
as the votes of the Fund's shareholders. Fund shareholders who do not vote will
not affect the Trust's votes at the Portfolio meeting. The percentage of the
Trust's votes representing Fund shareholders not voting will be voted by the
Trustees or officers of the Trust in the same proportion as the Fund
shareholders who do, in fact, vote. Certain changes in the Portfolio's
investment objectives, policies or restrictions may require the Fund to withdraw
its interest in the Portfolio. Any such withdrawal could result in a
distribution "in kind" of portfolio securities (as opposed to a cash
distribution from the Portfolio). If securities are distributed, the Fund could
incur brokerage, tax or other charges in converting the securities to cash. In
addition, the distribution in kind may result in a less diversified portfolio of
investments or adversely affect the liquidity of the Fund. Notwithstanding the
above, there are other means for meeting redemption requests, such as borrowing.
The Fund may withdraw its investment from the Portfolio at any time, if the
Board of Trustees of the Trust determines that it is in the best interests of
the shareholders of the Fund to do so. Upon any such withdrawal, the Board of
Trustees of the Trust would consider what action might be taken, including the
investment of all the Assets of the Fund in another pooled investment entity
having the same investment objectives as the Fund or the retaining of an
investment adviser to manage the Fund's Assets in accordance with the investment
policies described herein with respect to the corresponding Portfolio.
The Fund's investment objective is not a fundamental policy and may be changed
upon notice to but without the approval of the Fund's shareholders. If there is
a change in the Fund's investment objective, the Fund's shareholders should
consider whether the Fund remains an appropriate investment in light of their
then-current needs. The investment objective of the Portfolio is also not a
fundamental policy. Shareholders of the Fund will receive 30 days prior written
notice with respect to any change in the investment objective of the Fund or the
Portfolio. See "Risk Factors and Certain Securities and Investment Practices" in
the SAI for a description of the fundamental policies of Portfolio that cannot
be changed without approval by "the vote of a majority of the outstanding voting
securities" (as defined in the Investment Company Act of 1940, as amended (the
"1940 Act") of the Portfolio.
For descriptions of the investment objective, policies and restrictions of the
Portfolio, see "he Fund in Detail" herein and "Risk Factors and Certain
Securities and Investment Practices" in this Prospectus and in the SAI. For
descriptions of the management of the Trust and the Portfolio, see "Management
of the Trust and the Portfolio" herein and in the SAI. For descriptions of the
expenses of the Portfolio, see "he Fund--Expense Summary," herein and
"Management of the Trust and the Portfolio" herein and in the SAI.
PORTFOLIO TURNOVER
The frequency of Portfolio transactions-the Portfolio's portfolio turnover
rate-will vary from year to year depending on market conditions and the
Portfolio's cash flows. The Portfolio's annual portfolio turnover rate is not
expected to exceed 100%. The portfolio turnover rates for the Portfolio for the
fiscal year ended December 31, 1997, and for the period from January 24, 1996
(commencement of operations) to December 31, 1996, were 44% and 4%,
respectively.
NET ASSET VALUE
The Fund is open for business each day that the NYSE and the Tokyo Stock
Exchange is open (a Valuation Day). The Fund's net asset value ("NAV") is
calculated as of the close of regular trading on the NYSE, currently 4:00 p.m.
Eastern time ("Valuation Time"). The Fund will not process orders on any day
when either the NYSE or the Tokyo Stock Exchange is closed. Orders received on
such days will be priced on the next day the Fund computes its NAV. As such,
investors may experience a delay in purchasing or redeeming Shares of the Fund.
The Fund's NAV per share is the value of a single Share. The NAV per share of
the Fund is computed by dividing the value of the Fund's Assets (i.e., the value
of its investment in the Portfolio and other assets), less all liabilities,
allocable to the Institutional Class Shares by the total number of its Shares
outstanding. The Portfolio's securities and other assets are valued primarily on
the basis of market quotations or, if quotations are not readily available, by
Bankers Trust pursuant to procedures adopted by the Portfolio's Board of
Trustees. These procedures require Bankers Trust to value such a security at the
same value as an equivalent security which is readily marketable and, in making
such comparisons, to consider all relevant factors under applicable guidelines
of the SEC.
Under procedures adopted by the Board, a NAV for the Fund later determined to
have been inaccurate for any reason will be recalculated. Purchases and
redemptions made at NAV determined to have been inaccurate will be adjusted,
although in certain circumstances, such as where the difference between the
original NAV and the recalculated NAV divided by the recalculated NAV is 0.005
(1/2 of 1%) or less or shareholder transactions are otherwise insubstantially
affected, further action is not required.
PURCHASE AND REDEMPTION OF SHARES
HOW TO BUY SHARES
The Trust accepts purchase orders for shares of the Fund at the NAV per share
next determined after the order is received on each Valuation Day. See "Net
Asset Value" herein. Shares of the Fund may be available through
Investment Professionals, such as broker/dealers and investment advisers
(including Service Agents).
Purchase orders for shares of the Fund (including those purchased through a
Service Agent) that are transmitted to the Trust's Transfer Agent (the "Transfer
Agent"), prior to the Valuation Time on any Valuation Day will be effective at
that day's Valuation Time. The Trust and Transfer Agent reserve the right to
reject any purchase order.
Shares must be purchased in accordance with procedures established by the
Transfer Agent and each Service Agent. It is the responsibility of each Service
Agent to transmit to the Transfer Agent purchase and redemption orders and to
transmit to Bankers Trust as the Trust's custodian (the "Custodian") purchase
payments by the following business day (trade date + 1) after an order for
shares is placed. A shareholder must settle with the Service Agent for his or
her entitlement to an effective purchase or redemption order as of a particular
time. Because Bankers Trust is the Custodian and Transfer Agent of the Trust,
funds may be transferred directly from or to a customer's account held with
Bankers Trust to settle transactions with the Fund without incurring the
additional costs or delays associated with the wiring of Federal funds.
Certificates for shares will not be issued. Each shareholder's account will be
maintained by a Service Agent or Transfer Agent.
If orders are placed through an Investment Professional, it is the
responsibility of the Investment Professional to transmit the order to buy
shares of each class to the Transfer Agent before 4:00 p.m. Eastern time. The
Transfer Agent must receive payment within one business day after an order for
shares is placed; otherwise, the purchase order may be canceled and the investor
could be held liable for resulting fees and/or losses.
MINIMUM INVESTMENTS
TO OPEN AN ACCOUNT $5 MILLION
TO ADD TO AN ACCOUNT $100,000
MINIMUM BALANCE $1 MILLION
The Fund and its service providers reserve the right to, from time to time, at
their discretion, waive or reduce the investment minimums. Shares of the Fund
may be offered to employees of Bankers Trust and their spouses and minor
children without regard to the minimum initial investment requirements.
IF YOU ARE NEW TO BT ADVISOR FUNDS, complete and sign an account application and
mail it along with your check to the address listed below. If there is no
account application accompanying this Prospectus, call the BT Service Center at
1-800-368-4031.
BT Service Center
P.O. Box 419210
Kansas City, MO 64141-6210
Overnight mailings:
BT Service Center
210 West 10th Street, 8th Floor
Kansas City, MO 64105-1716
IF YOU ALREADY HAVE MONEY INVESTED IN A FUND IN THE BT FAMILY OF FUNDS, you can:
o Mail an account application with a check,
o Wire money into your account,
o Open an account by exchanging from another fund in the BT Family of
Funds, or
o Contact your Service Agent or Investment Professional.
If you are investing through a tax-sheltered retirement plan, such as an IRA,
for the first time, you will need a special application. Contact your Investment
Professional for more information and a retirement account application.
ADDITIONAL INFORMATION ABOUT BUYING SHARES
<TABLE>
<CAPTION>
TO OPEN AN ACCOUNT TO ADD TO AN ACCOUNT
<S> <C> <C>
BY WIRE Call the BT Service Center at Call your Investment Professional or wire
1-800-368-4031 to receive additional investment to:
wire instructions for account
establishment.
</TABLE>
<PAGE>
ROUTING NO.: 021001033
ATTN: Bankers Trust/IFTC Deposit
DDA NO.: 00-226-296
FBO: (Account name)
(Account number)
CREDIT: EAFE(R) Equity Index Fund - 514
Specify the complete name of the Fund of
your choice, and include your account num-
ber and your name.
<TABLE>
<CAPTION>
<S> <C> <C>
BY PHONE Contact your Service Agent, Contact your Service Agent,
Investment Professional, or call Investment Professional, or call
BT's Service Center at 1-800-368-4031. BT's Service Center at 1-800-368-4031.
If you are an existing shareholder, If you are an existing shareholder, you may
you may exchange from another BT exchange from another BT account
account with the same registration, with the same registration, including,
including, name, address, and name, address, and taxpayer ID number
taxpayer ID number
BY MAIL Complete and sign the account appli- Make your check payable to the complete
cation. Make your check payable to name of the Fund of your choice. Indicate
the complete name of the Fund of your Fund account number on your check
your choice. Mail to the appropriate and mail to the address printed on your
address indicated on the application. account statement.
</TABLE>
HOW TO SELL SHARES
You can arrange to take money out of your Fund account at any time by selling
(redeeming) some or all of your shares. Your shares shall be sold at the next
NAV calculated after an order is received by the Transfer Agent. Redemption
requests should be transmitted by customers in accordance with procedures
established by the Transfer Agent and the Shareholder's Service Agent.
Redemption requests for shares of the Fund received by the Service Agent and
transmitted to the Transfer Agent prior to the Valuation Time on each Valuation
Day will be effective at that day's Valuation Time and the redemption proceeds
normally will be delivered to the shareholder's account the next day, but in any
event within seven calendar days following receipt of the request.
Service Agents may allow redemptions or exchanges by telephone and may disclaim
liability for following instructions communicated by telephone that the Service
Agent reasonably believes to be genuine. The Service Agent must provide the
investor with an opportunity to choose whether or not to utilize the telephone
redemption or exchange privilege. The Transfer Agent and the Service Agent must
employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. If the Shareholder Servicing Agent does not do so, it may
be liable for any losses due to unauthorized or fraudulent instructions. Such
procedures may include, among others, requiring some form of personal
identification prior to acting upon instructions received by telephone,
providing written confirmation of such transactions and/or tape recording of
telephone instructions.
Redemption orders are processed without charge by the Trust. A Service Agent may
on at least 30 days' notice involuntarily redeem a shareholder's account with
the Fund having a balance below the minimum, but not if an account is below the
minimum due to a change in market value. See "Minimum Investments" herein for
minimum balance amounts.
TO SELL SHARES IN A RETIREMENT ACCOUNT, your request must be made in writing,
except for exchanges to other eligible funds in the BT Family of Funds, which
can be requested by phone or in writing. For information on retirement
distributions, contact your Service Agent or call the BT Service Center at
1-800-368-4031.
IF YOU ARE SELLING SOME BUT NOT ALL OF YOUR NON-RETIREMENT ACCOUNT SHARES, leave
at least $1,000 worth of shares in the account to keep it open.
TO SELL SHARES BY BANK WIRE you will need to sign up for these services in
advance when completing your account application.
CERTAIN REQUESTS MUST INCLUDE A SIGNATURE GUARANTEE to protect you and Bankers
Trust from fraud. Redemption requests in writing must include a signature
guarantee if any of the following situations apply:
o Your account registration has changed within the last 30 days,
o The check is being mailed to a different address than the one on your
account (record address),
o The check is being made payable to someone other than the account owner,
o The redemption proceeds are being transferred to a BT account with a
different registration, or
o You wish to have redemption proceeds wired to a non-predesignated bank
account.
A signature guarantee is also required if you change the pre-designated bank
information for receiving redemption proceeds on your account.
You should be able to obtain a signature guarantee from a bank, broker, dealer,
credit union (if authorized under state law), securities exchange or
association, clearing agency, or savings association. A notary public cannot
provide a signature guarantee.
ADDITIONAL INFORMATION ABOUT SELLING SHARES
BY WIRE - You must sign up for the wire feature before using it. To verify that
it is in place, call 1-800-368-4031. Minimum wire: $1,000. Your wire redemption
request must be received by the Transfer Agent before 4:00 p.m. Eastern time for
money to be wired on the next business day.
IN WRITING - Write a signed "letter of instruction" with your name, the Fund's
name and Fund's number, your Fund account number, the dollar amount or number of
Shares to be redeemed, and mail to one of the following addresses:
BT Service Center
P.O. Box 419210
Kansas City, MO 64141-6210
Overnight mailings:
BT Service Center
210 West 10th Street, 8th Floor
Kansas City, MO 64105-1716
For Trust accounts, the trustee must sign the letter indicating capacity as
trustee. If the trustee's name is not on the account registration, provide a
copy of the trust document certified within the last 60 days.
For a Business or Organization account, at least one person authorized by
corporate resolution to act on the account must sign the letter.
Unless otherwise instructed, the Transfer Agent will send a check to the account
address of record. The Trust reserves the right to close investor accounts via
30 day notice in writing if the Fund account balance falls below the Fund
minimums.
INVESTOR SERVICES
BT Advisor Funds provide a variety of services to help you manage your account.
<PAGE>
INFORMATION SERVICES
Statements and reports that your Investment Professional or the Transfer Agent
may send to you include the following:
o Confirmation statements (after every transaction that affects your account
balance, including distributions or your account registration)
o Account statements (monthly)
o Financial reports (every six months)
To reduce expenses, only one copy of most financial reports will be mailed, even
if you have more than one account in the Fund. Call your Investment Professional
or the BT Service Center at 1-800-368-4031 if you need additional copies of
financial reports.
EXCHANGE PRIVILEGE
Shareholders may exchange their shares for shares of certain other funds in the
BT Family of Funds registered in their state. The Fund reserves the right to
terminate or modify the exchange privilege in the future. To make an exchange,
follow the procedures indicated in "How to Buy Shares" and "How to Sell Shares"
herein. Before making an exchange, please note the following:
o Call your Service Agent for information and a prospectus. Read the prospectus
for relevant information.
o Complete and sign an application, taking care to register your new account
in the same name, address and taxpayer identification number as your
existing account(s).
o Each exchange represents the sale of shares of one fund and the purchase
of shares of another, which may produce a gain or loss for tax purposes.
Your Service Agent will receive a written confirmation of each exchange
transaction.
o Exchanges between the Fund described in this Prospectus and funds
described in other BT Family of Funds' Prospectuses, with the exception of
other passively managed BT Funds, are restricted during the 90 days
following purchase.
o Because excessive trading can hurt Fund performance and shareholders, the
Fund reserves the right to temporarily or permanently terminate the
exchange privilege of any investor who makes more than four exchanges out
of the Fund per calendar year. Accounts under common ownership or control,
including accounts with the same taxpayer identification number, will be
counted together for purposes of the four exchange limit.
o The Fund reserves the right to refuse exchange purchases by any person or
group if, in Bankers Trust's judgment, the Fund would be unable to invest
the money effectively in accordance with its investment objective and
policies, or would otherwise potentially be adversely affected.
o Exchanges may be restricted or refused if the Fund receives or anticipates
simultaneous orders affecting significant portions of the Fund's assets.
In particular, a pattern of exchanges that coincide with a "market timing"
strategy may be disruptive to the Fund.
SYSTEMATIC PROGRAMS
TO MOVE MONEY FROM YOUR BANK ACCOUNT TO BT ADVISOR FUNDS
MINIMUM MINIMUM FREQUENCY SETTING UP OR CHANGING
INITIAL SUBSEQUENT
$1,000 $100 Monthly, bimonthly,
For a new account, complete the appropriate section
quarterly or semi- on the application.
annually
<PAGE>
For existing accounts, call your Investment
Professional for an application.
To change the amount or frequency of your
investment, contact your Investment
Professional directly or call 1-800-368-4031.
Call at least 10 business days prior to your next
scheduled investment date.
SYSTEMATIC WITHDRAWAL PROGRAM lets you set up periodic redemptions from your
account.
<TABLE>
<CAPTION>
MINIMUM FREQUENCY SETTING UP OR CHANGING
<S> <C> <C>
$100 Monthly, quarterly, semi-annually or To establish, call your Investment Professional or call
annually 1-800-368-4031 after your account is open. The accounts
from which the withdrawals be processed must have a
minimum balance of $10,000, other than retirement accounts subject to
required minimum distributions.
</TABLE>
DIVIDENDS, DISTRIBUTIONS, AND TAXES
DISTRIBUTIONS. The Fund distributes substantially all of its net income and
capital gains to shareholders each year. The Fund distributes capital gains
annually. Normally, income dividends for the Fund are distributed annually.
The Fund intends to qualify as a regulated investment company, as defined in the
Internal Revenue Code of 1986, as amended (the "Code"). Provided the Fund meets
the requirements imposed by the Code, the Fund will not pay any Federal income
or excise taxes. Dividends paid by the Fund from its taxable net investment
income and distribution by the Fund of its net realized short-term capital gains
are taxable to shareholders as ordinary income, whether received in cash or
reinvested in additional shares of the Fund. The Funds dividends and
distributions will not qualify for the dividends-received deduction for
corporations.
DISTRIBUTION OPTIONS. When you open an account, specify on your account
application how you want to receive distributions. The Trust offers four
options:
1. REINVESTMENT OPTION. Your dividend and capital gain distributions will be
automatically reinvested in additional Shares of the Fund. If you do not
indicate a choice on your application you will be assigned this option.
2. INCOME-EARNED OPTION. Your capital gain distributions will be automatically
reinvested in additional Shares of the Fund, but you will be sent a check for
each dividend distribution.
3. CASH OPTION. You will be sent a check for your dividend and capital gain
distributions.
4. AUTOMATIC DIVIDENDS PROGRAM. Your dividend and capital gain distributions be
automatically invested in Shares of another fund in the BT Family of Funds as
long as the minimums for that account are met.
If you select distribution option 2 or 3 and the U.S. Postal Service cannot
deliver your checks, or if your checks remain uncashed for six months, those
checks will be reinvested in your account at the current NAV and your election
may be converted to the Reinvestment Option. You may change distribution option
at anytime by notifying the Transfer Agent in writing. For retirement accounts,
all distributions are automatically reinvested. When you are over 59 1/2 years
old, you can receive distributions in cash. If distributions from a retirement
account for any taxable year following the year in which the participant reaches
age 70 1/2 are less than the "minimum required distribution" for that taxable
year, an excise tax equal to 50% of the deficiency may be imposed by the
Internal Revenue Service (the "IRS"). The administrator, trustee or custodian of
such a retirement account will be responsible for reporting distributions from
such accounts to the IRS.
When the Fund deducts a distribution from its NAV, the reinvestment price is the
Fund's NAV at the close of business that day. Distribution checks will be mailed
within seven days, or longer for a December ex-dividend date.
TAXES. As with any investment, you should consider how an investment in the
Fund could affect you. Below are some of the Fund's tax implications. If your
account is not a tax-deferred retirement account beware of these tax
implications.
TAXES ON DISTRIBUTIONS. Distributions from the Fund are subject to federal
income tax and may also be subject to state or local taxes. Annual statements as
to the federal tax status of distributions, and distributions that are
attributable to state and local income and personal taxes, if applicable, will
be mailed to shareholders shortly after the end of the year. If living outside
the United States, your distributions from the Fund could also be taxed by the
country in which you reside.
For federal tax purposes, income and short-term capital gain distributions from
the Fund are taxed as dividends; long-term capital gain distributions are taxed
as long-term capital gains.
Mutual fund dividends from U.S. government securities are generally free from
state and local income taxes. However, particular states may limit this benefit,
and some types of securities, such as repurchase agreements and some
agency-backed securities, may not qualify for the benefit. In addition, some
states may impose intangible property taxes. You should consult your own tax
adviser for details and up-to-date information on the tax laws in your state.
Distributions are taxable when they are paid, whether you take them in cash or
reinvest them. However, distributions declared in December and paid in January
are taxable as if they were paid on December 31.
Every January, the Transfer Agent will send the IRS a statement showing the
taxable distributions paid to you in the previous year.
TAXES ON TRANSACTIONS. Your redemptions, including exchanges, are subject to
capital gains tax. A capital gain or loss is the difference between the cost of
your Shares and the price you receive when you sell them. Whenever you sell
Shares of the Fund, the Transfer Agent will send you or your Service Agent a
confirmation statement showing how many Shares you sold and at what price. You
also receive a consolidated transaction statement at least quarterly. However,
it is up to you or your tax preparer to determine whether this sale resulted in
a capital gain and, if so, the amount of tax to be paid. BE SURE TO KEEP YOUR
REGULAR ACCOUNT STATEMENTS; the information they contain will be essential in
calculating the amount of your capital gains.
"BUYING A DIVIDEND." If you buy Shares just before the Fund deducts a capital
gain distribution or dividend distribution, as applicable, from its NAV, you
will pay the full price for the Shares and then receive a portion of the price
back in the form of a taxable distribution.
CURRENCY CONSIDERATIONS. If the Fund's dividends exceed its taxable income in
any year, which is sometimes the result of currency-related losses, all or a
portion of the Fund's dividends may be treated as a return of capital to
shareholders for tax purposes. To minimize the risk of a return of capital, the
Fund may adjust its dividends to take currency fluctuations into account, which
may cause the dividends to vary. Any return of capital will reduce the cost
basis of your Shares, which will result in a higher reported capital gain or a
lower reported capital loss when you sell your Shares. The statement you receive
in January will specify whether any distributions included a return of capital.
Undistributed net gains from currency transactions, if any, will generally be
distributed as a separate dividend in December.
There are tax requirements that all Funds must follow in order to avoid federal
taxation. In its effort to adhere to these requirements, the Fund may have to
limit its investment activity in some types of instruments.
PERFORMANCE INFORMATION AND REPORTS
The Portfolio's recent strategies and holdings, and the Fund's performance, is
detailed twice a year in the Fund's financial reports (not available during the
first year for the Fund), which is sent to all Fund shareholders.
For current Fund performance or a free copy of the Fund's financial report,
please contact your Service Agent or Bankers Trust. Mutual fund performance is
commonly measured as total return and/or yield. The Fund's performance is
affected by the expenses of the Fund.
EXPLANATION OF TERMS
TOTAL RETURN is the change in value of an investment in the Fund over a given
period, assuming reinvestment of any dividends and capital gains. A cumulative
total return reflects actual performance over a stated period of time. An
average annual total return is a hypothetical rate of return that, if achieved
annually, would have produced the same cumulative total return if performance
had been constant over the entire period. Average annual total return
calculations smooth out variations in performance; they are not the same as
actual year-by-year results. Average annual total returns covering periods of
less than one year assume that performance will remain constant for the rest of
the year.
For the one-year period ended December 31, 1997, the Fund's total return was
2.11%.
For the period from January 24, 1996 (commencement of operations) to
December 31, 1997, the Funds cumulative total return was 9.49%.
YIELD refers to the income generated by an investment in the Fund over a given
period of time, expressed as an annual percentage rate. Yields are calculated
according to a standard that is required for all stock and bond funds. Because
this differs from other accounting methods, the quoted yield may not equal the
income actually paid to shareholders. This difference may be significant for a
Fund investing in a Portfolio whose investments are denominated in foreign
currencies.
