Prospectus dated June 30, 1997
supplementing the Prospectus dated October 18, 1996
of
Hansberger Institutional Series
515 East Las Olas Boulevard
Suite 1300
Fort Lauderdale, Florida
Telephone No. 954-522-5150
The attached Prospectus dated October 18, 1996 of the
Hansberger Institutional Series (the "Trust"), which is
incorporated herein by reference in its entirety, is hereby
amended and supplemented as follows:
- - Throughout the Prospectus, all references to the Statement of
Additional Information ("SAI") refer to the SAI dated June 30,
1997.
- - In the Introduction section on page 2, the last sentence under
the heading "How to Invest" is replaced with the following
sentence.
Currently, shares of Foreign Small Cap Fund are not being offered
or sold.
- - The section on page 3, under the heading "FEE SUMMARY," is
replaced in its entirety with the following:
The following table and example are intended to assist you
in understanding the expenses and fees that a shareholder of a
Fund will incur:
SHAREHOLDER TRANSACTION Emerging Foreign All
EXPENSE International Markets Small Cap Countries
Fund Fund Fund Fund
Maximum Sales Load Imposed None* None* None* None*
on Purchase
Redemption Fee 0.50%* 1.00%* 1.00%* 0.50%*
ANNUAL FUND OPERATING
EXPENSES (as a percentage of
average net assets)
Management Fees 0.75% 1.00% 0.90% 0.75%
12b-1 Fees None None None None
Other Expenses (after 0.25% 0.50% 0.35% 0.25%
voluntary waivers)**
Total Fund Operating
Expenses (after 1.00% 1.50% 1.25% 1.00%
voluntary waivers)***
* Shareholders will be charged a transaction fee, which is
payable directly to the Fund, in connection with each
purchase and redemption of shares of the Fund. The
transaction fee is intended to allocate transaction costs
associated with purchases and redemptions of shares of the
Fund to investors actually making such purchases and
redemptions rather than to the Fund's other shareholders.
The transaction fee represents the Adviser's estimate of
such transaction costs, which include the costs of acquiring
and disposing of the Fund's portfolio securities. The
transaction fee is 1.00% for the Emerging Markets and
Foreign Small Cap Funds and 0.50% for the International and
All Countries Funds. The transaction fee is not a sales
charge or load, and is retained by the Fund. The fee does
not apply to, and is not charged in connection with
exchanges from one Fund to another, certain insignificant
transactions, including the reinvestment of dividends or
capital gain distributions, or transactions involving
shareholders who previously purchased shares that were not
subject to the transaction fee.
** Reflects voluntary waivers and reimbursements of fees by the
Adviser. In the absence of such voluntary waivers or
reimbursements, Other Expenses for each of the following
Funds are estimated to be: International Fund - 0.45%;
Emerging Markets Fund - 0.55%; Foreign Small Cap Fund -
0.40%; and All Countries Fund_ - 0.45%.
*** Reflects voluntary waivers and reimbursements of fees by the
Adviser. In the absence of such voluntary waivers or
reimbursements, Total Fund Operating Expenses for each of
the following Funds are estimated to be: International Fund
- 1.20%; Emerging Markets Fund - 1.55%; Foreign Small Cap
Fund - 1.30; and All Countries Fund_ - 1.20%. Although the
Adviser anticipates voluntarily waiving fees and/or bearing
expenses that will result in total fund operating expenses
as set forth above, it is under no obligation to continue to
do so. See "MANAGEMENT OF THE FUNDS _ Investment Adviser."
Example
The following example demonstrates the expenses you would
pay on a $1,000 investment assuming 5% annual return and either
(1) complete redemption at the end of each time period:
1 year 3 years
International Fund $20 $43
Emerging Markets Fund $36 $68
Foreign Small Cap Fund $33 $61
All Countries Fund_ $20 $43
or (2) no redemption at the end of each period:
1 year 3 years
International Fund $15 $37
Emerging Markets Fund $25 $57
Foreign Small Cap Fund $23 $50
All Countries Fund_ $15 $37
The example should not be considered a representation of
past or future expenses. Actual expenses may be greater or less
than those shown. "Other Expenses" are based on estimated
amounts for the current fiscal year. The assumption of a 5%
annual return is required by the U.S. Securities and Exchange
Commission (the "SEC"), and is not a prediction of a Fund's
future performance. The example assumes the deduction of
transaction fees at the time of purchase and redemption.
Investments in the Funds prior to April 15, 1997, will not be
subject to the transaction fees.
The Adviser may direct a Fund's securities transactions
to brokers who may agree to assume (or to arrange for third
parties to assume) certain expenses of the Fund.
- -The following section is added at the top of Page 4.
FINANCIAL HIGHLIGHTS
The following information for the period ended December 31, 1996,
has been audited by Arthur Andersen LLP, the Fund's independent
public accountants, as indicated in their report dated January
17, 1997, on the Fund's financial statements as of December 31,
1996 incorporated by reference in the Fund's Statement of
Additional Information under "Financial Information." The
following information for the period ended March 31, 1997 is
unaudited. This table should be read in conjunction with the
Fund's audited and unaudited financial statements and notes
thereto.
For a Share Outstanding Throughout each Period
International Emerging Markets
Fund Fund
1/1/97 12/30/96 1/1/97 12/30/96
to (1) to (1)
3/31/97 to 3/31/97 to
12/31/96 12/31/96
Net Asset Value, Beginning
of Period $10.12 $10.12 $10.12 $10.12
Income From Investment
Operations:
Net Investment Income .03 -- .03 --
(Loss)
Net Realized and
Unrealized Gain .22 -- .33 --
(Loss) on Investments
Total From Investment .25 -- .36 --
Operations
Less Distributions:
Distributions From Net -- -- -- --
Investment Income
Dividends From Capital -- -- -- --
Gains
Total Distributions -- -- -- --
Net Asset Value, End of $10.37 $10.12 $10.48 $10.12
Period
Total Return 2.47% 0.00% 3.56% 0.00%
Ratios and Supplemental
Data
Net Assets, End Of Period
(000) $31,553 $4,296 $10,716 $5,233
Ratios Of Expenses To 1.00%* 1.00%* 1.50%* 1.50%*
Average Net Assets
Ratio Of Expenses To
Average Net Assets 3.87%* 77.13%* 4.89%* 65.28%*
(Excluding Waivers and
Reimbursements)
Ratio Of Net Income (Loss)
To Average Net Assets 3.82%* 3.50%* 1.64%* 2.87%*
Ratio Of Net Income (Loss)
To Average
Net Assets (Excluding .96%* (72.63)% (1.75)%* (60.91)%
Waivers and *
Reimbursement)
Portfolio Turnover Rate 1.21% 0.00% 3.13% 0.00%
Average Commission Rate $0.0201 $0.00 $0.0050 $0.00
Paid
*Annualized
(1)International Fund and Emerging Markets Fund commenced
operations on December 30, 1996.
- -The following sentence is added to the section under the
heading "Investment Policies Common to Each Fund" on page 5:
Each Fund may invest in securities of companies or investment
trusts that invest in, or securities backed by, mortgages ,
real estate or interests in real estate, including, but not
limited to, real estate investment trusts ("REITs").
The following paragraph is added at the end of the section
under the heading "Investment Techniques" on page 10:
REITS. REITs are trusts that invest primarily in
commercial real estate or real estate-related loans. The
value of interests in REITs may be affected by the value of
the