Performance information may include comparisons of the Fund's investment results
to various unmanaged indices or results of other mutual funds or investment or
savings vehicles. From time to time, Fund rankings may be quoted from various
sources, such as Lipper Analytical Services, Inc., Value Line and Morningstar,
Inc.
Unlike some bank deposits or other investments which pay a fixed yield for a
stated period of time, the total return of the Fund will vary depending upon
interest rates, the current market value of the securities held by the Portfolio
and changes in the expenses of the Fund or Portfolio. In addition, during
certain periods for which total return may be provided, Bankers Trust may have
voluntarily agreed to waive portions of its fees, or reimburse certain operating
expenses of the Fund or Portfolio, on a month- to-month basis. Such waivers will
have the effect of increasing the Fund's net income (and therefore its yield and
total return) during the period such waivers are in effect.
TOTAL RETURNS AND YIELDS ARE BASED ON PAST RESULTS AND ARE NOT AN INDICATION OF
FUTURE PERFORMANCE.
MANAGEMENT OF THE TRUST AND PORTFOLIO
BOARD OF TRUSTEES
The Trust and the Portfolio is governed by a Board of Trustees which is
responsible for protecting the interests of investors. A majority of the
Trustees who are not "interested persons" (as defined in the 1940 Act) of the
Trust or the Portfolio, as the case may be, have adopted written procedures
reasonably appropriate to deal with potential conflicts of interest arising from
the fact that the same individuals are Trustees of the Trust and the Portfolio,
up to and including creating separate boards of trustees. See "Management of the
Trust and the Portfolio" in the SAI for more information with respect to the
Trustees and officers of the Trust and the Portfolio.
INVESTMENT ADVISER
The Trust has not retained the services of an investment adviser since the Trust
seeks to achieve the investment objective of the Fund by investing all the
Assets of the Fund in the Portfolio. The Portfolio has retained the services of
Bankers Trust as investment adviser.
BANKERS TRUST COMPANY AND ITS AFFILIATES
Bankers Trust Company, a New York banking corporation with principal offices at
130 Liberty Street (One Bankers Trust Plaza), New York, New York 10006, is a
wholly owned subsidiary of Bankers Trust Corporation. Bankers Trust conducts a
variety of general banking and trust activities and is a major wholesale
supplier of financial services to the international and domestic institutional
market.
As of December 31, 1997, Bankers Trust Corporation was the seventh largest bank
holding company in the United States with total assets of over $100 billion.
Bankers Trust is dedicated to servicing the needs of corporations, governments,
financial institutions and private clients through a global network of over 90
offices in more than 50 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 over $300 billion in assets under
management globally. Of that total, approximately $148 billion are in U.S.
equity index assets alone.
Bankers Trust has more than 50 years of experience managing retirement assets
for the nation's largest corporations and institutions. In the past, these
clients have been serviced through separate account and commingled fund
structures. Now, the BT Family of Funds brings Bankers Trust's extensive
investment management expertise - once available to only the largest
institutions in the U.S. - to individual investors. Bankers Trust's officers
have had extensive experience in managing investment portfolios having
objectives similar to those of the Portfolio.
Bankers Trust, subject to the supervision and direction of the Board of Trustees
of the Portfolio, manages the Portfolio in accordance with the Portfolio's
investment objective and stated investment policies, makes investment decisions
for the Portfolio, places orders to purchase and sell securities and other
financial instruments on behalf of the Portfolio and employs professional
investment managers and securities analysts who provide research services to the
Portfolio. Bankers Trust may utilize the expertise of any of its world wide
subsidiaries and affiliates to assist it in its role as investment adviser. All
orders for investment transactions on behalf of the Portfolio are placed by
Bankers Trust with broker-dealers and other financial intermediaries that it
selects, including those affiliated with Bankers Trust. A Bankers Trust
affiliate will be used in connection with a purchase or sale of an investment
for the Portfolio only if Bankers Trust believes that the affiliate's charge for
the transaction does not exceed usual and customary levels. The Portfolio will
not invest in obligations for which Bankers Trust or any of its affiliates is
the ultimate obligor or accepting bank. The Portfolio may, however, invest in
the obligations of correspondents and customers of Bankers Trust.
The Investment Advisory Agreement provides for the Portfolio to pay Bankers
Trust a fee from the Portfolio, accrued daily and paid monthly, equal on an
annual basis to 0.25% of the average daily net assets of the Portfolio for its
then-current fiscal year.
Bankers Trust has been advised by its counsel that, in counsel's opinion,
Bankers Trust currently may perform the services for the Trust and the Portfolio
described in this Prospectus and the SAI without violation of the Glass-Steagall
Act or other applicable banking laws or regulations. State laws on this issue
may differ from the interpretations of relevant Federal law, and banks and
financial institutions may be required to register as dealers pursuant to state
securities law.
PORTFOLIO MANAGER
Richard J. Vella, Managing Director of Bankers Trust, has been co-manager
of the Portfolio since inception. Mr. Vella has been employed by Bankers Trust
since 1985 and has ten years of trading and investment experience.
Steven Wetter, Vice President of Bankers Trust, has been co-manager of the
Portfolio since inception. Mr. Wetter has been employed by Bankers Trust since
1992 and has ten years of trading and investment experience.
ADMINISTRATOR
Under its Administration and Services Agreement with the Trust, Bankers Trust
calculates the net asset value of the Fund and generally assists the Board of
Trustees of the Trust in all aspects of the administration and operation of the
Fund. The Administration and Services Agreement provides for the Trust to pay
Bankers Trust a fee, accrued daily and paid monthly equal on an annual basis to
0.15% of the average daily net assets of the Fund, attributable to the Class,
for its then-current fiscal year.
Under an Administration and Services Agreement with the Portfolio, Bankers Trust
calculates the value of the assets of the Portfolio and generally assists the
Board of Trustees in all aspects of the administration and operation of the
Portfolio. The Administration and Services Agreement provides for the Portfolio
to pay Bankers Trust a fee, accrued daily and paid monthly, equal on an annual
basis to 0.10% of the Portfolio's average daily net assets for its then-current
fiscal year. Under the Administration and Services Agreement, Bankers Trust may
delegate one or more of its responsibilities to others, including affiliates of
Edgewood, at Bankers Trust's expense.
DISTRIBUTOR
Edgewood Services, Inc. is the principal distributor for the Shares of the
Fund. In addition, Edgewood and its affiliates provide the Trust with office
facilities, and currently provide administration and distribution services for
other registered investment companies. The principal business address of
Edgewood and its affiliates is 5800 Corporate Drive, Pittsburgh, Pennsylvania
15237-5829.
CUSTODIAN AND TRANSFER AGENT
Bankers Trust acts as custodian of the assets of the Trust and the Portfolio and
serves as the transfer agent (the "Transfer Agent") for the Trust and the
Portfolio under the Administration and Services Agreement with the Trust and the
Portfolio.
ORGANIZATION OF THE TRUST AND FUND
The Fund is a mutual fund: an investment that pools shareholders' money and
invests it toward a specified goal. The Fund is a separate diversified series of
BT Advisor Funds, a Massachusetts business trust. The Fund offers two classes of
Shares of beneficial interest, Institutional Class Shares and Advisor Class
Shares. The Portfolio is a separate diversified series of BT Investment
Portfolios, a New York master trust fund. The Trust and BT Investment Portfolios
reserve the right to add additional series in the future. The Trust also
reserves the right to issue additional classes of Shares of the Fund.
The Trust or the Portfolio may hold special meetings and mail proxy materials.
These meetings may be called to elect or remove trustees, change fundamental
policies, approve Portfolio's investment advisory agreement, or for other
purposes. Shareholders not attending these meetings are encouraged to vote by
proxy. The Trust's Transfer Agent will mail proxy materials in advance,
including a voting card and information about the proposals to be voted on.
When matters are submitted for shareholder vote, shareholders of the Fund will
have one vote for each full share held and proportionate, fractional votes for
fractional shares held. A separate vote of the Fund or classes is required on
any matter affecting only the Fund or class on which shareholders are entitled
to vote. Shareholders of the Fund or class are not entitled to vote on Trust
matters that do not affect the Fund or class, respectively, and do not require a
separate vote of the Fund or class. All series of the Trust and all classes will
vote together on certain matters, such as electing trustees or approving
independent public auditors. There normally will be no meetings of shareholders
for the purpose of electing Trustees unless and until such time as less than a
majority of Trustees holding office have been elected by shareholders, at which
time the Trustees then in office will call a shareholders' meeting for the
election of Trustees. Any Trustee may be removed from office upon the vote of
shareholders holding at least two-thirds of that Trust's outstanding shares at a
meeting called for that purpose. The Trustees are required to call such a
meeting upon the written request of shareholders holding at least 10% of that
Trust's outstanding shares. The Trust will also assist shareholders in
communicating with one another as provided for in the 1940 Act. As of April 1,
1998, Bankers Trust Company as Trustee for Pacificorp Master Retirement Trust ,
Los Angeles, California, and Swiss Bank Corporation, New York, New York, owned
approximately 61.02% and 33.10% of the Fund, respectively , and, therefore, may,
for certain purposes, be deemed to control the Fund and be able to affect the
outcome of certain matters as presented for a vote of shareholders.
Each series of the Trust will vote separately on any matter involving the
Portfolio. Shareholders of all of the series of the Trust will, however, vote
together to elect Trustees of the Trust and for certain other matters. Under
certain circumstances, the shareholders of one or more series could control the
outcome of these votes. The series of BT Investment Portfolios will vote
together or separately on matters in the same manner, and in the same
circumstances, as do the series of the Trust. As with the Trust, the investors
in one or more series of BT Investment Portfolios could control the outcome of
these votes.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a business trust may,
under certain circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the Trust itself was unable to meet its
obligations.
The Declaration of Trust of the of BT Investment Portfolio provides that the
Fund and other entities investing in the Portfolio (e.g., other investment
companies, insurance company separate accounts and common and commingled trust
funds) will each be liable for all obligations of the Portfolio. However, the
risk of the Fund incurring financial loss on account of such liability is
limited to circumstances in which both inadequate insurance existed and the
Portfolio itself was unable to meet its obligations. Accordingly, the Trustees
of the Trust believe that neither the Fund nor its shareholders will be
adversely affected by reason of the Fund's investing in the Portfolio. No series
of BT Investment Portfolio has any preference over any other series.
ADDITIONAL INFORMATION
SHORT-TERM INVESTMENTS. The Portfolio may invest in certain short-term fixed
income securities. Such securities may be used to invest uncommitted cash
balances, to maintain liquidity to meet shareholder redemptions or to serve as
collateral for the obligations underlying the Portfolio's investment in
securities index futures or related options or warrants. These securities
include: obligations issued or guaranteed by the U.S. government or any of its
agencies or instrumentalities ("U.S. Government Securities') or by any of the
states, repurchase agreements, time deposits, certificates of deposit, bankers'
acceptances, commercial paper.
U.S. GOVERNMENT SECURITIES. Some U.S. Government Securities, such as Treasury
bills, notes and bonds, are supported by the full faith and credit of the United
States; others, such as those of the Federal Home Loan Banks, are supported by
the right of the issuer to borrow from the Treasury; others, such as those of
the Federal National Mortgage Association, are supported by the discretionary
authority of the U.S. government to purchase the agency's obligations; and still
others, such as those of the Student Loan Marketing Association, are supported
only by the credit of the instrumentality.
SECURITIES LENDING. The Portfolio is permitted to lend up to 30% of the total
value of its securities. These loans must be secured continuously be cash or
securities issued or guaranteed by the United States government, its agencies or
instrumentalities or by a letter of credit at least equal to the market value of
the securities loaned plus accrued income. By lending its securities, the
Portfolio may increase its income by continuing to receive income on the loaned
securities as well as by the opportunity to receive interest on the collateral.
During the term of the loan, a Portfolio continues to bear the risk of
fluctuations in the price of the loaned securities. In lending securities to
brokers, dealers and other organizations, the Portfolio is subject to risks
which, like those associated with other extensions of credit, include delays in
receiving additional collateral, in recovery should the borrower fail
financially and possible loss of the collateral. Upon receipt of appropriate
regulatory approval, cash collateral may be invested in a money market fund
managed by Bankers Trust (or its affiliate) and Bankers Trust may serve as the
Portfolio's lending agent and may share in revenue received from securities
lending transactions as compensation for this service.
WHEN ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. Delivery of and payment
for these securities may take place as long as a month or more after the date of
the purchase commitment. The value of these securities is subject to market
fluctuation during this period and no income accrues to the Portfolio until
settlement takes place. The Portfolio segregates with the Custodian liquid
securities in an amount at least equal to these commitments.
DERIVATIVES. The Portfolio may invest in various instruments that are commonly
known as "derivatives." Generally, a derivative is a financial arrangement, the
value of which is based on, or "derived" from, a traditional security, asset, or
market index. Some "derivatives" such as mortgage-related and other asset-backed
securities are in many respects like any other investment, although they may be
more volatile or less liquid than more traditional debt securities. There are,
in fact, many different types of derivatives and many different ways to use
them. There are a range of risks associated with those uses. Futures and options
are commonly used for traditional hedging purposes to attempt to protect a fund
from exposure to changing interest rates, securities prices, or currency
exchange rates and as a low cost method of gaining exposure to a particular
securities market without investing directly in those securities. Derivatives
will not be used to increase portfolio risk above the level that could be
achieved using only traditional investment securities or to acquire exposure to
changes in the value of assets or indices that by themselves would not be
purchased for the Portfolio.
SECURITIES INDEX FUTURES AND RELATED OPTIONS. The Portfolio may enter into
securities index futures contracts and related options provided that not more
than 5% of its assets are required as a margin deposit for futures contracts or
options and provided that not more than 20% of the Portfolio's assets are
invested in futures and options at any time. When the Portfolio has cash from
new investments in the Portfolio or holds a portion of its assets in money
market instruments, it may enter into index futures or options to attempt to
increase its exposure to the market. Strategies the Portfolio could use to
accomplish this include purchasing futures contracts, writing put options, and
purchasing call options. When the Portfolio wishes to sell securities, because
of shareholder redemptions or otherwise, it may use index futures or options to
hedge against market risk until the sale can be completed. These strategies
could include selling futures contracts, writing call options, and purchasing
put options.
SWAP AGREEMENTS. The Portfolio may enter into swap agreements only to the extent
that obligations under such agreements represent not more than 10% of the
Portfolio's total assets. Swap agreements are contracts between parties in which
one party agrees to make payments to the other party based on the change in
market value of a specified index or asset. In return, the other party agrees to
make payments to the first party based on the return of a different specified
index or asset.
Although swap agreements entail the risk that a party will default on its
payment obligations thereunder, the Portfolio will minimize this risk by
entering into agreements that mark to market no less frequently than quarterly.
Swap agreements also bear the risk that the Portfolio will not be able to meet
its obligation to the counterparty. This risk will be mitigated by investing the
Portfolio in the specific asset for which it is obligated to pay a return.
WARRANTS. The Portfolio's investment in warrants will not exceed more than 5% of
its assets (2% with respect to warrants not listed on the New York or American
Stock Exchanges). Warrants are instruments which entitle the holder to buy
underlying equity securities at a specific price for a specific period of time.
A warrant tends to be more volatile than its underlying securities and ceases to
have value if it is not exercised prior to its expiration date. In addition,
changes in the value of a warrant do not necessarily correspond to changes in
the value of its underlying securities.
CONVERTIBLE SECURITIES. The Portfolio may invest in convertible securities which
are a bond or preferred stock which may be converted at a stated price within a
specific period of time into a specified number of shares of common stock of the
same or different issuer. Convertible securities are senior to common stock in a
corporation's capital structure, but usually are subordinated to non-convertible
debt securities. While providing a fixed income stream -- generally higher in
yield than in the income derived from a common stock but lower than that
afforded by a non-convertible debt security -- a convertible security also
affords an investor the opportunity, through its conversion feature, to
participate in the capital appreciation of common stock into which it is
convertible.
In general, the market value of a convertible security is the higher of its
investment value (its value as a fixed income security) or its conversion value
(the value of the underlying shares of common stock if the security is
converted). As a fixed income security, the market value of a convertible
security generally increases when interest rates decline and generally decreases
when interest rates rise; however, the price of a convertible security generally
increases as the market value of the underlying stock increases, and generally
decreases as the market value of the underlying stock declines. Investments in
convertible securities generally entail less risk than investments in the common
stock of the same issuer.
FURTHER RISKS ASSOCIATED WITH THE USE OF FUTURES CONTRACTS, OPTIONS, WARRANTS,
CONVERTIBLE SECURITIES AND SWAP AGREEMENTS. The risk of loss associated with
futures contracts in some strategies can be substantial due to both the low
margin deposits required and the extremely high degree of leverage involved in
futures pricing. As a result, a relatively small price movement in a futures
contract may result in an immediate and substantial loss or gain. However, the
Portfolio will not use futures contracts, options, warrants, convertible
securities and swap agreements for speculative purposes or to leverage their net
assets. Accordingly, the primary risks associated with the use of futures
contracts, options, warrants, convertible securities and swap agreements by the
Portfolio are: (i) imperfect correlation between the change in market value of
the securities held by the Portfolio and the prices of futures contracts,
options, warrants, convertible securities and swap agreements; and (ii) possible
lack of a liquid secondary market for a futures contract and the resulting
inability to close a futures position prior to its maturity date. The risk of
imperfect correlation will be minimized by investing only in those contracts
whose behavior is expected to resemble that of the Portfolio's underlying
securities. The risk that the Portfolio will be unable to close out a futures
position will be minimized by entering into stock transactions on an exchange
with an active and liquid secondary market. However options, warrants,
convertible securities and swap agreements purchased or sold over-the-counter
may be less liquid than exchange-traded securities. Illiquid securities, in
general, may not represent more than 15% of the net assets of the Portfolio.
FOREIGN CURRENCY FORWARD, FUTURES AND RELATED OPTIONS TRANSACTIONS. The
Portfolio may enter into foreign currency forward and foreign currency futures
contracts in order to maintain the same currency exposure as the EAFE Index. The
Portfolio may not enter into such contracts as a way of protecting against
anticipated adverse changes in exchange rates between foreign currencies and the
U.S. dollar. A foreign currency forward contract is an obligation to purchase or
sell a specific currency at a future date, which may be any fixed number of days
from the date of the contract agreed upon by the parties, at a price set at the
time of the contract. Such contracts do not eliminate fluctuations in the
underlying prices of securities held by the Portfolio. Although such contracts
tend to minimize the risk of loss due to a decline in the value of a currency
that has been sold forward, and the risk of loss due to an increase in the value
of a currency that has been purchased forward, at the same time they tend to
limit any potential gain that might be realized should the value of such
currency increase.
Successful use of forward contracts depends on Bankers Trust's skill in
analyzing and predicting relative currency values. Forward contracts alter the
Portfolio's exposure to currency exchange rate activity and could result in
losses to the Portfolio if currencies do not perform as Bankers Trust
anticipates. The Portfolio may also incur significant costs when converting
assets from one currency to another.
ASSET COVERAGE. To assure that the Portfolio's use of futures and related
options, as well as when-issued and delayed delivery securities, interest rate
swaps and foreign currency forward futures and related options transactions are
not used to achieve excessive investment leverage, the Portfolio will cover such
transactions, as required under applicable interpretations of the SEC, either by
owning the underlying securities, entering into an off-setting transaction, or
by segregating with the Portfolio's Custodian liquid securities in an amount at
all times equal to or exceeding the Portfolio's commitment with respect to these
instruments or contracts.
<PAGE>
27
BT ADVISOR FUNDS
EAFE(R) EQUITY INDEX FUND
INSTITUTIONAL CLASS SHARES
INVESTMENT ADVISER OF THE PORTFOLIO AND ADMINISTRATOR
BANKERS TRUST COMPANY
130 Liberty Street
(One Bankers Trust Plaza)
New York, NY 10006
DISTRIBUTOR
EDGEWOOD SERVICES, INC.
5800 Corporate Drive
Pittsburgh, PA 15237-5829
CUSTODIAN AND TRANSFER AGENT
BANKERS TRUST COMPANY
130 Liberty Street
(One Bankers Trust Plaza)
New York, NY 10006
INDEPENDENT ACCOUNTANTS
COOPERS & LYBRAND L.L.P.
1100 Main Street, Suite 900
Kansas City, MO 64105
COUNSEL
WILLKIE FARR & GALLAGHER
153 East 53rd Street
New York, NY 10022
No person has been authorized to give any information or to make any
representations other than those contained in the Trusts' Prospectuses, the
corresponding SAIs or the Trusts' official sales literature in connection with
the offering of the Trust's Shares and, if given or made, such other information
or representations must not be relied on as having been authorized by a Trust.
This Prospectus does not constitute an offer in any state in which, or to any
person to whom, such offer may not lawfully be made.
Cusip #05576L874
STA514300 (4/98)
STATEMENT OF ADDITIONAL INFORMATION
APRIL 30, 1998
BT INSTITUTIONAL FUNDS
EQUITY 500 INDEX FUND
BT ADVISOR FUNDS -- INSTITUTIONAL CLASS SHARES
U.S. BOND INDEX FUND
SMALL CAP INDEX FUND
EAFE(R) EQUITY INDEX FUND
BT Advisor Funds (the "Trust") is comprised of several funds. The funds listed
above (each, a "Fund" and together the "Funds") are, with the exception of
Equity 500 Index Fund, each a series of the Trust and offers two classes of
shares (each a "Class" and collectively the "Classes"). This Statement of
Additional Information describes the Institutional Class Shares. Equity 500
Index Fund is a series of BT Institutional Funds (the "Institutional Trust")
(together with the Trust, the "Trusts").
As described in the Prospectuses, the Trusts seek to achieve the investment
objectives of each Fund by investing all the investable assets ("Assets") of the
Fund in a diversified open-end management investment company (or a series
thereof) having the same investment objectives as such Fund. These investment
companies are, respectively, BT Investment Portfolios and Equity 500 Index
Portfolio. U.S. Bond Index Portfolio, Small Cap Index Portfolio and EAFE(R)
Equity Index Portfolio are each a series of BT Investment Portfolios.
Shares of the Funds are sold by Edgewood Services, Inc. ("Edgewood"), the
Trusts' Distributor, to clients and customers (including affiliates and
correspondents) of Bankers Trust Company ("Bankers Trust"), the Portfolios'
Adviser, and to clients and customers of other organizations.
The Trusts' Prospectuses for the Funds are dated April 30, 1998. The
Prospectuses provide the basic information investors should know before
investing. This Statement of Additional Information ("SAI"), which is not a
Prospectus, is intended to provide additional information regarding the
activities and operations of the Trusts and should be read in conjunction with a
Fund's Prospectus. You may request a copy of a prospectus or a paper copy of
this SAI, if you have received it electronically, free of charge by calling the
Trust at the telephone number listed below or by contacting any Service Agent.
This SAI is not an offer of any Fund for which an investor has not received a
Prospectus. Capitalized terms not otherwise defined in this SAI have the
meanings accorded to them in a Fund's Prospectus.
BANKERS TRUST COMPANY
INVESTMENT ADVISER OF EACH PORTFOLIO AND ADMINISTRATOR
EDGEWOOD SERVICES, INC.
DISTRIBUTOR
5800 CORPORATE DRIVE
PITTSBURGH, PENNSYLVANIA 15237-5829
1-800-730-1313
<PAGE>
I
TABLE OF CONTENTS
Risk Factors and Certain Securities and Investment Practices.............1
Performance Information.................................................23
Valuation of Securities; Redemptions and Purchases in Kind..............25
Management of the Trusts and Portfolios.................................27
Organization of the Trusts..............................................33
Taxation................................................................34
Financial Statements....................................................35
Appendix................................................................36
<PAGE>
93
RISK FACTORS AND CERTAIN SECURITIES AND INVESTMENT PRACTICES
INVESTMENT OBJECTIVES
The investment objective(s) of each Fund is described in that Fund's Prospectus.
There can, of course, be no assurance that any Fund will achieve its investment
objective(s).
INVESTMENT PRACTICES
Each Fund seeks to achieve its investment objective by investing all of its
Assets in the corresponding Portfolio. The Trusts may withdraw a Fund's
investment from the corresponding Portfolio at any time if the Board of Trustees
of the respective Trust determines that it is in the best interests of the Fund
to do so.
Since the investment characteristics of each Fund will correspond directly to
those of the corresponding Portfolio, the following is a discussion of the
various investments of and techniques employed by each Portfolio.
CERTIFICATES OF DEPOSIT AND BANKERS' ACCEPTANCES. Certificates of deposit are
receipts issued by a depository institution in exchange for the deposit of
funds. The issuer agrees to pay the amount deposited plus interest to the bearer
of the receipt on the date specified on the certificate. The certificate usually
can be traded in the secondary market prior to maturity. Bankers' acceptances
typically arise from short-term credit arrangements designed to enable
businesses to obtain funds to finance commercial transactions. Generally, an
acceptance is a time draft drawn on a bank by an exporter or an importer to
obtain a stated amount of funds to pay for specific merchandise. The draft is
then "accepted" by a bank that, in effect, unconditionally guarantees to pay the
face value of the instrument on its maturity date. The acceptance may then be
held by the accepting bank as an earning asset or it may be sold in the
secondary market at the going rate of discount for a specific maturity. Although
maturities for acceptances can be as long as 270 days, most acceptances have
maturities of six months or less.
COMMERCIAL PAPER. Commercial paper consists of short-term (usually from 1 to 270
days) unsecured promissory notes issued by corporations in order to finance
their current operations. A variable amount master demand note (which is a type
of commercial paper) represents a direct borrowing arrangement involving
periodically fluctuating rates of interest under a letter agreement between a
commercial paper issuer and an institutional lender pursuant to which the lender
may determine to invest varying amounts.
For a description of commercial paper ratings, see Appendix A to this SAI.
ILLIQUID SECURITIES. Historically, illiquid securities have included securities
subject to contractual or legal restrictions on resale because they have not
been registered under the Securities Act of 1933, as amended (the "1933 Act"),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities which have not been
registered under the 1933 Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and a mutual fund
might be unable to dispose of restricted or other illiquid securities promptly
or at reasonable prices and might thereby experience difficulty satisfying
redemptions within seven days. A mutual fund might also have to register such
restricted securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.
In recent years, however, a large institutional market has developed for certain
securities that are not registered under the 1933 Act, including repurchase
agreements, commercial paper, foreign securities, municipal securities and
corporate bonds and notes. Institutional investors depend on an efficient
institutional market in which the unregistered security can be readily resold or
on an issuer's ability to honor a demand for repayment. The fact that there are
contractual or legal restrictions on resale of such investments to the general
public or to certain institutions may not be indicative of their liquidity.
The Securities and Exchange Commission (the "SEC") has adopted Rule 144A, which
allows a broader institutional trading market for securities otherwise subject
to restriction on their resale to the general public. Rule 144A establishes a
"safe harbor" from the registration requirements of the 1933 Act of resales of
certain securities to qualified institutional buyers. The Adviser anticipates
that the market for certain restricted securities such as institutional
commercial paper will expand further as a result of this regulation and the
development of automated systems for the trading, clearance and settlement of
unregistered securities of domestic and foreign issuers, such as the PORTAL
System sponsored by the National Association of Securities Dealers, Inc.
The Adviser will monitor the liquidity of Rule 144A securities in each
Portfolio's portfolio under the supervision of the Portfolio's Board of
Trustees. In reaching liquidity decisions, the Adviser will consider, among
other things, the following factors: (i) the frequency of trades and quotes for
the security; (ii) the number of dealers and other potential purchasers wishing
to purchase or sell the security; (iii) dealer undertakings to make a market in
the security and (iv) the nature of the security and of the marketplace trades
(e.g., the time needed to dispose of the security, the method of soliciting
offers and the mechanics of the transfer).
LENDING OF PORTFOLIO SECURITIES. Each Portfolio has the authority to lend
portfolio securities to brokers, dealers and other financial organizations. By
lending its securities, a Portfolio may increase its income by continuing to
receive payments in respect of dividends and 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 a fee paid by the borrower when irrevocable
letters of credit and U.S. Government Obligations are used as collateral. Each
Portfolio will adhere to the following conditions whenever its securities are
loaned: (i) the Portfolio must receive at least 100% collateral 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 substitute payments in respect of all dividends,
interest or other distributions on the loaned securities; and (v) 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 retain the right to terminate the loan and recall and vote the
securities.
SHORT-TERM INSTRUMENTS. When a Portfolio experiences large cash inflows through
the sale of securities and desirable equity securities, that are consistent with
the Portfolio's investment objective, which are unavailable in sufficient
quantities or at attractive prices, the Portfolio may hold short-term
investments (or shares of money market mutual funds) for a limited time pending
availability of such equity securities. Short-term instruments consist of
foreign and domestic: (i) short-term obligations of sovereign governments, their
agencies, instrumentalities, authorities or political subdivisions; (ii) other
short-term debt securities rated AA or higher by ("S&P") or Aa or higher by
Moody's Investors Service, 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.
<PAGE>
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each Portfolio may purchase
securities on a when-issued or delayed delivery basis. For example, delivery of
and payment for these securities can take place a month or more after the date
of the purchase commitment. The purchase price and the interest rate payable, if
any, on the securities are fixed on the purchase commitment date or at the time
the settlement date is fixed. The value of such securities is subject to market
fluctuation and no interest accrues to a Portfolio until settlement takes place.
At the time a Portfolio makes the commitment to purchase securities on a
when-issued or delayed delivery basis, it will record the transaction, reflect
the value each day of such securities in determining its net asset value and, if
applicable, calculate the maturity for the purposes of average maturity from
that date. At the time of settlement a when-issued security may be valued at
less than the purchase price. To facilitate such acquisitions, each Portfolio
will maintain with the Custodian a segregated account with liquid assets,
consisting of cash, U.S. government securities or other appropriate securities,
in an amount at least equal to such commitments. On delivery dates for such
transactions, each Portfolio will meet its obligations from maturities or sales
of the securities held in the segregated account and/or from cash flow. If a
Portfolio chooses to dispose of the right to acquire a when-issued security
prior to its acquisition, it could, as with the disposition of any other
portfolio obligation, incur a gain or loss due to market fluctuation. It is the
current policy of each Portfolio not to enter into when-issued commitments
exceeding in the aggregate 15% of the market value of the Portfolio's total
assets, less liabilities other than the obligations created by when-issued
commitments.
ADDITIONAL U.S. GOVERNMENT OBLIGATIONS. Each Portfolio may invest in obligations
issued or guaranteed by U.S. government agencies or instrumentalities. These
obligations may or may not be backed by the "full faith and credit" of the
United States. In the case of securities not backed by the full faith and credit
of the United States, each Portfolio must look principally to the federal agency
issuing or guaranteeing the obligation for ultimate repayment, and may not be
able to assert a claim against the United States itself in the event the agency
or instrumentality does not meet its commitments. Securities in which each
Portfolio may invest that are not backed by the full faith and credit of the
United States include, but are not limited to, obligations of the Tennessee
Valley Authority, the Federal Home Loan Mortgage Corporation and the U.S. Postal
Service, each of which has the right to borrow from the U.S. Treasury to meet
its obligations, and obligations of the Farm Credit Banks and the Federal Home
Loan Banks, both of whose obligations may be satisfied only by the individual
credits of each issuing agency. Securities which are backed by the full faith
and credit of the United States include obligations of the Government National
Mortgage Association, the Farmers Home Administration, and the Export-Import
Bank.
EQUITY INVESTMENTS. With the exception of the U.S. Bond Index Portfolio, each
Portfolio may invest in equity securities listed on any domestic or foreign
securities exchange or traded in the over-the-counter market as well as certain
restricted or unlisted securities. They may or may not pay dividends or carry
voting rights. Common stock occupies the most junior position in a company's
capital structure.
SWAP AGREEMENTS. Swap agreements are contracts entered into by two parties,
primarily institutional investors, for periods ranging from a few weeks to more
than one year. In a standard swap transaction, two parties agree to exchange the
returns (or differentials in rates of return) earned or realized on particular
predetermined investments or instruments. The gross returns to be exchanged or
swapped between the parties are calculated with respect to a notional amount,
I.E., the return on or increase in value of a particular dollar amount invested
at a particular interest rate, in a particular foreign currency, or in a basket
of securities representing a particular index. The notional amount of the swap
agreement is only a fictive basis on which to calculate the obligations which
the parties to a swap agreement have agreed to exchange. A Portfolio's
obligations (or rights) under a swap agreement will generally be equal only to
the net amount to be paid or received under the agreement based on the relative
values of the positions held by each party to the agreement (the "net amount").
A Portfolio's obligations under a swap agreement will be accrued daily (offset
against any amounts owing to the Portfolio) and any accrued but unpaid net
amounts owed to a swap counterparty will be covered by the maintenance of a
segregated account consisting of cash, U.S. Government securities, or high grade
debt obligations, to avoid any potential leveraging of the Portfolio's
portfolio.
The use of swap agreements will be successful in furthering its investment
objective will depend on the Adviser's ability to correctly predict whether
certain types of investments are likely to produce greater returns than other
investments. Swap agreements may be considered to be illiquid because they are
two party contracts and because they may have terms of greater than seven days.
Moreover, a Portfolio bears the risk of loss of the amount expected to be
received under a swap agreement in the event of the default or bankruptcy of a
swap agreement counterparty. A Portfolio will enter into swap agreements only
with counterparties that would be eligible for consideration as repurchase
agreement counterparties under the Portfolio's repurchase agreement guidelines.
Certain restrictions imposed on the Portfolios by the Internal Revenue Code may
limit the Portfolios' ability to use swap agreements. The swaps market is a
relatively new market and is largely unregulated. It is possible that
developments in the swaps market, including potential government regulation,
could adversely affect a Portfolio's ability to terminate existing swap
agreements or to realize amounts to be received under such agreements.
Certain swap agreements are exempt from most provisions of the Commodity
Exchange Act (the "CEA") and, therefore, are not regulated as futures or
commodity option transactions under the CEA, pursuant to regulations approved by
the Commodity Futures Trading Commission (the "CFTC") effective February 22,
1993. To qualify for this exemption, a swap agreement must be entered into by
eligible participants, which includes the following, provided the participant's
total assets exceed established levels: a bank or trust company, savings
association or credit union, insurance company, investment company subject to
regulation under the Investment Company Act of 1940, as amended (the "1940
Act"), commodity pool, corporation, partnership, proprietorship, organization,
trust or other entity, employee benefit plan, governmental entity,
broker-dealer, futures commission merchant, natural person, or regulated foreign
person. To be eligible, natural persons and most other entities must have total
assets exceeding $10 million; commodity pools and employee benefit plans must
have asset exceeding $5 million. In addition, an eligible swap transaction must
meet three conditions. First, the swap agreement may not be part of a fungible
class of agreements that are standardized as to their material economic terms.
Second, the creditworthiness of parties with actual or potential obligations
under the swap agreement must be a material consideration in entering into or
determining the terms of the swap agreement, including pricing, cost or credit
enhancement terms. Third, swap agreements may not be entered into and traded on
or through a multilateral transaction execution facility.
This exemption is not exclusive, and participants may continue to rely on
existing exclusions for swaps, such as the Policy Statement issued in July 1989
which recognized a "safe harbor" for swap transactions from regulation as
futures or commodity option transactions under the CEA or its regulations. The
Policy Statement applies to swap transactions settled in cash that: (i) have
individually tailored terms; (ii) lack exchange style offset and the use of a
clearing organization or margin system; (iii) are undertaken in conjunction with
a line of business; and (iv) are not marketed to the public.
REVERSE REPURCHASE AGREEMENTS. The Portfolios may borrow funds for temporary or
emergency purposes, such as meeting larger than anticipated redemption requests,
and not for leverage, by among other things, agreeing to sell portfolio
securities to financial institutions such as banks and broker-dealers and to
repurchase them at a mutually agreed date and price (a "reverse repurchase
agreement"). At the time a Portfolio enters into a reverse repurchase agreement
it will place in a segregated custodial account cash, U.S. Government
Obligations or high-grade debt obligations having a value equal to the
repurchase price, including accrued interest. Reverse repurchase agreements
involve the risk that the market value of the securities sold by a Portfolio may
decline below the repurchase price of those securities. Reverse repurchase
agreements are considered to be borrowings by a Portfolio.
<PAGE>
WARRANTS. Warrants entitle the holder to buy common stock from the issuer at a
specific price (the strike price) for a specific period of time. The strike
price of warrants sometimes is much lower than the current market price of the
underlying securities, yet warrants are subject to similar price fluctuations.
As a result, warrants may be more volatile investments than the underlying
securities.
Warrants do not entitle the holder to dividends or voting rights with respect to
the underlying securities and do not represent any rights in the assets of the
issuing company. Also, the value of the warrant does not necessarily change with
the value of the underlying securities and a warrant ceases to have value if it
is not exercised prior to the expiration date.
CONVERTIBLE SECURITIES. Convertible securities may be a debt security or
preferred stock which may be converted into common stock or carries the right to
purchase common stock. Convertible securities entitle the holder to exchange the
securities for a specified number of shares of common stock, usually of the same
company, at specified prices within a certain period of time.
The terms of any convertible security determine its ranking in a company's
capital structure. In the case of subordinated convertible debentures, the
holders' claims on assets and earnings are subordinated to the claims of other
creditors, and are senior to the claims of preferred and common shareholders. In
the case of convertible preferred stock, the holders' claims on assets and
earnings are subordinated to the claims of all creditors and are senior to the
claims of common shareholders.
GINNIE MAE CERTIFICATES. The Government National Mortgage Association ("Ginnie
Mae") is a wholly-owned corporate instrumentality of the United States within
the Department of Housing and Urban Development. The National Housing Act of
1934, as amended (the "Housing Act"), authorizes Ginnie Mae to guarantee the
timely payment of the principal of and interest on certificates that are based
on and backed by a pool of mortgage loans insured by the Federal Housing
Administration under the Housing Act, or Title V of the Housing Act of 1949
("FHA Loans"), or guaranteed by the Department of Veterans Affairs under the
Servicemen's Readjustment Act of 1944, as amended ("VA Loans"), or by pools of
other eligible mortgage loans. The Housing Act provides that the full faith and
credit of the U.S. government is pledged to the payment of all amounts that may
be required to be paid under any Ginnie Mae guaranty. In order to meet its
obligations under such guaranty, Ginnie Mae is authorized to borrow from the
U.S. Treasury with no limitations as to amount.
The Ginnie Mae Certificates in which the U.S. Bond Index Portfolio will invest
will represent a pro rata interest in one or more pools of the following types
of mortgage loans: (i) fixed-rate level payment mortgage loans; (ii) fixed-rate
graduated payment mortgage loans; (iii) fixed-rate growing equity mortgage
loans; (iv) fixed-rate mortgage loans secured by manufactured (mobile) homes;
(v) mortgage loans on multifamily residential properties under construction;
(vi) mortgage loans on completed multifamily projects; (vii) fixed-rate mortgage
loans as to which escrowed funds are used to reduce the borrower's monthly
payments during the early years of the mortgage loans ("buydown" mortgage
loans); (viii) mortgage loans that provide for adjustments in payments based on
periodic changes in interest rates or in other payment terms of the mortgage
loans; and (ix) mortgage-backed serial notes. All of these mortgage loans will
be FHA Loans or VA Loans and, except as otherwise specified above, will be
fully-amortizing loans secured by first liens on one- to four-family housing
units.
FANNIE MAE CERTIFICATES. The Federal National Mortgage Association ("Fannie
Mae") is a federally chartered and privately owned corporation organized and
existing under the Federal National Mortgage Association Charter Act of 1938.
The obligations of Fannie Mae are not backed by the full faith and credit of the
U.S. government.
<PAGE>
Each Fannie Mae Certificate will represent a pro rata interest in one or more
pools of FHA Loans, VA Loans or conventional mortgage loans (i.e., mortgage
loans that are not insured or guaranteed by any governmental agency) of the
following types: (i) fixed-rate level payment mortgage loans; (ii) fixed-rate
growing equity mortgage loans; (iii) fixed-rate graduated payment mortgage
loans; (iv) variable rate mortgage loans; (v) other adjustable rate mortgage
loans; and (vi) fixed-rate and adjustable mortgage loans secured by multifamily
projects.
FREDDIE MAC CERTIFICATES. The Federal Home Loan Mortgage Corporation ("Freddie
Mac") is a corporate instrumentality of the United States created pursuant to
the Emergency Home Finance Act of 1970, as amended (the "FHLMC Act"). The
obligations of Freddie Mac are obligations solely of Freddie Mac and are not
backed by the full faith and credit of the U.S. government.
Freddie Mac Certificates represent a pro rata interest in a group of mortgage
loans (a "Freddie Mac Certificate group") purchased by Freddie Mac. The mortgage
loans underlying the Freddie Mac Certificates will consist of fixed-rate or
adjustable rate mortgage loans with original terms to maturity of between ten
and thirty years, substantially all of which are secured by first liens on one-
to four-family residential properties or multifamily projects. Each mortgage
loan must meet the applicable standards set forth in the FHLMC Act. A Freddie
Mac Certificate group may include whole loans, participating interests in whole
loans and undivided interests in whole loans and participations comprising
another Freddie Mac Certificate group.
ADJUSTABLE RATE MORTGAGES - INTEREST RATE INDICES. Adjustable rate mortgages in
which the U.S. Bond Index Portfolio invests may be adjusted on the basis of one
of several indices. The One Year Treasury Index is the figure derived from the
average weekly quoted yield on U.S. Treasury Securities adjusted to a constant
maturity of one year. The Cost of Funds Index reflects the monthly weighted
average cost of funds of savings and loan associations and savings banks whose
home offices are located in Arizona, California and Nevada (the "FHLB Eleventh
District") that are member institutions of the Federal Home Loan Bank of San
Francisco (the "FHLB of San Francisco"), as computed from statistics tabulated
and published by the FHLB of San Francisco. The FHLB of San Francisco normally
announces the Cost of Funds Index on the last working day of the month following
the month in which the cost of funds was incurred.
A number of factors affect the performance of the Cost of Funds Index and may
cause the Cost of Funds Index to move in a manner different from indices based
upon specific interest rates, such as the One Year Treasury Index. Because of
the various origination dates and maturities of the liabilities of members of
the FHLB Eleventh District upon which the Cost of Funds Index is based, among
other things, at any time the Cost of Funds Index may not reflect the average
prevailing market interest rates on new liabilities of similar maturities. There
can be no assurance that the Cost of Funds Index will necessarily move in the
same direction or at the same rate as prevailing interest rates since as longer
term deposits or borrowings mature and are renewed at market interest rates, the
Cost of Funds Index will rise or fall depending upon the differential between
the prior and the new rates on such deposits and borrowings. In addition,
dislocations in the thrift industry in recent years have caused and may continue
to cause the cost of funds of thrift institutions to change for reasons
unrelated to changes in general interest rate levels. Furthermore, any movement
in the Cost of Funds Index as compared to other indices based upon specific
interest rates may be affected by changes instituted by the FHLB of San
Francisco in the method used to calculate the Cost of Funds Index. To the extent
that the Cost of Funds Index may reflect interest changes on a more delayed
basis than other indices, in a period of rising interest rates, any increase may
produce a higher yield later than would be produced by such other indices, and
in a period of declining interest rates, the Cost of Funds Index may remain
higher than other market interest rates which may result in a higher level of
principal prepayments on mortgage loans which adjust in accordance with the Cost
of Funds Index than mortgage loans which adjust in accordance with other
indices.
LIBOR, the London interbank offered rate, is the interest rate that the most
creditworthy international banks dealing in U.S. dollar-denominated deposits and
loans charge each other for large dollar-denominated loans. LIBOR is also
usually the base rate for large dollar-denominated loans in the international
market. LIBOR is generally quoted for loans having rate adjustments at one,
three, six or twelve month intervals.
ASSET-BACKED SECURITIES. The asset-backed securities in which the U.S. Bond
Index Portfolio may invest are limited to those which are readily marketable,
dollar-denominated and rated BBB or higher by S&P or Baa or higher by Moody's.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities do not have the benefit
of the same type of security interest in the related collateral. Credit card
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
give such debtors the right to avoid payment of certain amounts owed on the
credit cards, thereby reducing the balance due. Most issuers of automobile
receivables permit the servicer to retain possession of the underlying
obligations. If the servicer were to sell these obligations to another party,
there is a risk that the purchaser would acquire an interest superior to that of
the holders of the related automobile receivables. In addition, because of the
large number of vehicles involved in a typical issuance and technical
requirements under state laws, the trustee for the holders of the automobile
receivables may not have a proper security interest in all of the obligations
backing such receivables. Therefore, there is the possibility that recoveries on
repossessed collateral may not, in some cases, be available to support payments
on these securities.
MORTGAGE-BACKED SECURITIES AND ASSET-BACKED SECURITIES--TYPES OF CREDIT SUPPORT.
The mortgage-backed securities in which the U.S. Bond Index Portfolio may invest
are limited to those relating to residential mortgages. Mortgage-backed
securities and asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failure by obligors on underlying assets to make payments, such
securities may contain elements of credit support. Such credit support falls
into two categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the pass-through of
payments due on the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default enhances the likelihood of
ultimate payment of the obligations on at least a portion of the assets in the
pool. Such protection may be provided through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor from third parties, through
various means of structuring the transaction or through a combination of such
approaches. The U.S. Bond Index Portfolio will not pay any additional fees for
such credit support, although the existence of credit support may increase the
price of a security.
The ratings of mortgage-backed securities and asset-backed securities for which
third-party credit enhancement provides liquidity protection or protection
against losses from default are generally dependent upon the continued
creditworthiness of the provider of the credit enhancement. The ratings of such
securities could be subject to reduction in the event of deterioration in the
creditworthiness of the credit enhancement provider even in cases where the
delinquency and loss experience on the underlying pool of assets is better than
expected.
Examples of credit support arising out of the structure of the transaction
include "senior-subordinated securities" (multiple class securities with one or
more classes subordinate to other classes as to the payment of principal thereof
and interest thereon, with the result that defaults on the underlying assets are
borne first by the holders of the subordinated class), creation of "reserve
funds" (where cash or investments, sometimes funded from a portion of the
payments on the underlying assets, are held in reserve against future losses)
and "over-collateralization" (where the scheduled payments on, or the principal
amount of, the underlying assets exceed those required to make payment of the
securities and pay any servicing or other fees). The degree of credit support
provided for each issue is generally based on historical information with
respect to the level of credit risk associated with the underlying assets.
Delinquency or loss in excess of that which is anticipated could adversely
affect the return on an investment in such a security.
STRIPPED MORTGAGE-BACKED SECURITIES. The cash flows and yields on IO and PO
classes are extremely sensitive to the rate of principal payments (including
prepayments) on the related underlying mortgage assets. For example, a rapid or
slow rate of principal payments may have a material adverse effect on the yield
to maturity of IOs or POs, respectively. If the underlying mortgage assets
experience greater than anticipated prepayments of principal, an investor may
fail to recoup fully its initial investment in an IO class of a stripped
mortgage-backed security, even if the IO class is rated AAA or Aaa. Conversely,
if the underlying mortgage assets experience slower than anticipated prepayments
of principal, the yield on a PO class will be affected more severely than would
be the case with a traditional mortgage-backed security.
FOREIGN SECURITIES: SPECIAL CONSIDERATIONS CONCERNING 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.
The securities markets in Asia 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 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 Asia 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 Asian securities markets may represent a disproportionately large percentage
of market capitalization and trading value. The limited liquidity of securities
markets in Asia may also affect the Portfolio's ability to acquire or dispose of
securities at the price and time it wishes to do so. The EAFE(R) Equity Index
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 Asian
securities markets are susceptible to being influenced by large investors
trading significant blocks of securities.
Many 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.
The EAFE(R) Equity Index Portfolio invests in securities denominated in
currencies of Asian 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.
<PAGE>
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
GENERAL. The successful use of such instruments draws upon the Adviser's skill
and experience with respect to such instruments and usually depends on the
Adviser's ability to forecast interest rate and currency exchange rate movements
correctly. Should interest or exchange rates move in an unexpected manner, a
Portfolio may not achieve the anticipated benefits of futures contracts or
options on futures contracts or may realize losses and thus will be in a worse
position than if such strategies had not been used. In addition, the correlation
between movements in the price of futures contracts or options on futures
contracts and movements in the price of the securities and currencies hedged or
used for cover will not be perfect and could produce unanticipated losses.
Successful use of the futures contract and related options are subject to
special risk considerations. A liquid secondary market for any futures or
options contract may not be available when a futures or options position is
sought to be closed. In addition, there may be an imperfect correlation between
movements in the securities or currency in the Portfolio. Successful use of
futures or options contracts is further dependent on Bankers Trust's ability to
correctly predict movements in the securities or foreign currency markets and no
assurance can be given that its judgment will be correct. Successful use of
options on securities or stock indices are subject to similar risk
considerations. In addition, by writing covered call options, the Portfolio
gives up the opportunity, while the option is in effect, to profit from any
price increase in the underlying securities above the options exercise price.
FUTURES CONTRACTS. Each Portfolio may enter into contracts for the purchase or
sale for future delivery of fixed-income securities, foreign currencies, or
contracts based on financial indices including any index of U.S. Government
securities, foreign government securities or corporate debt securities. U.S.
futures contracts have been designed by exchanges which have been designated
"contracts markets" by the CFTC, and must be executed through a futures
commission merchant, or brokerage firm, which is a member of the relevant
contract market. Futures contracts trade on a number of exchange markets, and,
through their clearing corporations, the exchanges guarantee performance of the
contracts as between the clearing members of the exchange. Each Portfolio may
enter into futures contracts which are based on debt securities that are backed
by the full faith and credit of the U.S. government, such as long-term U.S.
Treasury Bonds, Treasury Notes, Ginnie Mae modified pass-through mortgage-backed
securities and three-month U.S. Treasury Bills. A Portfolio may also enter into
futures contracts which are based on bonds issued by entities other than the
U.S. government.
At the same time a futures contract is purchased or sold, the Portfolio must
allocate cash or securities as a deposit payment ("initial deposit"). It is
expected that the initial deposit would be approximately 1 1/2% to 5% of a
contract's face value. Daily thereafter, the futures contract is valued and the
payment of "variation margin" may be required, since each day the Portfolio
would provide or receive cash that reflects any decline or increase in the
contract's value.
At the time of delivery of securities pursuant to such a contract, adjustments
are made to recognize differences in value arising from the delivery of
securities with a different interest rate from that specified in the contract.
In some (but not many) cases, securities called for by a futures contract may
not have been issued when the contract was written.
Although futures contracts by their terms call for the actual delivery or
acquisition of securities, in most cases the contractual obligation is fulfilled
before the date of the contract without having to make or take delivery of the
securities. The offsetting of a contractual obligation is accomplished by buying
(or selling, as the case may be) on a commodities exchange an identical futures
contract calling for delivery in the same month. Such a transaction, which is
effected through a member of an exchange, cancels the obligation to make or take
delivery of the securities. Since all transactions in the futures market are
made, offset or fulfilled through a clearinghouse associated with the exchange
on which the contracts are traded, the Portfolio will incur brokerage fees when
it purchases or sells futures contracts.
The purpose of the acquisition or sale of a futures contract, in the case of a
Portfolio which holds or intends to acquire fixed-income securities, is to
attempt to protect the Portfolio from fluctuations in interest or foreign
exchange rates without actually buying or selling fixed-income securities or
foreign currencies. For example, if interest rates were expected to increase,
the Portfolio might enter into futures contracts for the sale of debt
securities. Such a sale would have much the same effect as selling an equivalent
value of the debt securities owned by the Portfolio. If interest rates did
increase, the value of the debt security in the Portfolio would decline, but the
value of the futures contracts to the Portfolio would increase at approximately
the same rate, thereby keeping the net asset value of the Portfolio from
declining as much as it otherwise would have. The Portfolio could accomplish
similar results by selling debt securities and investing in bonds with short
maturities when interest rates are expected to increase. However, since the
futures market is more liquid than the cash market, the use of futures contracts
as an investment technique allows the Portfolio to maintain a defensive position
without having to sell its portfolio securities.
Similarly, when it is expected that interest rates may decline, futures
contracts may be purchased to attempt to hedge against anticipated purchases of
debt securities at higher prices. Since the fluctuations in the value of futures
contracts should be similar to those of debt securities, a Portfolio could take
advantage of the anticipated rise in the value of debt securities without
actually buying them until the market had stabilized. At that time, the futures
contracts could be liquidated and the Portfolio could then buy debt securities
on the cash market. To the extent a Portfolio enters into futures contracts for
this purpose, the assets in the segregated asset account maintained to cover the
Portfolio's obligations with respect to such futures contracts will consist of
cash, cash equivalents or high quality liquid debt securities from its portfolio
in an amount equal to the difference between the fluctuating market value of
such futures contracts and the aggregate value of the initial and variation
margin payments made by the Portfolio with respect to such futures contracts.
The ordinary spreads between prices in the cash and futures market, due to
differences in the nature of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by the Adviser may still not
result in a successful transaction.
In addition, futures contracts entail risks. Although the Adviser believes that
use of such contracts will benefit the Portfolios, if the Adviser's investment
judgment about the general direction of interest rates is incorrect, a
Portfolio's overall performance would be poorer than if it had not entered into
any such contract. For example, if a Portfolio has hedged against the
possibility of an increase in interest rates which would adversely affect the
price of debt securities held in its portfolio and interest rates decrease
instead, the Portfolio will lose part or all of the benefit of the increased
value of its debt securities which it has hedged because it will have offsetting
losses in its futures positions. In addition, in such situations, if a Portfolio
has insufficient cash, it may have to sell debt securities from its portfolio to
meet daily variation margin requirements. Such sales of bonds may be, but will
not necessarily be, at increased prices which reflect the rising market. A
Portfolio may have to sell securities at a time when it may be disadvantageous
to do so.
OPTIONS ON FUTURES CONTRACTS. Each Portfolio may purchase and write options on
futures contracts for hedging purposes. The purchase of a call option on a
futures contract is similar in some respects to the purchase of a call option on
an individual security. Depending on the pricing of the option compared to
either the price of the futures contract upon which it is based or the price of
the underlying debt securities, it may or may not be less risky than ownership
of the futures contract or underlying debt securities. As with the purchase of
futures contracts, when a Portfolio is not fully invested it may purchase a call
option on a futures contract to hedge against a market advance due to declining
interest rates.
The writing of a call option on a futures contract constitutes a partial hedge
against declining prices of the underlying security or foreign currency which is
deliverable upon exercise of the futures contract. If the futures price at
expiration of the option is below the exercise price, a Portfolio will retain
the full amount of the option premium which provides a partial hedge against any
decline that may have occurred in the Portfolio's portfolio holdings. The
writing of a put option on a futures contract constitutes a partial hedge
against increasing prices of the underlying security or foreign currency which
is deliverable upon exercise of the futures contract. If the futures price at
expiration of the option is higher than the exercise price, the Portfolio will
retain the full amount of the option premium which provides a partial hedge
against any increase in the price of securities which the Portfolio intends to
purchase. If a put or call option the Portfolio has written is exercised, the
Portfolio will incur a loss which will be reduced by the amount of the premium
it receives. Depending on the degree of correlation between changes in the value
of its portfolio securities and changes in the value of its futures positions,
the Portfolio's losses from existing options on futures may to some extent be
reduced or increased by changes in the value of portfolio securities.
The purchase of a put option on a futures contract is similar in some respects
to the purchase of protective put options on portfolio securities. For example,
a Portfolio may purchase a put option on a futures contract to hedge its
portfolio against the risk of rising interest rates.
The amount of risk a Portfolio assumes when it purchases an option on a futures
contract is the premium paid for the option plus related transaction costs. In
addition to the correlation risks discussed above, the purchase of an option
also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the option purchased.
The Board of Trustees of each Portfolio has adopted the requirement that futures
contracts and options on futures contracts be used as a hedge and may also use
stock index futures on continual basis to equitize cash so that the Portfolio
may maintain 100% equity exposure. In addition to this requirement, the Board of
Trustees of each Portfolio has also adopted a restriction that the Portfolio
will not enter into any futures contracts or options on futures contracts if
immediately thereafter the amount of margin deposits on all the futures
contracts of the Portfolio and premiums paid on outstanding options on futures
contracts owned by the Portfolio (other than those entered into for bona fide
hedging purposes) would exceed 5% of the market value of the total assets of the
Portfolio.
OPTIONS ON FOREIGN CURRENCIES. The EAFE(R) Equity Index Portfolio may purchase
and write options on foreign currencies for hedging purposes in a manner similar
to that in which futures contracts on foreign currencies, or forward contracts,
will be utilized. For example, a decline in the dollar value of a foreign
currency in which portfolio securities are denominated will reduce the dollar
value of such securities, even if their value in the foreign currency remains
constant. In order to protect against such diminutions in the value of portfolio
securities, the Portfolio may purchase put options on the foreign currency. If
the value of the currency does decline, the Portfolio will have the right to
sell such currency for a fixed amount in dollars and will thereby offset, in
whole or in part, the adverse effect on its portfolio which otherwise would have
resulted.
Conversely, where a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby increasing the cost of such
securities, the EAFE(R) Equity Index Portfolio may purchase call options
thereon. The purchase of such options could offset, at least partially, the
effects of the adverse movements in exchange rates. As in the case of other
types of options, however, the benefit to the Portfolio deriving from purchases
of foreign currency options will be reduced by the amount of the premium and
related transaction costs. In addition, where currency exchange rates do not
move in the direction or to the extent anticipated, the Portfolio could sustain
losses on transactions in foreign currency options which would require it to
forego a portion or all of the benefits of advantageous changes in such rates.
The EAFE(R) Equity Index Portfolio may write options on foreign currencies for
the same types of hedging purposes. For example, where the Portfolio anticipates
a decline in the dollar value of foreign currency denominated securities due to
adverse fluctuations in exchange rates it could, instead of purchasing a put
option, write a call option on the relevant currency. If the expected decline
occurs, the options will most likely not be exercised, and the diminution in
value of portfolio securities will be offset by the amount of the premium
received.
Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, the EAFE(R) Equity
Index Portfolio could write a put option on the relevant currency which, if
rates move in the manner projected, will expire unexercised and allow the
Portfolio to hedge such increased cost up to the amount of the premium. As in
the case of other types of options, however, the writing of a foreign currency
option will constitute only a partial hedge up to the amount of the premium, and
only if rates move in the expected direction. If this does not occur, the option
may be exercised and the Portfolio would be required to purchase or sell the
underlying currency at a loss which may not be offset by the amount of the
premium. Through the writing of options on foreign currencies, the Portfolio
also may be required to forego all or a portion of the benefits which might
otherwise have been obtained from favorable movements in exchange rates.
The EAFE(R) Equity Index Portfolio intends to write covered call options on
foreign currencies. A call option written on a foreign currency by the Portfolio
is "covered" if the Portfolio owns the underlying foreign currency covered by
the call or has an absolute and immediate right to acquire that foreign currency
without additional cash consideration (or for additional cash consideration held
in a segregated account by its Custodian) upon conversion or exchange of other
foreign currency held in its portfolio. A call option is also covered if the
Portfolio has a call on the same foreign currency and in the same principal
amount as the call written where the exercise price of the call held (a) is
equal to or less than the exercise price of the call written or (b) is greater
than the exercise price of the call written if the difference is maintained by
the Portfolio in cash, U.S. Government securities and other high quality liquid
debt securities in a segregated account with its custodian.
The EAFE(R) Equity Index Portfolio also intends to write call options on foreign
currencies that are not covered for cross-hedging purposes. A call option on a
foreign currency is for cross-hedging purposes if it is not covered, but is
designed to provide a hedge against a decline in the U.S. dollar value of a
security which the Portfolio owns or has the right to acquire and which is
denominated in the currency underlying the option due to an adverse change in
the exchange rate. In such circumstances, the Portfolio collateralizes the
option by maintaining in a segregated account with its custodian, cash or U.S.
Government securities or other high quality liquid debt securities in an amount
not less than the value of the underlying foreign currency in U.S. dollars
marked to market daily.
<PAGE>
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 (the "OCC"), thereby
reducing the risk of counterparty default. Further, a liquid secondary market in
options traded on a national securities exchange may be more readily available
than in the over-the-counter market, potentially permitting a Portfolio to
liquidate open positions at a profit prior to exercise or expiration, or to
limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however, is
subject to the risks of the availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effects of other political and
economic events. In addition, exchange-traded options on foreign currencies
involve certain risks not presented by the over-the-counter market. For example,
exercise and settlement of such options must be made exclusively through the
OCC, which has established banking relationships in applicable foreign countries
for this purpose. As a result, the OCC may, if it determines that foreign
governmental restrictions or taxes would prevent the orderly settlement of
foreign currency option exercises, or would result in undue burdens on the OCC
or its clearing member, impose special procedures on exercise and settlement,
such as technical changes in the mechanics of delivery of currency, the fixing
of dollar settlement prices or prohibitions on exercise.
As in the case of forward contracts, certain options on foreign currencies are
traded over-the-counter and involve liquidity and credit risks which may not be
present in the case of exchange-traded currency options. A Portfolio's ability
to terminate over-the-counter options will be more limited than with
exchange-traded options. It is also possible that broker-dealers participating
in over-the-counter options transactions will not fulfill their obligations.
Until such time as the staff of the SEC changes its position, each Portfolio
will treat purchased over-the-counter options and assets used to cover written
over-the-counter options as illiquid securities. With respect to options written
with primary dealers in U.S. Government securities pursuant to an agreement
requiring a closing purchase transaction at a formula price, the amount of
illiquid securities may be calculated with reference to the repurchase formula.
In addition, futures contracts, options on futures contracts, forward contracts
and options on foreign currencies may be traded on foreign exchanges. Such
transactions are subject to the risk of governmental actions affecting trading
in or the prices of foreign currencies or securities. The value of such
positions also could be adversely affected by: (i) other complex foreign
political and economic factors; (ii) lesser availability than in the United
States of data on which to make trading decisions; (iii) delays in the
Portfolio's ability to act upon economic events occurring in foreign markets
during nonbusiness hours in the United States; (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States; and (v) lesser trading volume.
OPTIONS ON SECURITIES. Each Portfolio may write (sell) covered call and put
options to a limited extent on its portfolio securities ("covered options") in
an attempt to increase income. However, the Portfolio may forgo the benefits of
appreciation on securities sold or may pay more than the market price on
securities acquired pursuant to call and put options written by the Portfolio.
When a Portfolio writes a covered call option, it gives the purchaser of the
option the right to buy the underlying security at the price specified in the
option (the "exercise price") by exercising the option at any time during the
option period. If the option expires unexercised, the Portfolio will realize
income in an amount equal to the premium received for writing the option. If the
option is exercised, a decision over which the Portfolio has no control, the
Portfolio must sell the underlying security to the option holder at the exercise
price. By writing a covered call option, the Portfolio forgoes, in exchange for
the premium less the commission ("net premium"), the opportunity to profit
during the option period from an increase in the market value of the underlying
security above the exercise price.
When a Portfolio writes a covered put option, it gives the purchaser of the
option the right to sell the underlying security to the Portfolio at the
specified exercise price at any time during the option period. If the option
expires unexercised, the Portfolio will realize income in the amount of the
premium received for writing the option. If the put option is exercised, a
decision over which the Portfolio has no control, the Portfolio must purchase
the underlying security from the option holder at the exercise price. By writing
a covered put option, the Portfolio, in exchange for the net premium received,
accepts the risk of a decline in the market value of the underlying security
below the exercise price. The Portfolio will only write put options involving
securities for which a determination is made at the time the option is written
that the Portfolio wishes to acquire the securities at the exercise price.
A Portfolio may terminate its obligation as the writer of a call or put option
by purchasing an option with the same exercise price and expiration date as the
option previously written. This transaction is called a "closing purchase
transaction." The Portfolio will realize a profit or loss for a closing purchase
transaction if the amount paid to purchase an option is less or more, as the
case may be, than the amount received from the sale thereof. To close out a
position as a purchaser of an option, the Portfolio, may make a "closing sale
transaction" which involves liquidating the Portfolio's position by selling the
option previously purchased. Where the Portfolio cannot effect a closing
purchase transaction, it may be forced to incur brokerage commissions or dealer
spreads in selling securities it receives or it may be forced to hold underlying
securities until an option is exercised or expires.
When a Portfolio writes an option, an amount equal to the net premium received
by the Portfolio is included in the liability section of the Portfolio's
Statement of Assets and Liabilities as a deferred credit. The amount of the
deferred credit will be subsequently marked to market to reflect the current
market value of the option written. The current market value of a traded option
is the last sale price or, in the absence of a sale, the mean between the
closing bid and asked price. If an option expires on its stipulated expiration
date or if the Portfolio enters into a closing purchase transaction, the
Portfolio will realize a gain (or loss if the cost of a closing purchase
transaction exceeds the premium received when the option was sold), and the
deferred credit related to such option will be eliminated. If a call option is
exercised, the Portfolio will realize a gain or loss from the sale of the
underlying security and the proceeds of the sale will be increased by the
premium originally received. The writing of covered call options may be deemed
to involve the pledge of the securities against which the option is being
written. Securities against which call options are written will be segregated on
the books of the custodian for the Portfolio.
A Portfolio may purchase call and put options on any securities in which it may
invest. The Portfolio would normally purchase a call option in anticipation of
an increase in the market value of such securities. The purchase of a call
option would entitle the Portfolio, in exchange for the premium paid, to
purchase a security at a specified price during the option period. The Portfolio
would ordinarily have a gain if the value of the securities increased above the
exercise price sufficiently to cover the premium and would have a loss if the
value of the securities remained at or below the exercise price during the
option period.
A Portfolio would normally purchase put options in anticipation of a decline in
the market value of securities in its portfolio ("protective puts") or
securities of the type in which it is permitted to invest. The purchase of a put
option would entitle the Portfolio, in exchange for the premium paid, to sell a
security, which may or may not be held in the Portfolio's portfolio, at a
specified price during the option period. The purchase of protective puts is
designed merely to offset or hedge against a decline in the market value of the
Portfolio's portfolio securities. Put options also may be purchased by the
Portfolio for the purpose of affirmatively benefiting from a decline in the
price of securities which the Portfolio does not own. The Portfolio would
ordinarily recognize a gain if the value of the securities decreased below the
exercise price sufficiently to cover the premium and would recognize a loss if
the value of the securities remained at or above the exercise price. Gains and
losses on the purchase of protective put options would tend to be offset by
countervailing changes in the value of underlying portfolio securities.
Each Portfolio has adopted certain other nonfundamental policies concerning
option transactions which are discussed below. The Portfolio's activities in
options may also be restricted by the requirements of the Internal Revenue Code
of 1986, as amended (the "Code"), for qualification as a regulated investment
company.
The hours of trading for options on securities may not conform to the hours
during which the underlying securities are traded. To the extent that the option
markets close before the markets for the underlying securities, significant
price and rate movements can take place in the underlying securities markets
that cannot be reflected in the option markets. It is impossible to predict the
volume of trading that may exist in such options, and there can be no assurance
that viable exchange markets will develop or continue.
A Portfolio may engage in over-the-counter options transactions with
broker-dealers who make markets in these options. At present, approximately ten
broker-dealers, including several of the largest primary dealers in U.S.
government securities, make these markets. The ability to terminate
over-the-counter option positions is more limited than with exchange-traded
option positions because the predominant market is the issuing broker rather
than an exchange, and may involve the risk that broker-dealers participating in
such transactions will not fulfill their obligations. To reduce this risk, the
Portfolio will purchase such options only from broker-dealers who are primary
government securities dealers recognized by the Federal Reserve Bank of New York
and who agree to (and are expected to be capable of) entering into closing
transactions, although there can be no guarantee that any such option will be
liquidated at a favorable price prior to expiration. The Adviser will monitor
the creditworthiness of dealers with whom the Portfolio enters into such options
transactions under the general supervision of the Portfolios' Trustees.
OPTIONS ON SECURITIES INDICES. In addition to options on securities, each
Portfolio may also purchase and write (sell) call and put options on securities
indices. Such options give the holder the right to receive a cash settlement
during the term of the option based upon the difference between the exercise
price and the value of the index. Such options will be used for the purposes
described above under "Options on Securities."
<PAGE>
EAFE(R) Equity Index Portfolio may, to the extent allowed by Federal and state
securities laws, invest in securities indices instead of investing directly in
individual foreign securities.
Options on securities indices entail risks in addition to the risks of options
on securities. The absence of a liquid secondary market to close out options
positions on securities indices is more likely to occur, although the Portfolio
generally will only purchase or write such an option if the Adviser believes the
option can be closed out.
Use of options on securities indices also entails the risk that trading in such
options may be interrupted if trading in certain securities included in the
index is interrupted. The Portfolio will not purchase such options unless the
Adviser believes the market is sufficiently developed such that the risk of
trading in such options is no greater than the risk of trading in options on
securities.
Price movements in a Portfolio's portfolio may not correlate precisely with
movements in the level of an index and, therefore, the use of options on indices
cannot serve as a complete hedge. Because options on securities indices require
settlement in cash, the Adviser may be forced to liquidate portfolio securities
to meet settlement obligations.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Because each Portfolio may buy and
sell securities denominated in currencies other than the U.S. dollar and
receives interest, dividends and sale proceeds in currencies other than the U.S.
dollar, each Portfolio from time to time may enter into foreign currency
exchange transactions to convert to and from different foreign currencies and to
convert foreign currencies to and from the U.S. dollar. A Portfolio either
enters into these transactions on a spot (I.E., cash) basis at the spot rate
prevailing in the foreign currency exchange market or uses forward contracts to
purchase or sell foreign currencies.
A forward foreign currency exchange contract is an obligation by a Portfolio to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract. Forward foreign currency exchange
contracts establish an exchange rate at a future date. These contracts are
transferable in the interbank market conducted directly between currency traders
(usually large commercial banks) and their customers. A forward foreign currency
exchange contract generally has no deposit requirement and is traded at a net
price without commission. Each Portfolio maintains with its custodian a
segregated account of high grade liquid assets in an amount at least equal to
its obligations under each forward foreign currency exchange contract. Neither
spot transactions nor forward foreign currency exchange contracts eliminate
fluctuations in the prices of the Portfolio's securities or in foreign exchange
rates, or prevent loss if the prices of these securities should decline.
Each Portfolio may enter into foreign currency hedging transactions in an
attempt to protect against changes in foreign currency exchange rates between
the trade and settlement dates of specific securities transactions or changes in
foreign currency exchange rates that would adversely affect a portfolio position
or an anticipated investment position. Since consideration of the prospect for
currency parities will be incorporated into Bankers Trust's long-term investment
decisions, a Portfolio will not routinely enter into foreign currency hedging
transactions with respect to security transactions; however, Bankers Trust
believes that it is important to have the flexibility to enter into foreign
currency hedging transactions when it determines that the transactions would be
in the Portfolio's best interest. Although these transactions tend to minimize
the risk of loss due to a decline in the value of the hedged currency, at the
same time they tend to limit any potential gain that might be realized should
the value of the hedged currency increase. The precise matching of the forward
contract amounts and the value of the securities involved will not generally be
possible because the future value of such securities in foreign currencies will
change as a consequence of market movements in the value of such securities
between the date the forward contract is entered into and the date it matures.
The projection of currency market movements is extremely difficult, and the
successful execution of a hedging strategy is highly uncertain.
While these contracts are not presently regulated by the CFTC, the CFTC may in
the future assert authority to regulate forward contracts. In such event the
Portfolio's ability to utilize forward contracts in the manner set forth in the
Prospectus may be restricted. Forward contracts may reduce the potential gain
from a positive change in the relationship between the U.S. dollar and foreign
currencies. Unanticipated changes in currency prices may result in poorer
overall performance for the Portfolio than if it had not entered into such
contracts. The use of foreign currency forward contracts may not eliminate
fluctuations in the underlying U.S. dollar equivalent value of the prices of or
rates of return on a Portfolio's foreign currency denominated portfolio
securities and the use of such techniques will subject a Portfolio to certain
risks.
The matching of the increase in value of a forward contract and the decline in
the U.S. dollar equivalent value of the foreign currency denominated asset that
is the subject of the hedge generally will not be precise. In addition, a
Portfolio may not always be able to enter into foreign currency forward
contracts at attractive prices and this will limit the Portfolio's ability to
use such contract to hedge or cross-hedge its assets. Also, with regard to a
Portfolio's use of cross-hedges, there can be no assurance that historical
correlations between the movement of certain foreign currencies relative to the
U.S. dollar will continue. Thus, at any time poor correlation may exist between
movements in the exchange rates of the foreign currencies underlying a
Portfolio's cross-hedges and the movements in the exchange rates of the foreign
currencies in which the Portfolio's assets that are the subject of such
cross-hedges are denominated.
YEAR 2000 MATTERS
Like other mutual funds, financial and business organizations and individuals
around the world, the Funds could be adversely affected if the computer systems
used by Bankers Trust and other service providers do not properly process and
calculate date-related information and data from and after January 1, 2000. This
is commonly known as the "Year 2000 Problem." Bankers Trust is taking steps that
it believes are reasonably designed to address the Year 2000 Problem with
respect to computer systems that it uses and to obtain reasonable assurances
that comparable steps are being taken by the Funds' other major service
providers. At this time, however, there can be no assurance that these steps
will be sufficient to avoid any adverse impact to the Fund nor can there be any
assurance that the Year 2000 Problem will not have an adverse effect on the
companies whose securities are held by the Fund or on global markets or
economies, generally.
RATING SERVICES
The ratings of rating services represent their opinions as to the quality of the
securities that they undertake to rate. It should be emphasized, however, that
ratings are relative and subjective and are not absolute standards of quality.
Although these ratings are an initial criterion for selection of portfolio
investments, Bankers Trust also makes its own evaluation of these securities,
subject to review by the Board of Trustees. After purchase by a Portfolio, an
obligation may cease to be rated or its rating may be reduced below the minimum
required for purchase by the Portfolio. Neither event would require a Fund to
eliminate the obligation from its portfolio, but Bankers Trust will consider
such an event in its determination of whether a Fund should continue to hold the
obligation. A description of the ratings used herein and in the Funds'
Prospectuses is set forth in the Appendix herein.
INVESTMENT RESTRICTIONS
The following investment restrictions are "fundamental policies" of each Fund
and each Portfolio and may not be changed with respect to the Fund or the
Portfolio without the approval of a "majority of the outstanding voting
securities" of the Fund or the Portfolio, as the case may be. "Majority of the
outstanding voting securities" under the 1940 Act, and as used in this SAI and
the Prospectus, means, with respect to the Fund (or the Portfolio), the lesser
of (i) 67% or more of the outstanding voting securities of the Fund (or of the
total beneficial interests of the Portfolio) present at a meeting, if the
holders of more than 50% of the outstanding voting securities of the Fund or of
the total beneficial interests of the Portfolio) are present or represented by
proxy or (ii) more than 50% of the outstanding voting securities of the Fund (or
of the total beneficial interests of the Portfolio). Whenever the Trust is
requested to vote on a fundamental policy of a Portfolio, the Trust will hold a
meeting of the corresponding Fund's shareholders and will cast its vote as
instructed by that Fund's shareholders. Fund shareholders who do not vote will
not affect the Trust's votes at the Portfolio meeting. The percentage of the
Trust's votes representing Fund shareholders not voting will be voted by the
Trustees of the Trust in the same proportion as the Fund shareholders who do, in
fact, vote.
As a matter of fundamental policy, no Portfolio (or Fund) may (except that no
investment restriction of a Fund shall prevent a Fund from investing all of its
Assets in an open-end investment company with substantially the same investment
objectives):
(1) borrow money or mortgage or hypothecate assets of the Portfolio (Fund),
except that in an amount not to exceed 1/3 of the current value of the
Portfolio's (Fund's) assets, it may borrow money as a temporary measure for
extraordinary or emergency purposes and enter into reverse repurchase agreements
or dollar roll transactions, and except that it may pledge, mortgage or
hypothecate not more than 1/3 of such assets to secure such borrowings (it is
intended that money would be borrowed only from banks and only either to
accommodate requests for the withdrawal of beneficial interests (redemption of
shares) while effecting an orderly liquidation of portfolio securities or to
maintain liquidity in the event of an unanticipated failure to complete a
portfolio security transaction or other similar situations) or reverse
repurchase agreements, provided that collateral arrangements with respect to
options and futures, including deposits of initial deposit and variation margin,
are not considered a pledge of assets for purposes of this restriction and
except that assets may be pledged to secure letters of credit solely for the
purpose of participating in a captive insurance company sponsored by the
Investment Company Institute; for additional related restrictions, see clause
(i) under the caption "Additional Restrictions" below (as an operating policy,
the Portfolios may not engage in dollar roll transactions);
(2) underwrite securities issued by other persons except insofar as the
Portfolios (Trust or the Funds) may technically be deemed an underwriter under
the 1933 Act in selling a portfolio security;
(3) make loans to other persons except: (a) through the lending of the
Portfolio's (Fund's) portfolio securities and provided that any such loans not
exceed 30% of the Portfolio's (Fund's) total assets (taken at market value); (b)
through the use of repurchase agreements or the purchase of short-term
obligations; or (c) by purchasing a portion of an issue of debt securities of
types distributed publicly or privately;
(4) purchase or sell real estate (including limited partnership interests but
excluding securities secured by real estate or interests therein), interests in
oil, gas or mineral leases, commodities or commodity contracts (except futures
and option contracts) in the ordinary course of business (except that the
Portfolio (Trust) may hold and sell, for the Portfolio's (Fund's) portfolio,
real estate acquired as a result of the Portfolio's (Fund's) ownership of
securities);
<PAGE>
(5) concentrate its investments in any particular industry (excluding U.S.
Government securities), but if it is deemed appropriate for the achievement of a
Portfolio's (Fund's) investment objective(s), up to 25% of its total assets may
be invested in any one industry; and
(6) issue any senior security (as that term is defined in the 1940 Act) if such
issuance is specifically prohibited by the 1940 Act or the rules and regulations
promulgated thereunder, provided that collateral arrangements with respect to
options and futures, including deposits of initial deposit and variation margin,
are not considered to be the issuance of a senior security for purposes of this
restriction.
ADDITIONAL RESTRICTIONS. In order to comply with certain statutes and policies
each Portfolio (or the Trust, on behalf of each Fund) will not as a matter of
operating policy (except that no operating policy shall prevent a Fund from
investing all of its Assets in an open-end investment company with substantially
the same investment objectives):
(i) borrow money (including through reverse repurchase or forward roll
transactions) for any purpose in excess of 5% of the Portfolio's (Fund's)
total assets (taken at cost), except that the Portfolio (Fund) 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 (Fund'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
(Fund), and the value of securities of any one issuer in which the
Portfolio (Fund) is short exceeds the lesser of 2.0% of the value of the
Portfolio's (Fund'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 (Fund) 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 (Funds) have no current intention to
engage in short selling);
(v) invest for the purpose of exercising control or management;
(vi) purchase securities issued by any investment company except by purchase
in the open market where no commission or profit to a sponsor or dealer
results from such purchase other than the customary broker's commission,
or except when such purchase, though not made in the open market, is part
of a plan of merger or consolidation; provided, however, that securities
of any investment company will not be purchased for the Portfolio (Fund)
if such purchase at the time thereof would cause: (a) more than 10% of the
Portfolio's (Fund'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 (Fund'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 (Fund), unless permitted to exceed these imitations by
an exemptive order of the SEC; provided further that, except in the case
of a merger or consolidation, the Portfolio (Fund) shall not purchase any
securities of any open-end investment company unless the Portfolio (Fund)
(1) waives the investment advisory fee with respect to assets invested in
other open-end investment companies and (2) incurs no sales charge in
connection with the investment (as an operating policy, each Portfolio
will not invest in another open-end registered investment company);
(vii) invest more than 10% of the Portfolio's (Fund's) total assets (taken at
the greater of cost or market value) in securities that are restricted as
to resale under the 1933 Act (other than Rule 144A securities deemed
liquid by the Portfolio's (Fund's) Board of Trustees);
(viii) invest more than 15% of the Portfolio's (Fund's) net assets (taken at
the greater of cost or market value) in securities that are illiquid or
not readily marketable not including (a) Rule 144A securities that have
been determined to be liquid by the Board of Trustees; and (b) commercial
paper that is sold under section 4(2) of the 1933 Act which: (i) is not
traded flat or in default as to interest or principal; and (ii) is rated
in one of the two highest categories by at least two nationally recognized
statistical rating organizations and the Portfolio's (Fund's) Board of
Trustees have determined the commercial paper to be liquid; or (iii) is
rated in one of the two highest categories by one nationally recognized
statistical rating agency and the Portfolio's (Fund's) Board of Trustees
have determined that the commercial paper is equivalent quality and is
liquid;
(ix) no more than 5% of the Portfolio's (Fund's) total assets are invested in
securities issued by issuers which (including predecessors) have been in
operation less than three years;
(x)with respect to 75% of the Portfolio's (Fund's) total assets, purchase
securities of any issuer if such purchase at the time thereof would cause
the Portfolio (Fund) to hold more than 10% of any class of securities of
such issuer, for which purposes all indebtedness of an issuer shall be
deemed a single class and all preferred stock of an issuer shall be deemed
a single class, except that futures or option contracts shall not be
subject to this restriction;
(xi) if the Portfolio (Fund) is a "diversified" fund with respect to 75% of
its assets, invest more than 5% of its total assets in the securities
(excluding U.S. government securities) of any one issuer;
(xii) 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 partner of the Adviser, if after
the purchase of the securities of such issuer for the Portfolio (Fund) one
or more of such persons owns beneficially more than 1/2 of 1% of the
shares or securities, or both, all taken at market value, of such issuer,
and such persons owning more than 1/2 of 1% of such shares or securities
together own beneficially more than 5% of such shares or securities, or
both, all taken at market value;
(xiii)invest in warrants (other than warrants acquired by the Portfolio (Fund)
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 (Fund's) net assets or if, as a
result, more than 2% of the Portfolio's (Fund's) net assets would be
invested in warrants not listed on a recognized United States or foreign
stock exchange, to the extent permitted by applicable state securities
laws;
(xiv) write puts and calls on securities unless each of the following
conditions are met: (a) the security underlying the put or call is within
the Investment Practices of the Portfolio (Fund) 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 (Fund's) net assets; (c) the securities
subject to the exercise of the call written by the Portfolio (Fund) must
be owned by the Portfolio (Fund) at the time the call is sold and must
continue to be owned by the Portfolio (Fund) until the call has been
exercised, has lapsed, or the Portfolio (Fund) has purchased a closing
call, and such purchase has been confirmed, thereby extinguishing the
Portfolio's (Fund's) obligation to deliver securities pursuant to the call
it has sold; and (d) at the time a put is written, the Portfolio (Fund)
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 (Fund) 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 (Fund) has purchased a closing put, which is a put of the same
series as the one previously written); and
(xv) buy and sell puts and calls on securities, stock index futures or
options on stock index futures, or financial futures or options on
financial futures unless such options are written by other persons and:
(a) the options or futures are offered through the facilities of a
national securities association or are listed on a national securities or
commodities exchange, except for put and call options issued by non-U.S.
entities or listed on non-U.S. securities or commodities exchanges; (b)
the aggregate premiums paid on all such options which are held at any time
do not exceed 20% of the Portfolio's (Fund'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 (Fund'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.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
The Adviser is responsible for decisions to buy and sell securities, futures
contracts and options on such securities and futures for each Portfolio, the
selection of brokers, dealers and futures commission merchants to effect
transactions and the negotiation of brokerage commissions, if any.
Broker-dealers may receive brokerage commissions on portfolio transactions,
including options, futures and options on futures transactions and the purchase
and sale of underlying securities upon the exercise of options. Orders may be
directed to any broker-dealer or futures commission merchant, including to the
extent and in the manner permitted by applicable law, Bankers Trust or its
subsidiaries or affiliates. Purchases and sales of certain portfolio securities
on behalf of a Portfolio are frequently placed by the Adviser with the issuer or
a primary or secondary market-maker for these securities on a net basis, without
any brokerage commission being paid by the Portfolio. Trading does, however,
involve transaction costs. Transactions with dealers serving as market-makers
reflect the spread between the bid and asked prices. Transaction costs may also
include fees paid to third parties for information as to potential purchasers or
sellers of securities. Purchases of underwritten issues may be made which will
include an underwriting fee paid to the underwriter.
The Adviser seeks to evaluate the overall reasonableness of the brokerage
commissions paid (to the extent applicable) in placing orders for the purchase
and sale of securities for a Portfolio taking into account such factors as
price, commission (negotiable in the case of national securities exchange
transactions), if any, size of order, difficulty of execution and skill required
of the executing broker-dealer through familiarity with commissions charged on
comparable transactions, as well as by comparing commissions paid by the
Portfolio to reported commissions paid by others. The Adviser reviews on a
routine basis commission rates, execution and settlement services performed,
making internal and external comparisons.
The Adviser is authorized, consistent with Section 28(e) of the Securities
Exchange Act of 1934, as amended, when placing portfolio transactions for a
Portfolio with a broker to pay a brokerage commission (to the extent applicable)
in excess of that which another broker might have charged for effecting the same
transaction on account of the receipt of research, market or statistical
information. The term "research, market or statistical information" includes
advice as to the value of securities; the advisability of investing in,
purchasing or selling securities; the availability of securities or purchasers
or sellers of securities; and furnishing analyses and reports concerning
issuers, industries, securities, economic factors and trends, portfolio strategy
and the performance of accounts.
Consistent with the policy stated above, the Rules of Fair Practice of the NASD
and such other policies as the Trustees of the Portfolio may determine, the
Adviser may consider sales of shares of the Fund 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 each Portfolio's assets, as well as the assets of other clients.
Except for implementing the policies stated above, there is no intention to
place portfolio transactions with particular brokers or dealers or groups
thereof. In effecting transactions in over-the-counter securities, orders are
placed with the principal market-makers for the security being traded unless,
after exercising care, it appears that more favorable results are available
otherwise.
Although certain research, market and statistical information from brokers and
dealers can be useful to a Portfolio and to the Adviser, it is the opinion of
the management of the Portfolios that such information is only supplementary to
the Adviser's own research effort, since the information must still be analyzed,
weighed and reviewed by the Adviser's staff. Such information may be useful to
the Adviser in providing services to clients other than the Portfolios, and not
all such information is used by the Adviser in connection with the Portfolios.
Conversely, such information provided to the Adviser by brokers and dealers
through whom other clients of the Adviser effect securities transactions may be
useful to the Adviser in providing services to the Portfolios.
In certain instances there may be securities which are suitable for a Portfolio
as well as for one or more of the Adviser's other clients. Investment decisions
for a Portfolio and for the Adviser's other clients are made with a view to
achieving their respective investment objectives. It may develop that a
particular security is bought or sold for only one client even though it might
be held by, or bought or sold for, other clients. Likewise, a particular
security may be bought for one or more clients when one or more clients are
selling that same security. Some simultaneous transactions are inevitable when
several clients receive investment advice from the same investment adviser,
particularly when the same security is suitable for the investment objectives of
more than one client. When two or more clients are simultaneously engaged in the
purchase or sale of the same security, the securities are allocated among
clients in a manner believed to be equitable to each. It is recognized that in
some cases this system could have a detrimental effect on the price or volume of
the security as far as a Portfolio is concerned. However, it is believed that
the ability of a Portfolio to participate in volume transactions will produce
better executions for the Portfolio.
For the fiscal years ended December 31, 1997, 1996, and 1995, Equity 500 Index
Portfolio paid brokerage commissions in the amount of $341,058, $289,791, and
$172,924, respectively.
For the fiscal year ended December 31, 1997, and for the period from July 10,
1996 (commencement of operations) to December 31, 1996, the Small Cap Index
Portfolio, paid brokerage commissions in the amount of $64,041, and $55,569,
respectively.
For the fiscal year ended December 31, 1997 and for the period from January 24,
1996 (commencement of operations) to December 31, 1996, the EAFE Equity Index
Portfolio, paid brokerage commissions in the amount of $33,474, and $66,791,
respectively.
For the period from June 30, 1997 (commencement of operations) to December 31,
1997, U.S. Bond Index Portfolio did not pay any brokerage commissions.
PERFORMANCE INFORMATION
STANDARD PERFORMANCE INFORMATION
From time to time, quotations of a Fund's performance may be included in
advertisements, sales literature or shareholder reports. These performance
figures are calculated in the following manner:
YIELD: Yields for a Fund used in advertising are computed by dividing the
Fund's interest and dividend income for a given 30-day or one-month
period, net of expenses, by the average number of shares entitled to
receive distributions during the period, dividing this figure by the
Fund's net asset value per share at the end of the period, and annualizing
the result (assuming compounding of income) in order to arrive at an
annual percentage rate. Income is calculated for purpose of yield
quotations in accordance with standardized methods applicable to all stock
and bond mutual funds. Dividends from equity investments are treated as if
they were accrued on a daily basis, solely for the purpose of yield
calculations. In general, interest income is reduced with respect to bonds
trading at a premium over their par value by subtracting a portion of the
premium from income on a daily basis, and is increased with respect to
bonds trading at a discount by adding a portion of the discount to daily
income. Capital gains and losses generally are excluded from the
calculation.
Income calculated for the purposes of calculating a Fund's yield differs
from income as determined for other accounting purposes. Because of the
different accounting methods used, and because of the compounding assumed
in yield calculations, the yield quoted for a Fund may differ from the
rate of distributions of the Fund paid over the same period or the rate of
income reported in the Fund's financial statements.
TOTAL RETURN: A Fund's average annual total return is calculated for
certain periods by determining the average annual compounded rates of
return over those periods that would cause an investment of $1,000 (made
at the maximum public offering price with all distributions reinvested) to
reach the value of that investment at the end of the periods. A Fund may
also calculate total return figures which represent aggregate performance
over a period or year-by-year performance.
PERFORMANCE RESULTS: Any total return quotation provided for a Fund should
not be considered as representative of the performance of the Fund in the
future since the net asset value and public offering price of shares of
the Fund will vary based not only on the type, quality and maturities of
the securities held in the corresponding Portfolio, but also on changes in
the current value of such securities and on changes in the expenses of the
Fund and the corresponding Portfolio. These factors and possible
differences in the methods used to calculate total return should be
considered when comparing the total return of a Fund to total returns
published for other investment companies or other investment vehicles.
Total return reflects the performance of both principal and income.
COMPARISON OF FUND PERFORMANCE
Comparison of the quoted nonstandardized performance of various investments is
valid only if performance is calculated in the same manner. Since there are
different methods of calculating performance, investors should consider the
effect of the methods used to calculate performance when comparing performance
of a Fund with performance quoted with respect to other investment companies or
types of investments.
In connection with communicating its performance to current or prospective
shareholders, a Fund also may compare these figures to the performance of other
mutual funds tracked by mutual fund rating services or to unmanaged indices
which may assume reinvestment of dividends but generally do not reflect
deductions for administrative and management costs.
Evaluations of a Fund's performance made by independent sources may also be used
in advertisements concerning the Fund. Sources for a Fund's performance
information could include the following:
Asian Wall Street Journal, a weekly Asian newspaper that often reviews U.S.
mutual funds investing internationally.
Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds investing abroad.
Changing Times, The Kiplinger Magazine, a monthly investment advisory
publication that periodically features the performance of a variety of
securities.
Consumer Digest, a monthly business/financial magazine that includes a "Money
Watch" section featuring financial news.
Financial Times, Europe's business newspaper, which features from time to time
articles on international or country-specific funds.
Financial World, a general business/financial magazine that includes a "Market
Watch" department reporting on activities in the mutual fund industry.
Forbes, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the performance
of a variety of mutual funds.
Global Investor, a European publication that periodically reviews the
performance of U.S. mutual funds investing internationally.
Investor's Daily, a daily newspaper that features financial, economic and
business news.
Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a weekly
publication of industry-wide mutual fund averages by type of fund.
Money, a monthly magazine that from time to time features both specific funds
and the mutual fund industry as a whole.
Morningstar Inc., a publisher of financial information and mutual fund research.
New York Times, a nationally distributed newspaper which regularly covers
financial news.
Personal Investing News, a monthly news publication that often reports on
investment opportunities and market conditions.
Personal Investor, a monthly investment advisory publication that includes a
"Mutual Funds Outlook" section reporting on mutual fund performance measures,
yields, indices and portfolio holdings.
Success, a monthly magazine targeted to the world of entrepreneurs and growing
business, often featuring mutual fund performance data.
U.S. News and World Report, a national business weekly that periodically
reports mutual fund performance data.
Value Line, a biweekly publication that reports on the largest 15,000 mutual
funds.
Wall Street Journal, a Dow Jones and Company, Inc. newspaper which
regularly covers financial news.
Weisenberger Investment Companies Services, an annual compendium of information
about mutual funds and other investment companies, including comparative data on
funds' backgrounds, management policies, salient features, management results,
income and dividend records, and price ranges.
Working Women, a monthly publication that features a "Financial Workshop"
section reporting on the mutual fund/financial industry.
ECONOMIC AND MARKET INFORMATION
Advertising and sales literature of a Fund may include discussions of economic,
financial and political developments and their effect on the securities market.
Such discussions may take the form of commentary on these developments by Fund
portfolio managers and their views and analysis on how such developments could
affect the Funds. In addition, advertising and sales literature may quote
statistics and give general information about the mutual fund industry,
including the growth of the industry, from sources such as the Investment
Company Institute ("ICI"). For example, according to the ICI, thirty-seven
percent of American households are pursuing their financial goals through mutual
funds. These investors, as well as businesses and institutions, have entrusted
over $4.4 trillion to the more than 6,700 funds available.
VALUATION OF SECURITIES; REDEMPTIONS AND PURCHASES IN KIND
Equity and debt securities (other than short-term debt obligations maturing in
60 days or less), including listed securities and securities for which price
quotations are available, will normally be valued on the basis of market
valuations furnished by a pricing service. Short-term debt obligations and money
market securities maturing in 60 days or less are valued at amortized cost,
which approximates market.
Securities for which market quotations are not available are valued by Bankers
Trust pursuant to procedures adopted by each Portfolio's Board of Trustees. It
is generally agreed that securities for which market quotations are not readily
available should not be valued at the same value as that carried by an
equivalent security which is readily marketable.
The problems inherent in making a good faith determination of value are
recognized in the codification effected by SEC Financial Reporting Release No. 1
("FRR 1" (formerly Accounting Series Release No. 113)) which concludes that
there is "no automatic formula" for calculating the value of restricted
securities. It recommends that the best method simply is to consider all
relevant factors before making any calculation.
According to FRR 1 such factors would include consideration of the:
type of security involved, financial statements, cost at date of
purchase, size of holding, discount from market value of
unrestricted securities of the same class at the time of purchase,
special reports prepared by analysts, information as to any
transactions or offers with respect to the security, existence of
merger proposals or tender offers affecting the security, price and
extent of public trading in similar securities of the issuer or
comparable companies, and other relevant matters.
To the extent that a Portfolio purchases securities which are restricted as to
resale or for which current market quotations are not available, the Adviser of
the Portfolio will value such securities based upon all relevant factors as
outlined in FRR 1.
The Trust, on behalf of each Fund, and each Portfolio reserve the right, if
conditions exist which make cash payments undesirable, to honor any request for
redemption or repurchase order by making payment in whole or in part in readily
marketable securities chosen by the Trust, or the Portfolio, as the case may be,
and valued as they are for purposes of computing the Fund's or the Portfolio's
net asset value, as the case may be (a redemption in kind). If payment is made
to a Fund shareholder in securities, an investor, including the Fund, the
shareholder may incur transaction expenses in converting these securities into
cash. The Trust, on behalf of each Fund, and each Portfolio have elected,
however, to be governed by Rule 18f-1 under the 1940 Act as a result of which
each Fund and each Portfolio are obligated to redeem shares or beneficial
interests, as the case may be, with respect to any one investor during any
90-day period, solely in cash up to the lesser of $250,000 or 1% of the net
asset value of the Fund or the Portfolio, as the case may be, at the beginning
of the period.
Each Portfolio has agreed to make a redemption in kind to the corresponding Fund
whenever the Fund wishes to make a redemption in kind and therefore shareholders
of the Fund that receive redemptions in kind will receive portfolio securities
of the corresponding Portfolio and in no case will they receive a security
issued by the Portfolio. The Portfolio has advised the Trust that the Portfolio
will not redeem in kind except in circumstances in which the Fund is permitted
to redeem in kind or unless requested by the Fund.
Each investor in a Portfolio, including the corresponding Fund, may add to or
reduce its investment in the Portfolio on each day the Portfolio determines its
net asset value. At the close of each such business day, the value of each
investor's beneficial interest in the Portfolio will be determined by
multiplying the net asset value of the Portfolio by the percentage, effective
for that day, which represents that investor's share of the aggregate beneficial
interests in the Portfolio. Any additions or withdrawals which are to be
effected as of the close of business on that day will then be effected. The
investor's percentage of the aggregate beneficial interests in the Portfolio
will then be recomputed as the percentage equal to the fraction (i) the
numerator of which is the value of such investor's investment in the Portfolio
as of the close of business on such day plus or minus, as the case may be, the
amount of net additions to or withdrawals from the investor's investment in the
Portfolio effected as of the close of business on such day, and (ii) the
denominator of which is the aggregate net asset value of the Portfolio as of the
close of business on such day plus or minus, as the case may be, the amount of
net additions to or withdrawals from the aggregate investments in the Portfolio
by all investors in the Portfolio. The percentage so determined will then be
applied to determine the value of the investor's interest in the Portfolio as
the close of business on the following business day.
Each Fund may, at its own option, accept securities in payment for shares. The
securities delivered in payment for shares are valued by the method described
under "Net Asset Value" as of the day the Fund receives the securities. This is
a taxable transaction to the shareholder. Securities may be accepted in payment
for shares only if they are, in the judgment of Bankers Trust, appropriate
investments for the Fund's corresponding Portfolio. In addition, securities
accepted in payment for shares must: (i) meet the investment objective and
policies of the acquiring Fund's corresponding Portfolio; (ii) be acquired by
the applicable Fund for investment and not for resale (other than for resale to
the Fund's corresponding Portfolio); (iii) be liquid securities which are not
restricted as to transfer either by law or liquidity of market; and (iv) if
stock, have a value which is readily ascertainable as evidenced by a listing on
a stock exchange, over-the-counter market or by readily available market
quotations from a dealer in such securities. When securities are used as payment
for shares or as a redemption in kind from the fund, the transaction fee will
not be assessed. However, the shareholder will be charged the costs associated
with receiving or delivering the securities. These costs include security
movement costs and taxes and registration costs. Each Fund reserves the right to
accept or reject at its own option any and all securities offered in payment for
its shares.
TRADING IN FOREIGN SECURITIES
With respect to the EAFE(R) Equity Index Fund, trading in foreign cities may be
completed at times which vary from the closing of the New York Stock Exchange
("NYSE"). In computing the net asset values, the Funds value foreign securities
at the latest closing price on the exchange on which they are traded immediately
prior to the closing of the NYSE. Similarly, foreign securities quoted in
foreign currencies are translated into U.S. dollars at the foreign exchange
rates.
Occasionally, events that affect values and exchange rates may occur between the
times at which they are determined and the closing of the NYSE. If such events
materially affect the value of portfolio securities, these securities may be
valued at their fair value as determined in good faith by the Trustees, although
the actual calculation may be done by others.
MANAGEMENT OF THE TRUSTS AND THE PORTFOLIOS
Each Board of Trustees is composed of persons experienced in financial matters
who meet throughout the year to oversee the activities of the Funds or
Portfolios they represent. In addition, the Trustees review contractual
arrangements with companies that provide services to the Funds/Portfolios and
review the Funds' performance.
The Trustees and officers of the Trusts and Portfolios their birthdates, their
principal occupations during the past five years, and addresses are set forth
below. Their titles may have varied during that period. Unless otherwise
indicated, the address of each officer is 5800 Corporate Drive, Pittsburgh,
Pennsylvania 15237-5829.
TRUSTEES OF THE BT ADVISOR FUNDS
MARTIN J. GRUBER (birthdate: July 15, 1937) -- Trustee; Chairman of the
Finance Department and Nomura Professor of Finance, Leonard N. Stern School of
Business, New York University (since 1964). His address is 229 S. Irving Street,
Ridgewood, New Jersey 07450.
RICHARD J. HERRING (birthdate: February 18, 1946) -- Trustee; Vice Dean and
Director, Wharton Undergraduate Division, Professor, Finance Department, The
Wharton School, University of Pennsylvania. His address is 3255 Roberts Road,
Bryn Mawr, Pennsylvania 19010.
BRUCE E. LANGTON (birthdate: May 10, 1931) -- Trustee; Retired; Director,
Adela Investment Co. and University Patents, Inc.; formerly Assistant Treasurer
of IBM Corporation (until 1986). His address is 99 Jordan Lane, Stamford,
Connecticut 06903.
HARRY VAN BENSCHOTEN (birthdate: February 18, 1928) -- Trustee; Retired (since
1987); Corporate Vice President, Newmont Mining Corporation (prior to 1987);
Director, Canada Life Insurance Company of New York and Competitive
Technologies, Inc., a public company listed on the American Stock Exchange. His
address is 6581 Ridgewood Drive, Naples, Florida 33963.
TRUSTEES OF BT INSTITUTIONAL FUNDS
RICHARD J. HERRING (birthdate: February 18, 1946) -- Trustee; Vice Dean and
Director, Wharton Undergraduate Division, Professor, Finance Department, The
Wharton School, University of Pennsylvania. His address is 3255 Roberts Road,
Bryn Mawr, Pennsylvania 19010.
BRUCE E. LANGTON (birthdate: May 10, 1931) -- Trustee; Retired; Director,
Adela Investment Co. and University Patents, Inc.; formerly Assistant Treasurer
of IBM Corporation (until 1986). His address is 99 Jordan Lane, Stamford,
Connecticut 06903.
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.
TRUSTEES OF THE PORTFOLIOS
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 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.
OFFICERS OF THE TRUSTS AND PORTFOLIOS
Unless otherwise specified, each officer listed below holds the same position
with each Trust and each Portfolio.
RONALD M. PETNUCH -- (birthdate: February 27, 1960) -- President and Treasurer;
Senior Vice President; Federated Services Company ("FSC"); formerly, Director of
Proprietary Client Services, Federated Administrative Services ("FAS"), and
Associate Corporate Counsel, Federated Investors ("FI").
CHARLES L. DAVIS, JR. -- (birthdate: March 23, 1960) -- Vice President and
Assistant Treasurer; Vice President, FAS.
JAY S. NEUMAN -- (birthdate: April 22, 1950) -- Secretary; Corporate
Counsel, FI.
Messrs. Petnuch, Davis & Neuman also hold similar positions for other investment
companies for which Edgewood or an affiliate serves as the principal
underwriter.
No person who is an officer or director of Bankers Trust is an officer or
Trustee of the Trusts or the Portfolios. No director, officer or employee of
Edgewood or any of its affiliates will receive any compensation from the Trusts
or the Portfolios for serving as an officer or Trustee of the Trusts or the
Portfolios.
As of April 1, 1998, the Trustees and officers of the Trusts and the Portfolios
owned in the aggregate less than 1% of the shares of any Fund or Trust (all
series taken together).
<TABLE>
<CAPTION>
TRUSTEE COMPENSATION TABLE
AGGREGATE AGGREGATE AGGREGATE TOTAL COMPENSATION
NAME OF PERSON, COMPENSATION COMPENSATION FROM COMPENSATION FROM FUND COMPLEX
POSITION FROM TRUST* INSTITUTIONAL TRUST** FROM PORTFOLIOS+ PAID TO TRUSTEES++
<S> <C> <C> <C> <C>
Martin J. Gruber,
Trustee of the Trust $13,125 N/A N/A $27,500
Harry Van Benschoten,
Trustee of the Trust $13,125 N/A N/A $27,500
Bruce E. Langton
Trustee of the Trust
and Institutional Trust $13,125 $13,750 N/A $27,500
Richard J. Herring
Trustee of the Trust
and Institutional Trust $13,125 $13,750 N/A $27,500
Charles P. Biggar,
Trustee of Portfolios
and Institutional Trust N/A $13,750 $8,327 $27,500
S. Leland Dill,
Trustee of Portfolios N/A N/A $8,327 $27,500
Philip Saunders, Jr.,
Trustee of Portfolios N/A N/A $8,327 $27,500
</TABLE>
* The aggregate compensation is provided for the BT Advisor Funds which is
comprised of 4 funds. Information is furnished for the Trust's fiscal year ended
December 31, 1997.
** The aggregate compensation is provided for the BT Institutional Funds which
is comprised of 10 funds. Information is furnished for the Trust's fiscal year
ended December 31, 1997.
+ The aggregate compensation is provided for the Equity 500 Index Portfolio and
BT Investment Portfolios. Information is furnished for the Trust's fiscal year
ended December 31, 1997.
++ Aggregated information is furnished for the BT Family of Funds which consists
of the following: BT Investment Funds, BT Institutional Funds, BT Pyramid Mutual
Funds, BT Advisor Funds, BT Investment Portfolios, Cash Management Portfolio,
Treasury Money Portfolio, Tax Free Money Portfolio, NY Tax Free Money Portfolio,
International Equity Portfolio, Short Intermediate US Government Securities
Portfolio, Intermediate Tax Free Portfolio, Asset Management Portfolio, Equity
500 Index Portfolio, and Capital Appreciation Portfolio. The compensation is
provided for the calendar year ended December 31, 1997.
As of April 1, 1990, the following shareholders of record owned 5% or more of
the outstanding Shares of the Equity 500 Index Fund: Northern Telecom, Jersey
City, NJ, owned approximately 2,097,287 Shares (17.20%); Bankers Trust Company
as trustee for The William Penn Foundation, Philadelphia, PA, owned
approximately 2,066,792 Shares (16.95%); Bankers Trust Company as custodian for
Premark Retirement Savings Plan, Jersey City, NJ, owned approximately 1,000,378
Shares (8.20%); and Syracuse University, Syracuse, NY, owned approximately
665,349 Shares (5.46%).
As of April 1, 1998, the following shareholders of record owned 5% or more of
the outstanding Institutional Class Shares of the EAFE Equity Index Fund:
Bankers Trust Company as trustee for Pacificorp Master Retirement Trust, Los
Angeles, CA, owned approximately 1,849,935 Shares (61.02%); and Swiss Bank
Corporation, New York, NY, owned approximately 1,003,682 Shares (33.10%).
As of April 1, 1998, the following shareholders of record owned 5% or more of
the outstanding Institutional Class Shares of the Small Cap Index Fund: Merck &
Co., Whitehouse Station, NJ, owned approximately 1,890,290 Shares (34.02%);
Miami Valley Equipment Inc., Dayton, OH, owned approximately 1,703,213 Shares
(30.66%); FMCO, Holland, MI, owned approximately 840,863 Shares (15.13%); and
Dawn & Co., New Britain, CT, owned approximately 720,836 Shares (12.97%).
As of April 1, 1998, the following shareholders of record owned 5% or more of
the outstanding Institutional Class Shares of the U.S. Bond Index Fund: Baptist
Health Systems, Inc., Birmingham, AL, 510,754 Shares (60.54%); Bankers Trust
Company as trustee for Phillips Exeter Academy, Jersey City, NJ, owned
approximately 183,773 Shares (21.78%); Bankers Trust Company as trustee for
Autoliv Inc. Restricted Trust, Jersey City, NJ, owned approximately 102,204
Shares (12.12%); and Batrus & Co., New York, NY, owned approximately 46,965
Shares (5.57%).
INVESTMENT ADVISER
Under the terms of each Portfolio's investment advisory agreement with Bankers
Trust (the "Advisory Agreement"), Bankers Trust manages the Portfolio subject to
the supervision and direction of the Board of Trustees of the Portfolio. Bankers
Trust will: (i) act in strict conformity with each Portfolio's Declaration of
Trust, the 1940 Act and the Investment Advisers Act of 1940, as the same may
from time to time be amended; (ii) manage each Portfolio in accordance with the
Portfolio's investment objectives, restrictions and policies; (iii) make
investment decisions for each Portfolio; and (iv) place purchase and sale orders
for securities and other financial instruments on behalf of each Portfolio.
Bankers Trust bears all expenses in connection with the performance of services
under each Advisory Agreement. The Trust and each Portfolio bears certain other
expenses incurred in its operation, including: taxes, interest, brokerage fees
and commissions, if any; fees of Trustees of the Trust or the Portfolio who are
not officers, directors or employees of Bankers Trust, Edgewood or any of their
affiliates; SEC fees and state Blue Sky qualification fees; charges of
custodians and transfer and dividend disbursing agents; certain insurance
premiums; outside auditing and legal expenses; costs of maintenance of corporate
existence; costs attributable to investor services, including, without
limitation, telephone and personnel expenses; costs of preparing and printing
prospectuses and statements of additional information for regulatory purposes
and for distribution to existing shareholders; costs of shareholders' reports
and meetings of shareholders, officers and Trustees of the Trust or the
Portfolio; and any extraordinary expenses.
For the fiscal years ended December 31, 1997, 1996, and 1995, Bankers Trust
earned $2,430,147, $1,505,963 and $770,530, respectively, as compensation for
investment advisory services provided to the Equity 500 Index Portfolio. During
the same periods, Bankers Trust reimbursed $1,739,490, $870,024, and $418,814,
respectively, to the Portfolio to cover expenses.
For the fiscal year ended December 31, 1997 and for the period from July 1, 1996
(commencement of operations) to December 31, 1997, Bankers Trust earned $123,632
and $34,759, respectively, for investment advisory services provided to the
Small Cap Index Portfolio. During the same periods, Bankers Trust reimbursed
$107,835 and $26,968, respectively, to the Portfolio to cover expenses.
For the fiscal year ended December 31, 1997 and for the period from January 24,
1996 (commencement of operations) to December 31, 1997, Bankers Trust earned
$113,810 and $68,584, respectively, for investment advisory services provided to
the EAFE Equity Index Portfolio. During the same periods, Bankers Trust
reimbursed $28,070 and $30,591, respectively, to the Portfolio to cover
expenses.
For the period from June 30, 1997 (commencement of operations) to December 31,
1997, Bankers Trust earned $33,131 for investment advisory services provided to
the U.S. Bond Index Portfolio. During the same period, Bankers Trust reimbursed
$39,527 to the Portfolio to cover expenses.
Bankers Trust may have deposit, loan and other commercial banking relationships
with the issuers of obligations which may be purchased on behalf of the
Portfolios, including outstanding loans to such issuers which could be repaid in
whole or in part with the proceeds of securities so purchased. Such affiliates
deal, trade and invest for their own accounts in such obligations and are among
the leading dealers of various types of such obligations. Bankers Trust has
informed the Portfolios that, in making its investment decisions, it does not
obtain or use material inside information in its possession or in the possession
of any of its affiliates. In making investment recommendations for the
Portfolios, Bankers Trust will not inquire or take into consideration whether an
issuer of securities proposed for purchase or sale by a Portfolio is a customer
of Bankers Trust, its parent or its subsidiaries or affiliates and, in dealing
with its customers, Bankers Trust, its parent, subsidiaries and affiliates will
not inquire or take into consideration whether securities of such customers are
held by any fund managed by Bankers Trust or any such affiliate.
The prospectus contains disclosure as to the amount of Bankers Trust's
investment advisory and administration and services fees, including waivers
thereof. Bankers Trust may not recoup any of its waived investment advisory or
administration and services fees. Such waivers by Bankers Trust shall stay in
effect for at least 12 months.
ADMINISTRATOR
Under the Administration and Services Agreements, Bankers Trust is obligated on
a continuous basis to provide such administrative services as the Board of
Trustees of the Trusts and the Portfolios reasonably deem necessary for the
proper administration of the Trusts or the Portfolios. Bankers Trust will:
generally assist in all aspects of each class of shares of each Funds' and
Portfolios' operations; supply and maintain office facilities (which may be in
Bankers Trust's own offices), statistical and research data, data processing
services, clerical, accounting, bookkeeping and recordkeeping services
(including without limitation the maintenance of such books and records as are
required under the 1940 Act and the rules thereunder, except as maintained by
other agents), internal auditing, executive and administrative services, and
stationery and office supplies; prepare reports to shareholders or investors;
prepare and file tax returns; supply financial information and supporting data
for reports to and filings with the SEC and various state Blue Sky authorities;
supply supporting documentation for meetings of the Board of Trustees; provide
monitoring reports and assistance regarding compliance with Declarations of
Trust, by-laws, investment objectives and policies and with Federal and state
securities laws; arrange for appropriate insurance coverage; calculate net asset
values, net income and realized capital gains or losses; and negotiate
arrangements with, and supervise and coordinate the activities of, agents and
others to supply services.
Pursuant to a sub-administration agreement (the "Sub-Administration Agreement"),
FSC performs such sub-administration duties for the Trusts and the Portfolios as
from time to time may be agreed upon by Bankers Trust and FSC. The
Sub-Administration Agreement provides that FSC will receive such compensation as
from time to time may be agreed upon by FSC and Bankers Trust. All such
compensation will be paid by Bankers Trust.
For the fiscal year ended December 31, 1997, and for the period from July 10,
1996 (commencement of operations) to December 31, 1997, Bankers Trust earned
$113,569 and $26,726, respectively as compensation for administrative and other
services provided to Small Cap Index Fund-Institutional Class Shares. During the
same periods, Bankers Trust reimbursed $106,928 and $69,671, respectively to
Small Cap Index Fund-Institutional Class Shares to cover expenses.
For the fiscal year ended December 31, 1997, and for the period from January 24,
1996 (commencement of operations to December 31, 1997, Bankers Trust earned
$65,464 and $41,404, respectively, as compensation for administrative and other
services provided to EAFE(R) Equity Index Fund-Institutional Class Shares.
During the same periods, Bankers Trust reimbursed $118,022 and $104,356,
respectively, to EAFE(R) Equity Index Fund-Institutional Class Shares to cover
expenses.
For the fiscal years ended December 31, 1997, 1996, and 1995, Bankers Trust
earned $724,120, $541,924, and $270,327, respectively, for administrative and
other services provided to the Equity 500 Index Fund. During the same periods,
Bankers Trust reimbursed $525,736, $658,635, and $421,776, respectively to
Equity 500 Index Fund to cover expenses.
For the period from June 30, 1997 (commencement of operations) to December 31,
1997, Bankers Trust earned $19,528 for administrative and other services
provided to the U.S. Bond Index Fund-Institutional Class Shares. During the same
period, Bankers Trust reimbursed $52,269 to U.S. Bond Index Fund-Institutional
Class Shares to cover expenses.
For the fiscal year ended December 31, 1997 and for the period from July 10,
1996 (commencement of operations) to December 31, 1997, Bankers Trust earned
$41,211, and $11,586, as compensation for administrative and other services
provided to the Small Cap Index Portfolio.
For the fiscal year ended December 31, 1997 and for the period from January 24,
1996 to December 31, 1997, Bankers Trust earned $45,524 and $27,433, as
compensation for administrative and other services provided by the EAFE Equity
Index Portfolio.
For the fiscal years ended December 31, 1997, 1996, and 1995, Bankers Trust
earned $1.215,073, $752,981, and $385,265, respectively, as compensation for
administrative and other services provided to the Equity 500 Index Portfolio.
For the period from June 30, 1997 (commencement of operations) to December
31, 1997, Bankers Trust earned $11,044 as compensation for administrative and
other services provided to the U.S. Bond Index Portfolio.
Bankers Trust has agreed that if in any fiscal year the aggregate expenses of
any Fund and its respective Portfolio (including fees pursuant to the Advisory
Agreement, but excluding interest, taxes, brokerage and, if permitted by the
relevant state securities commissions, extraordinary expenses) exceed the
expense limitation of any state having jurisdiction over a Fund or Class,
Bankers Trust will reimburse that Fund for the excess expense to the extent
required by state law. As of the date of this SAI, the most restrictive annual
expense limitation applicable to any Fund or Class is 2.50% of the Fund's or
Class' first $30 million of average annual net assets, 2.00% of the next $70
million of average annual net assets and 1.50% of the remaining average annual
net assets.
CUSTODIAN AND TRANSFER AGENT
Bankers Trust, 130 Liberty Street (One Bankers Trust Plaza), New York, New York
10006, serves as Custodian for the Trusts and for the Portfolios pursuant to the
administration and services agreements. As Custodian, it holds the Funds' and
each Portfolio's assets. Bankers Trust also serves as transfer agent of the
Trusts and of each Portfolio pursuant to the respective administration and
services agreement. Under its transfer agency agreement with the Trusts, Bankers
Trust maintains the shareholder account records for each Class of shares of each
Fund, handles certain communications between shareholders and the Trusts and
causes to be distributed any dividends and distributions payable by the Trusts.
Bankers Trust may be reimbursed by the Funds or the Portfolios for its
out-of-pocket expenses. Bankers Trust will comply with the self-custodian
provisions of Rule 17f-2 under the 1940 Act.
USE OF NAME
The Trusts and Bankers Trust have agreed that each Trust may use "BT" as part of
its name for so long as Bankers Trust serves as investment adviser to the
Portfolios. The Trusts have acknowledged that the term "BT" is used by and is a
property right of certain subsidiaries of Bankers Trust and that those
subsidiaries and/or Bankers Trust may at any time permit others to use that
term.
Each Trust may be required, on 60 days' notice from Bankers Trust at any time,
to abandon use of the acronym "BT" as part of its name. If this were to occur,
the Trustees would select an appropriate new name for each Trust, but there
would be no other material effect on the Trusts, their shareholders or
activities.
BANKING REGULATORY MATTERS
Bankers Trust has been advised by its counsel that in its opinion Bankers Trust
may perform the services for the Portfolios contemplated by the Advisory
Agreements and other activities for the Funds and the Portfolios described in
the Prospectuses and this SAI without violation of the Glass-Steagall Act or
other applicable banking laws or regulations. However, counsel has pointed out
that future changes in either Federal or state statutes and regulations
concerning the permissible activities of banks or trust companies, as well as
future judicial or administrative decisions or interpretations of present and
future statutes and regulations, might prevent Bankers Trust from continuing to
perform those services for the Trusts and the Portfolios. State laws on this
issue may differ from the interpretations of relevant Federal law and banks and
financial institutions may be required to register as dealers pursuant to state
securities law. If the circumstances described above should change, the Boards
of Trustees would review the relationships with Bankers Trust and consider
taking all actions necessary in the circumstances.
COUNSEL AND INDEPENDENT ACCOUNTANTS
Willkie Farr & Gallagher, One Citicorp Center, 153 East 53rd Street, New York,
New York 10022-4669, serves as Counsel to the Trusts and each Portfolio. Coopers
& Lybrand L.L.P., 1100 Main Street, Suite 900, Kansas City, Missouri 64105 acts
as Independent Accountants of the Trusts and each Portfolio.
ORGANIZATION OF THE TRUSTS
Shares of each Trust do not have cumulative voting rights, which means that
holders of more than 50% of the shares voting for the election of Trustees can
elect all Trustees. Shares are transferable but have no preemptive, conversion
or subscription rights. Shareholders generally vote by Fund, except with respect
to the election of Trustees and the ratification of the selection of independent
accountants.
Massachusetts law provides that shareholders could under certain circumstances
be held personally liable for the obligations of each Trust. However, each
Trust's Declaration of Trust disclaims shareholder liability for acts or
obligations of the respective Trust and requires that notice of this disclaimer
be given in each agreement, obligation or instrument entered into or executed by
a Trust or a Trustee. The Declaration of Trust provides for indemnification from
each Trust's property for all losses and expenses of any shareholder held
personally liable for the obligations of each Trust. Thus, the risk of a
shareholder's incurring financial loss on account of shareholder liability is
limited to circumstances in which each Trust itself would be unable to meet its
obligations, a possibility that a Trust believes is remote. Upon payment of any
liability incurred by a Trust, the shareholder paying the liability will be
entitled to reimbursement from the general assets of the respective Trust. The
Trustees intend to conduct the operations of each Trust in a manner so as to
avoid, as far as possible, ultimate liability of the shareholders for
liabilities of that Trust.
TAXATION
TAXATION OF THE FUNDS
The Fund intends to qualify annually as a regulated investment company under the
Internal Revenue Code of 1986, as amended (the "Code").
As a regulated investment company, each Fund will not be subject to U.S. Federal
income tax on its investment company taxable income and net capital gains (the
excess of net long-term capital gains over net short-term capital losses), if
any, that it distributes to shareholders. The fund intends to distribute to its
shareholders, at least annually, substantially all of its investment company
taxable income and net capital gains, and therefore does not anticipate
incurring a Federal income tax liability.
DISTRIBUTIONS
Dividends paid out of the Fund's investment company taxable income will be
taxable to a U.S. shareholder as ordinary income. Distributions of net capital
gains, if any, designated as capital gain dividends are taxable as long-term
capital gains, regardless of how long the shareholder has held the Fund's
shares, and are not eligible for the dividends-received deduction. Shareholders
receiving distributions in the form of additional shares, rather than cash,
generally will have a cost basis in each such share equal to the net asset value
of a share of the Fund on the reinvestment date. Shareholders will be notified
annually as to the U.S. Federal tax status of distributions. Shareholders should
consult their own tax adviser concerning the application of federal, state and
local taxes to the distributions they receive from the Fund.
TAXATION OF THE PORTFOLIOS
The Portfolios are not subject to the Federal income taxation. Instead, the Fund
and other investors investing in a Portfolio must take into account, in
computing their Federal income tax liability, their share of the Portfolio's
income, gains, losses, deductions, credits and tax preference items, without
regard to whether they have received any cash distributions from the Portfolio.
BACKUP WITHHOLDING
A Fund may be required to withhold U.S. Federal income tax at the rate of 31% of
all taxable distributions payable to shareholders who fail to provide the Fund
with their correct taxpayer identification number or to make required
certifications, or who have been notified by the Internal Revenue Service that
they are subject to backup withholding. Corporate shareholders and certain other
shareholders specified in the Code generally are exempt from such backup
withholding. Backup withholding is not an additional tax. Any amounts withheld
may be credited against the shareholder's U.S. Federal income tax liability.
<PAGE>
FOREIGN SHAREHOLDERS
The tax consequences to a foreign shareholder of an investment in a Fund may be
different from those described herein. Foreign shareholders are advised to
consult their own tax advisers with respect to the particular tax consequences
to them of an investment in a Fund.
OTHER TAXATION
The Trust is organized as a Massachusetts business trust and, under current law,
neither the Trust nor any Fund is liable for any income or franchise tax in the
Commonwealth of Massachusetts, provided that the Fund continues to qualify as a
regulated investment company under Subchapter M of the Code.
Each Portfolio is organized as a New York trust. Each Portfolio is not subject
to any income or franchise tax in the State of New York or the Commonwealth of
Massachusetts.
FOREIGN WITHHOLDING TAXES
Income received by a Portfolio from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries.
FINANCIAL STATEMENTS
The financial statements for the Funds and the Portfolios for the period ended
December 31,1997, are incorporated herein by reference to the Funds' Annual
Reports dated December 31, 1997. A copy of a Fund's Annual Report may be
obtained without charge by contacting the Fund.
<PAGE>
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'S CORPORATE BOND RATINGS:
AAA - Debt rated AAA has the highest rating assigned by S&P to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.
AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher-rated issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to weakened capacity to pay interest and repay principal for debt
in this category than in higher-rated categories.
BB - Debt rate BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments.
B - Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB- rating.
CCC - Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal.
CC - Debt rated CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating.
C -The rating C is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC- debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed but debt service
payments are continued.
CI - The rating CI is reserved for income bonds on which no interest is being
paid.
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.
<PAGE>
INVESTMENT ADVISER OF EACH PORTFOLIO AND ADMINISTRATOR
BANKERS TRUST COMPANY
DISTRIBUTOR
EDGEWOOD SERVICES, INC.
CUSTODIAN AND TRANSFER AGENT
BANKERS TRUST COMPANY
INDEPENDENT ACCOUNTANTS
COOPERS & LYBRAND L.L.P.
COUNSEL
WILLKIE FARR & GALLAGHER
--------------------
No person has been authorized to give any information or to make any
representations other than those contained in the Trust's Prospectuses, its
Statements of Additional Information or the Trust's official sales literature in
connection with the offering of the Trust's shares and, if given or made, such
other information or representations must not be relied on as having been
authorized by the Trust. Neither the Prospectuses nor this SAI constitutes an
offer in any state in which, or to any person to whom, such offer may not
lawfully be made.
--------------------
Cusips:
05576L700
05576L809
05576L882
05576L874
055922751
BT0466H(4/98)
PART C OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements:
Incorporated by reference to the Annual Report of BT Advisor Funds
dated December 31, 1997, pursuant to Rule 411 under the Securities Act
of 1933. (File Nos. 33-62103 and 811-7347)
(b) Exhibits:
(l) (i) Declaration of Trust of the Trust; 1
(ii) Amendment to the Declaration of Trust; 2
(iii) Designation of Series relating to addition of Growth
Fund and Growth and Income Fund; 5
(iv) First Amended and Restated Establishment and
Designation of Series and Classes of Shares; 6
(2) By-Laws of the Trust; 1
(3) Not Applicable
(4) Not Applicable
(5) Investment Advisory Contract; (To be filed by Amendment) (6) (i)
Conformed Copy of Distributor's Contract; 7
(ii) Copy of Distribution and Service Plan; 7
(iii) Copy of Schedule A to Exhibit A to the Distributor's
Contract; +
(7) Not Applicable
(8) Conformed copy of Custodian Agreement of the Registrant
including exhibits A-E; +
(9) (i) Administration and Services Agreement of the
Registrant; 2
(ii) Transfer Agency Agreement; 4
(iii) Copy of Exhibit D to the Administration and Services
Agreement of the Registrant; +
(10) Opinion and Consent of counsel; 5
(11) Conformed copy of Consent of Independent Accountants; +
(12) Not Applicable
(13) Copy of Initial Capital Understanding 4
(14) Not Applicable
(15) Plan of Distribution pursuant to Rule 12b-1 under the
Investment Company Act of 1940; 2
- -----------------------------------
+ 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 August
24, 1995.
2. Incorporated by reference to Pre-Effective Amendment No. 2 to Registrant's
Registration Statement as filed with the Commission on January 3, 1996.
4. Incorporated by reference to Post-Effective Amendment No. 1 to Registrant's
Registration Statement as filed with the Commission on April 29, 1996.
5. Incorporated by reference to Post-Effective Amendment No. 3 to Registrant's
Registration Statement as filed with the Commission on August 1, 1996.
6. Incorporated by reference to Post-Effective Amendment No. 4 to Registrant's
Registration Statement as filed with the Commission on September 19, 1996.
7. Incorporated by reference to Post-Effective Amendment No. 6 to Registrant's
Registration Statement as filed with the Commission on February 5, 1997.
<PAGE>
(16) (i) Copy of Schedule for computation of Fund Performance
for Small Cap Index Fund; 7
(ii) Copy of Schedule for computation of Fund Performance
for U.S. Bond Index Fund; +
(17) Copy of Financial Data Schedules; + (18) Rule 18f-3 Plan; 5
(19) Conformed copy of Power of Attorney of Registrant and BT
Investment Portfolios; 7
ITEM 25. Persons Controlled by or Under Common Control with Registrant:
Not Applicable
ITEM 26. Number of Holders of Securities.
Title of Class Number of Record Holders
as of March 31, 1998
U.S. Bond Index Fund
Advisor Class 15
Institutional Class 4
EAFE(R) Equity Index Fund
Advisor Class 108
Institutional Class 10
Small Cap Index Fund
Advisor Class 68
Institutional Class 12
ITEM 27. Indemnification; (5)
ITEM 28. Business and Other Connections of Investment Adviser:
Bankers Trust serves as investment adviser to each Fund. 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, 29 King Street, Chappaqua, NY 10514-3432. Retired Senior
Vice President and Director of International Business Machines Corporation.
Director of Bankers Trust and Bankers Trust New York Corporation. Director of
Computer Task Group, FlightSafety International, Inc., Phillips Gas Company,
Phillips Petroleum Company, Caliber Systems, Inc. (formerly Roadway Services,
Inc.), Rohm and Hass Company and TIG Holdings, Chairman Emeritus of Amherst
College, and Chairman of the Colonial Williamsburg Foundation.
- ---------------------------
+ All exhibits have been filed electronically.
5. Incorporated by reference to Post-Effective Amendment No. 3 to Registrant's
Registration Statement as filed with the Commission on August 1, 1996.
7. Incorporated by reference to Post-Effective Amendment No. 6 to Registrant's
Registration Statement as filed with the Commission on February 5, 1997.
Phillip A. Griffiths, Director, Institute for Advanced Study, Olden Lane,
Princeton, NJ 08540. Director of Bankers Trust Company. Chairman, Committee on
Science, Engineering and Public Policy of the National Academies of Sciences and
Engineering & the Institute of Medicine; member, National Academy of Sciences,
American Academy of Arts and Sciences, American Philosophical Society, member
and chairman of the Nominations Committee and Committee on Science and
Engineering Indicators, National Science Board, and trustee of North Carolina
School of Science and Mathematics and the Woodward Academy. Former member of the
board of directors, Research Triangle Institute.
William R. Howell, J.C. Penney Company, Inc., P.O. Box 10001, Dallas, TX
75301-0001. Chairman of the Board and Chief Executive Officer, J.C. Penney
Company, Inc. Director of Bankers Trust and Bankers Trust New York Corporation.
Also a Director of Exxon Corporation, Halliburton Company, Warner-Lambert
Corporation, National Urban League, Inc. and the National Retail Federation.
Jon M. Huntsman, Huntsman Corporation, 500 Huntsman Way, Salt Lake City, UT
84108. Chairman and Chief Executive Officer, Huntsman Corporation and other
affiliated companies. Director of Bankers Trust and Bankers Trust New York
Corporation. Chairman, chief executive officer and director of Sunstar
Corporation and JK Corp. Chairman and director of Co-Ex Plastics Inc. and Global
Polymers Corporation. Chairman of Constar Corporation and Petrostar Corporation.
President of Autostar Corporation and Restar Corporation. Director of Airstar
Corporation, Consolidated Press International (Australia), Razzleberry Foods
Corporation and Thiokol Corporation. General Partner of Huntsman Group Ltd.,
McLeod Creek Partnership and Trustar Ltd. Chairman of Primary Children's Medical
Center Foundation, an overseer, The Wharton School, University of Pennsylvania,
an advisor, University of Utah, Eccles Business School, founder of Huntsman
Cancer Institute, University of Utah, chairman and director of the Huntsman
Cancer Foundation, and a trustee and president of the Jon and Karen Huntsman
Foundation.
Vernon E. Jordan, Jr., Akin, Gump, Strauss, Hauer & Feld, LLP, 1333 New
Hampshire Ave., N.W., Suite 400, Washington, DC 20036. Senior Partner, Akin,
Gump, Strauss, Hauer & Feld, LLP. Director of Bankers Trust and Bankers Trust
New York Corporation. Also a Director of American Express Company, Corning
Incorporated, Dow Jones, Inc., J.C. Penney Company, Inc., Revlon Group
Incorporated, Ryder System, Inc., Sara Lee Corporation, Union Carbide
Corporation and Xerox Corporation, a trustee of Brookings Institution, The Ford
Foundation and Howard University, and governor of the Joint Center for Political
and Economic Studies.
Hamish Maxwell, Philip Morris Companies Inc., 100 Park Avenue, 10th Floor,
New York, NY 10017. Retired Chairman and Chief Executive Officer, Philip Morris
Companies Inc. Director of Bankers Trust and Bankers Trust New York Corporation.
Director of The New Corporation Limited and Sola International Inc.
Frank N. Newman, President and Chief Executive Officer of Bankers Trust Company
and Bankers Trust New York Corporation, 130 Liberty Street, New York, NY 10006.
Director of Bankers Trust Company. Former Deputy Secretary of the United States
Treasury and former vice chairman of the board and director of BankAmerica
Corporation and Bank of America. Also a director of Carnegie Hall.
N.J. Nicholas Jr., 15 West 53rd Street, New York, NY 10019. Former
President, Co-Chief Executive Officer and Director of Time Warner Inc. Director
of Bankers Trust and Bankers Trust New York Corporation. Also a Director of
Boston Scientific Corporation and Xerox Corporation.
Russell E. Palmer, The Palmer Group, 3600 Market Street, Suite 530,
Philadelphia, PA 19104. Chairman and Chief Executive Officer of The Palmer
Group. Director of Bankers Trust and Bankers Trust New York Corporation. Former
Dean of The Wharton School, University of Pennsylvania and former chief
executive officer of Touche Ross & Co. (now Deloitte and Touche). Also Director
of Allied-Signal Inc., Contel Cellular, Inc., Federal Home Loan Mortgage
Corporation, GTE Corporation, Goodyear Tire & Rubber Company, Imasco Limited,
The May Department Stores Company and Safeguard Scientifics, Inc. Member, Radnor
Venture Partners Advisory Board, advisory board of the Controller General of the
United States, and a trustee, the University of Pennsylvania.
Donald L. Stahelli, Chairman of the Board and Chief Executive Officer,
Continental Grain Company, 277 Park Avenue, 50th Floor, New York, NY 10172.
Director of Bankers Trust Company. Also a director of ContiFinancial
Corporation, Prudential Life Insurance Company of America, National Committee on
United States-China Relations, America-China Society, U.S.-Russia Trade Council,
The Points of Light Foundation and New York City Partnership, Vice Chairman of
the U.S.-China Business Council, member of the Advisory Board of Rabobank
Nederland (Utrecht, The Netherlands), Council on Foreign Relations and the
Executive Committee of the National Advisory Council of Brigham Young
University's Marriott School of Management and a trustee of the American
Graduate School of International Management.
Patricia Carry Stewart, c/o Office of the Secretary, 280 Park Avenue - 17W,
New York, NY 10017. Former Vice President, The Edna McConnell Clark Foundation.
Director of Bankers Trust and Bankers Trust New York Corporation. Director,
Borden Inc., Continental Corp. and Melville Corporation, director and vice chair
of Community Foundation for Palm Beach and Martin Counties, and a trustee
emerita of Cornell University.
George J. Vojta, Bankers Trust Company, 280 Park Avenue, New York, NY
10017. Vice Chairman of the Board of Bankers Trust and Bankers Trust New York
Corporation. Director of Northwest Airlines and Private Export Funding Corp.,
the New York State Banking Board and St. Lukes-Roosevelt Hospital Center, a
partner of New York City Partnership and chairman, Wharton Financial Services
Center.
Item 29. Principal Underwriters:
(a) Edgewood Services, Inc. the Distributor for shares of the
Registrant, acts as principal underwriter for the following
open-end investment companies, including the Registrant: BT
Advisor Funds, BT Institutional Funds, BT Investment Funds, BT
Pyramid Mutual Funds, Deutsche Portfolios, Deutsche Funds, Inc.,
Excelsior Funds, Excelsior Funds, Inc., (formerly, UST Master
Funds, Inc.), Excelsior Institutional Trust, Excelsior Tax-Exempt
Funds, Inc. (formerly, UST Master Tax-Exempt Funds, Inc.), FTI
Funds, FundManager Portfolios, Great Plains Funds, Marketvest
Funds, Marketvest Funds, Inc., Old Westbury Funds, Inc.,
Robertsons Stephens Investment Trust, WesMark Funds and WCT
Funds. (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
Federated Investors Tower Edgewood Services, Inc. and Treasurer
Pittsburgh, PA 15222-3779
Thomas P. Schmitt Vice President, --
Federated Investors Tower Edgewood Services, Inc.
Pittsburgh, PA 15222-3779
Thomas P. Sholes 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) Not Applicable.
ITEM 30. Location of Accounts and Records:
BT ADVISOR FUNDS:. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
BANKERS TRUST COMPANY: 280 Park Avenue, New York, New York 10017
INVESTORS FIDUCIARY TRUST COMPANY: 127 West 10th Street,
Kansas City, MO 64105.
EDGEWOOD SERVICES, INC.: 5800 Corporate Drive
Pittsburgh, Pennsylvania 15237-5829
ITEM 31. Management Services:
Not applicable.
ITEM 32. Undertakings
The Registrant undertakes to comply with Section 16(c) of the 1940 Act as
though such provisions of the Act were applicable to the Registrant except that
the request referred to in the third full paragraph thereof may only be made by
shareholders who hold in the aggregate at least 10% of the outstanding shares of
the Registrant, regardless of the net asset value or values of shares held by
such requesting shareholders.
If the information called for by Item 5A of Form N-lA is contained in the
latest annual report to shareholders, the Registrant shall furnish each person
to whom a prospectus is delivered with a copy of the Registrant's latest annual
report to shareholders upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, the Registrant, BT ADVISOR FUNDS
certifies that it meets all of the requirements for effectiveness of this
Amendment to its Registration Statement pursuant to Rule 485(b) under the
Securities act of 1933, and has duly caused this Amendment to the Registrant's
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 30th Day of April, 1998
BT ADVISOR FUNDS
By: /s/ Jay S. Neuman
Jay S. Neuman, Secretary
April 30, 1998
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to its Registration Statement has been signed below by the following person in
the capacity and on the date indicated:
NAME TITLE DATE
By: /s/ Jay S. Neuman Attorney in Fact April 30, 1998
Jay S. Neuman For the Persons
SECRETARY Listed Below
/s/RONALD M. PETNUCH* President and Treasurer
Ronald M. Petnuch (Chief Executive Officer,
Principal Financial and Accounting
Officer)
/s/HARRY VAN BENSCHOTEN* Trustee
Harry Van Benschoten
/s/MARTIN J. GRUBER* Trustee
Martin J. Gruber
/s/BRUCE E. LANGTON* Trustee
Bruce E. Langton
/s/RICHARD J. HERRING* Trustee
Richard J. Herring
* By Power of Attorney
<PAGE>
SIGNATURES
BT INVESTMENT PORTFOLIOS has duly caused this Post Effective Amendment No.
7 to the Registration Statement on Form N-1A of BT Advisor Funds to be signed on
their behalf by the undersigned, thereto authorized in the City of Pittsburgh
and the Commonwealth of Pennsylvania on the 30th day of April, 1998.
BT INVESTMENT PORTFOLIOS
By: /s/ Jay S. Neuman
Jay S. Neuman, Secretary
April 30, 1998
This Post Effective Amendment No. 7 to the Registration Statement of BT
Advisor Funds has been signed below by the following persons in the capacities
indicated with respect to BT INVESTMENT PORTFOLIOS.
NAME TITLE DATE
By: /s/ Jay S. Neuman Attorney in Fact April 30, 1998
Jay S. Neuman For the Persons
SECRETARY Listed Below
/s/RONALD M. PETNUCH* President and Treasurer
Ronald M. Petnuch (Chief Executive Officer,
Principal Financial and Accounting
Officer)
/s/CHARLES P. BIGGAR* Trustee
Charles P. Biggar
/s/S. LELAND DILL* Trustee
S. Leland Dill
/s/PHILIP SAUNDERS, JR.* Trustee
Philip Saunders, Jr.
* By Power of Attorney
Exhibit (9) iii under Form N-1A
Exhibit 10 under Item 601/Reg. S-K
BT ADVISOR FUNDS
(formerly, BT Global Investors)
EXHIBIT D
TO THE
ADMINISTRATION AND SERVICES AGREEMENT
MADE AS OF SEPTEMBER 15, 1995
BETWEEN
BT ADVISOR FUNDS AND BANKERS TRUST COMPANY
AS REVISED: AUGUST 7, 1996
FEE
Global High Yield Securities Fund...........................0.95%
Capital Appreciation Fund...................................0.65%
Small Cap Fund..............................................0.65%
International Equity Fund...................................0.85%
Pacific Basin Equity Fund...................................0.75%
Latin American Equity Fund..................................0.95%
U.S. Bond Index Fund
Advisor Class.........................................0.20%
Institutional Class...................................0.20%
Equity 500 Equal Weighted Index Fund
Advisor Class.........................................0.30%
Institutional Class...................................0.15%
Small Cap Index Fund
Advisor Class.........................................0.25%
Institutional Class...................................0.20%
EAFE(R) Equity Index Fund
Advisor Class.........................................0.30%
Institutional Class...................................0.15%
Growth Fund
Intermediary Class Shares.............................0.65%
Investment Class Shares...............................0.65%
Growth and Income Fund
Intermediary Class Shares.............................0.65%
Investment Class Shares...............................0.65%
Exhibit (11) under N-1A
Exhibit 23 under Item 601/Reg SK
Consent of Independent Accountants
We consent to the incorporation by reference in Post-Effective Amendment No. 7
to the Registration Statement of the EAFE Equity Index Fund and Small Cap Index
Fund, (two of the Funds comprising BT Advisor Funds) on Form N-1A of our reports
dated February 18, 1998 on our audits of the financial statements and financial
highlights of the EAFE Equity Index Portfolio and Small Cap Index Portfolio,
which reports are included in the Annual Reports to Shareholders for the year
ended December 31, 1997 which are incorporated by reference in the
Post-Effective Amendment to the Registration Statement. We also consent to the
reference in the Statement of Additional Information to our Firm under the
caption "Counsel and Independent Accountants."
/s/ Coopers & Lybrand L.L.P.
Kansas City, Missouri
April 29, 1998
Exhibit (11) under N-1A
Exhibit 23 under Item 601/Reg SK
Consent of Independent Accountants
We consent to the incorporation by reference in Post-Effective Amendment No. 7
to the Registration Statement of the U.S. Bond Index Fund, (one of the Funds
comprising BT Advisor Funds) on Form N-1A of our reports dated February 27, 1998
on our audits of the financial statements and financial highlights of the U.S.
Bond Index Portfolio, which report is included in the Annual Report to
Shareholders for the year ended December 31, 1997 which is incorporated by
reference in the Post-Effective Amendment to the Registration Statement. We also
consent to the reference in the Statement of Additional Information to our Firm
under the caption "Counsel and Independent Accountants."
/s/ Coopers & Lybrand L.L.P.
Kansas City, Missouri
April 29, 1998
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
U.S. Bond Index Fund
Advisor Class
Yield = 2{( $1,281.00 - $69.11 )+1)^6-1}=
----------------------------------------------------------
Computation of SEC Yield 23,413 *( $10.25 - 0.00000)
As of: December 31, 1997
SEC Yield = 6.14%
==============
Dividend and/or Interest
Inc for the 30 days ended $1,281.00
Net Expenses for $69.11
the Period
Avg Daily Shares
Outstanding and entitled
to receive dividends 23,413
Maximum offering price $10.25
per share as of 3/31/98
Undistributed net income 0.00000
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
U.S. Bond Index Fund
Institutional Class Shares
Yield = 2{( $94,466.72 - $2,193.14 )+1)^6-1}=
----------------------------------------------------------
Computation of SEC Yield 1,730,680 *( $10.29 - 0.00000)
As of: December 31, 1997
SEC Yield = 6.30%
==============
Dividend and/or Interest
Inc for the 30 days ended $94,466.72
Net Expenses for $2,193.14
the Period
Avg Daily Shares
Outstanding and entitled
to receive dividends 1,730,680
Maximum offering price $10.29
per share as of 3/31/98
Undistributed net income 0.00000
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Schedule for Computation of Initial
Fund Performance Data Invest of: $1,000
Offering
BT Advisor US Bond Index Insitutional Price/Share= $10.00
Class
Return Since Inception 6/30/97 NAV= $10.29
ending 12/31/97
FYE: December 31, 1997
Beginning Capital Reinvest Ending Total
DECLARED: Daily Reinvest Period Dividend Gain Price Period Ending Investment
PAID: Monthly Dates Shares /Share /Share /Share Shares Price Value
6/30/97 100.000 0.000000000 0.00000 $10.00 100.000 $10.00 $1,000.00
7/31/97 100.000 0.051731895 0.00000 $10.23 100.506 $10.23 $1,028.17
8/31/97 100.506 0.053520542 0.00000 $10.08 101.039 $10.08 $1,018.48
9/30/97 101.039 0.051649908 0.00000 $10.18 101.552 $10.18 $1,033.80
10/31/97 101.552 0.053292597 0.00000 $10.28 102.078 $10.28 $1,049.37
11/30/97 102.078 0.051603348 0.00000 $10.27 102.591 $10.27 $1,053.61
12/12/98 102.591 0.000000000 0.04141 $10.29 103.004 $10.29 $1,059.91
12/31/97 103.004 0.051715566 0.00000 $10.29 103.522 $10.29 $1,065.24
$1,000 (1+T) = Ending Value
T = 6.52%
Schedule for Computation of Initial
Fund Performance Data Invest of: $1,000
Offering
BT Advisor US Bond Index Advisor Class Price/Share= $10.00
Return Since Inception 6/30/97 NAV= $10.25
ending 12/31/97
FYE: December 31, 1997
Beginning Capital Reinvest Ending Total
DECLARED: Daily Reinvest Period Dividend Gain Price Period Ending Investment
PAID: Monthly Dates Shares /Share /Share /Share Shares Price Value
6/30/97 100.000 0.000000000 0.00000 $10.00 100.000 $10.00 $1,000.00
7/31/97 100.000 0.051080612 0.00000 $10.23 100.499 $10.22 $1,027.10
8/31/97 100.499 0.052772249 0.00000 $10.08 101.025 $10.08 $1,018.34
9/30/97 101.025 0.050869867 0.00000 $10.18 101.530 $10.16 $1,031.55
10/31/97 101.530 0.052337315 0.00000 $10.28 102.047 $10.26 $1,047.00
11/30/97 102.047 0.050782110 0.00000 $10.27 102.552 $10.24 $1,050.13
12/12/98 102.552 0.000000000 0.04138 $10.29 102.964 $10.27 $1,057.44
12/31/97 102.964 0.050775637 0.00000 $10.29 103.472 $10.25 $1,060.59
$1,000 (1+T) = Ending Value
T = 6.06%
</TABLE>
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 ADVISOR FUNDS (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 Advisor Funds
Signature Financial
6 St. James Avenue
Boston, MA 02116
Attention: Thomas M. Lenz
Phone: (617) 423-0800
Fax: (617) 542-5815
with a copy to:
Bankers Trust Company
4 Albany Street, 2nd Floor
New York, NY 10006
Attention: William O'Dell
Phone: (212) 250-2838
Fax: (212) 250-4462
if to the Custodian, to:
Bankers Trust Company
16 Wall Street, 4th Floor
New York, NY 10005
Attention: Vince Fiordimondo
Phone: (212) 618-3602
Fax: (212) 618-3823
or in either case to such other address as shall have been furnished to the
receiving party pursuant to the provisions hereof and (b) shall be deemed
effective when received, or, in the case of a telex, when sent to the proper
number and acknowledged by a proper answerback.
22....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 ADVISOR FUNDS
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
<PAGE>
EXHIBIT A
To Custodian Agreement dated as of July 1, 1996 between Bankers Trust
Company and BT Advisor Funds.
LIST OF PORTFOLIOS
Terms used herein as defined terms unless otherwise defined shall have the
meanings ascribed to them in the above-referred to Custodian Agreement.
THE FOLLOWING IS A LIST OF PORTFOLIOS THE FOLLOWING IS A LIST OF INVESTMENT
REFERRED TO IN THE FIRST WHEREAS PORTFOLIOS REFERRED TO IN SECTION 28
CLAUSE OF THE AGREEMENT OF THE AGREEMENT
Cash Management Fund Cash Management Portfolio
Treasury Money Fund Treasury Money Portfolio
Tax Free Money Fund Tax Free Money Portfolio
NY Tax Free Money Fund NY Tax Free Money Portfolio
Utility Fund Utility Portfolio
Short/Intermediate U.S. Government Short/Intermediate U.S. Government
Securities Fund Securities Portfolio Intermediate Tax Free Fund Intermediate
Tax Free Portfolio BT Investment Lifecycle Short Range Fund BT Investment
Lifecycle Short Range Portfolio BT Investment Lifecycle Mid Range Fund BT
Investment Lifecycle Mid Range Portfolio BT Investment Lifecycle Long Range Fund
BT Investment Lifecycle Long Range Portfolio Capital Appreciation Fund Capital
Appreciation Portfolio International Equity Fund International Equity Portfolio
Small Cap Fund Small Cap Portfolio Global High Securities Fund Global High
Securities Portfolio Latin American Equity Fund Latin American Equity Portfolio
Pacific Basin Equity Fund Pacific Basin Equity Portfolio
Dated as of: July 1, 1996 BT ADVISOR FUNDS
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
<PAGE>
EXHIBIT B
To Custodian Agreement dated as of July 1, 1996 between Bankers Trust
Company and BT Advisor Funds
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 ADVISOR FUNDS
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
<PAGE>
EXHIBIT C
To Custodian Agreement dated as of July 1, 1996 between Bankers Trust
Company and BT Advisor Funds.
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.
<PAGE>
EXHIBIT D
To Custodian Agreement dated as of July 1, 1996 between Bankers Trust
Company and BT Advisor Funds.
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.
<PAGE>
Dated as of: July 1, 1996 BT ADVISOR FUNDS
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
<PAGE>
EXHIBIT E
To Custodian Agreement dated as of July 1, 1996 between Bankers Trust
Company and BT Advisor Funds.
APPROVED REFERENCE TO CUSTODIAN
"Bankers Trust acts as Custodian of the assets of the Trust and the
Portfolio..."
Exhibit 6(iii) under Form N-1A
Exhibit 1 under Item 601/Reg. S-K
SCHEDULE A
OF
EXHIBIT A
TO THE
DISTRIBUTOR'S CONTRACT
AS LAST AMENDED: DECEMBER 18, 1997
The provisions of the Distributor's Contract between BT Advisor Funds and
Edgewood Services, Inc. shall be effective with respect to each Fund and Class
as of the date set forth below.
Name of Fund Effective Date Distribution
and/or
Service Fee
[None]
<PAGE>
SCHEDULE A
OF
EXHIBIT B
TO THE
DISTRIBUTOR'S CONTRACT
AS LAST AMENDED: DECEMBER 18, 1997
The provisions of the Distributor's Contract between BT Advisor Funds and
Edgewood Services, Inc. shall be effective with respect to each Fund and Class
as of the date set forth below.
Name of Fund Effective Date
U.S. Bond Index Fund
Advisor Class September 30, 1996
Institutional Class September 30, 1996
Equity 500 Equal Weighted Index Fund
Advisor Class September 30, 1996
Institutional Class September 30, 1996
Small Cap Index Fund
Advisor Class September 30, 1996
Institutional Class September 30, 1996
EAFE(R) Equity Index Fund
Advisor Class September 30, 1996
Institutional Class September 30, 1996
Global High Yield Securities Fund December 18, 1997
Capital Appreciation Fund December 18, 1997
Small Cap Fund December 18, 1997
International Equity Fund December 18, 1997
Pacific Basin Equity Fund December 18, 1997
Latin American Equity Fund December 18, 1997
Growth Fund
Intermediary Class December 18, 1997
Investment Class December 18, 1997
Growth and Income Fund
Intermediary Class December 18, 1997
Investment Class December 18, 1997
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains Summary Financial Information extracted from the BT
Advisor EAFE Equity Index Fund Annual Report dated December 31, 1997 and is
qualified in its entirety by reference to such Annual Report.
</LEGEND>
<CIK> 0000948630
<NAME> BT ADVISOR EAFE EQUITY INDEX FUND ADVISOR CLASS
<SERIES>
<NUMBER> 4
<NAME> EAFE EQUITY INDEX FUND ADVISOR CLASS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 36731891
<INVESTMENTS-AT-VALUE> 36731891
<RECEIVABLES> 1982625
<ASSETS-OTHER> 9163
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 38723679
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2829
<TOTAL-LIABILITIES> 2829
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 36665584
<SHARES-COMMON-STOCK> 333679
<SHARES-COMMON-PRIOR> 70726
<ACCUMULATED-NII-CURRENT> (317554)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (147832)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2529652
<NET-ASSETS> 38720850
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 792950
<EXPENSES-NET> 27771
<NET-INVESTMENT-INCOME> 500637
<REALIZED-GAINS-CURRENT> 1947153
<APPREC-INCREASE-CURRENT> 934766
<NET-CHANGE-FROM-OPS> 3382556
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 818191
<DISTRIBUTIONS-OF-GAINS> 2099543
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 18359793
<NUMBER-OF-SHARES-REDEEMED> 25977108
<SHARES-REINVESTED> 2686886
<NET-CHANGE-IN-ASSETS> (1663696)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 4558
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 150944
<AVERAGE-NET-ASSETS> 1915255
<PER-SHARE-NAV-BEGIN> 10.14
<PER-SHARE-NII> .05
<PER-SHARE-GAIN-APPREC> .13
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> .69
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.63
<EXPENSE-RATIO> 65
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains Summary Financial Information extracted from the BT
Advisor EAFE Equity Index Fund Annual Report dated December 31, 1997 and is
qualified in its entirety by reference to such Annual Report.
</LEGEND>
<CIK> 0000948630
<NAME> BT ADVISOR FUNDS
<SERIES>
<NUMBER> 4
<NAME> BT ADVISOR EAFE EQUITY INDEX FUND INSTITUTIONAL CLASS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 36731891
<INVESTMENTS-AT-VALUE> 36731891
<RECEIVABLES> 1982625
<ASSETS-OTHER> 9163
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 38723679
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2829
<TOTAL-LIABILITIES> 2829
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 36665584
<SHARES-COMMON-STOCK> 3556906
<SHARES-COMMON-PRIOR> 3735688
<ACCUMULATED-NII-CURRENT> (317554)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (147832)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2529652
<NET-ASSETS> 38720850
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 792950
<EXPENSES-NET> 27771
<NET-INVESTMENT-INCOME> 500637
<REALIZED-GAINS-CURRENT> 1947153
<APPREC-INCREASE-CURRENT> 934766
<NET-CHANGE-FROM-OPS> 3382556
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 818191
<DISTRIBUTIONS-OF-GAINS> 2099543
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 18359793
<NUMBER-OF-SHARES-REDEEMED> 25977108
<SHARES-REINVESTED> 2686886
<NET-CHANGE-IN-ASSETS> (1663696)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 4558
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 150944
<AVERAGE-NET-ASSETS> 43642656
<PER-SHARE-NAV-BEGIN> 10.62
<PER-SHARE-NII> .23
<PER-SHARE-GAIN-APPREC> .02
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> .85
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.98
<EXPENSE-RATIO> 40
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains Summary Financial Information extracted from the BT
Advisor Small Cap Index Fund Annual Report dated December 31, 1997 and is
qualified in its entirety by reference to such Annual Report.
</LEGEND>
<CIK> 0000948630
<NAME> BT ADVISOR FUNDS
<SERIES>
<NUMBER> 5
<NAME> SMALL CAP INDEX FUND ADVISOR CLASS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 39522189
<INVESTMENTS-AT-VALUE> 39522189
<RECEIVABLES> 124808
<ASSETS-OTHER> 11630
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 39658627
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 13010
<TOTAL-LIABILITIES> 13010
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 31452466
<SHARES-COMMON-STOCK> 114124
<SHARES-COMMON-PRIOR> 6991
<ACCUMULATED-NII-CURRENT> 53464
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (286479)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 8426166
<NET-ASSETS> 39645617
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 861731
<EXPENSES-NET> 87431
<NET-INVESTMENT-INCOME> 774300
<REALIZED-GAINS-CURRENT> 5721943
<APPREC-INCREASE-CURRENT> 5946591
<NET-CHANGE-FROM-OPS> 12442834
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 715805
<DISTRIBUTIONS-OF-GAINS> 6062224
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1812603
<NUMBER-OF-SHARES-REDEEMED> 657007
<SHARES-REINVESTED> 174689
<NET-CHANGE-IN-ASSETS> (21989285)
<ACCUMULATED-NII-PRIOR> (5031)
<ACCUMULATED-GAINS-PRIOR> 53802
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 196910
<AVERAGE-NET-ASSETS> 644070
<PER-SHARE-NAV-BEGIN> 11.04
<PER-SHARE-NII> .08
<PER-SHARE-GAIN-APPREC> 2.63
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 2.06
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.69
<EXPENSE-RATIO> 45
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains Summary Financial Information extracted from the BT Small
Cap Index Fund Annual Report dated December 31, 1997 and is qualified in its
entirety by reference to such Annual Report. </LEGEND> <CIK> 0000948630 <NAME>
BT ADVISOR FUNDS <SERIES>
<NUMBER> 5
<NAME> SMALL CAP INDEX ADVISOR FUND INSTITUTIONAL CLASS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 39522189
<INVESTMENTS-AT-VALUE> 39522189
<RECEIVABLES> 124808
<ASSETS-OTHER> 11630
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 39658627
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 13010
<TOTAL-LIABILITIES> 13010
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 31452466
<SHARES-COMMON-STOCK> 3442833
<SHARES-COMMON-PRIOR> 5645008
<ACCUMULATED-NII-CURRENT> 53464
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (286479)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 8426166
<NET-ASSETS> 39645617
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 861731
<EXPENSES-NET> 87431
<NET-INVESTMENT-INCOME> 774300
<REALIZED-GAINS-CURRENT> 5721943
<APPREC-INCREASE-CURRENT> 5946591
<NET-CHANGE-FROM-OPS> 12442834
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 715805
<DISTRIBUTIONS-OF-GAINS> 6062224
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 35513549
<NUMBER-OF-SHARES-REDEEMED> 71077503
<SHARES-REINVESTED> 6579579
<NET-CHANGE-IN-ASSETS> (21989285)
<ACCUMULATED-NII-PRIOR> (5031)
<ACCUMULATED-GAINS-PRIOR> 53802
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 196910
<AVERAGE-NET-ASSETS> 56784619
<PER-SHARE-NAV-BEGIN> 10.90
<PER-SHARE-NII> .23
<PER-SHARE-GAIN-APPREC> 2.21
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 2.21
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.13
<EXPENSE-RATIO> 25
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains Summary Financial Information extracted from the BT
Advisor U.S. Bond Index Fund Annual Report dated December 31, 1997 and is
qualified in its entirety by reference to such Annual Report.
</LEGEND>
<CIK> 0000948630
<NAME> BT ADVISOR FUNDS
<SERIES>
<NUMBER> 10
<NAME> U.S. BOND INDEX FUND ADVISOR CLASS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 8317460
<INVESTMENTS-AT-VALUE> 8317460
<RECEIVABLES> 37245
<ASSETS-OTHER> 8049
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 8346269
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 16485
<TOTAL-LIABILITIES> 16485
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 7783879
<SHARES-COMMON-STOCK> 23556
<SHARES-COMMON-PRIOR> 5
<ACCUMULATED-NII-CURRENT> 108
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 136018
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 426264
<NET-ASSETS> 8346269
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 614718
<EXPENSES-NET> 9848
<NET-INVESTMENT-INCOME> 604870
<REALIZED-GAINS-CURRENT> 224635
<APPREC-INCREASE-CURRENT> 426264
<NET-CHANGE-FROM-OPS> 1255769
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 604762
<DISTRIBUTIONS-OF-GAINS> 88617
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 237843
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 2770
<NET-CHANGE-IN-ASSETS> 8346169
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 63348
<AVERAGE-NET-ASSETS> 84213
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .31
<PER-SHARE-GAIN-APPREC> .29
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> .35
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.25
<EXPENSE-RATIO> 40
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains Summary Financial Information extracted from the BT
Advisor U.S. Bond Index Fund Annual Report dated December 31, 1997 and is
qualified in its entirety by reference to such Annual Report.
</LEGEND>
<CIK> 0000948630
<NAME> BT ADVISOR FUNDS
<SERIES>
<NUMBER> 10
<NAME> BT ADVISOR U.S. BOND INDEX FUND INSTITUTIONAL CLASS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 8317460
<INVESTMENTS-AT-VALUE> 8317460
<RECEIVABLES> 37245
<ASSETS-OTHER> 8049
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 8346269
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 16485
<TOTAL-LIABILITIES> 16485
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 7783879
<SHARES-COMMON-STOCK> 789133
<SHARES-COMMON-PRIOR> 5
<ACCUMULATED-NII-CURRENT> 108
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 136018
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 426264
<NET-ASSETS> 8346269
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 614718
<EXPENSES-NET> 9848
<NET-INVESTMENT-INCOME> 604870
<REALIZED-GAINS-CURRENT> 224635
<APPREC-INCREASE-CURRENT> 426264
<NET-CHANGE-FROM-OPS> 1255769
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 604762
<DISTRIBUTIONS-OF-GAINS> 88617
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 27731959
<NUMBER-OF-SHARES-REDEEMED> 20841880
<SHARES-REINVESTED> 653087
<NET-CHANGE-IN-ASSETS> 8346169
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 63348
<AVERAGE-NET-ASSETS> 19368812
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .32
<PER-SHARE-GAIN-APPREC> .31
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> .36
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.27
<EXPENSE-RATIO> 30
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
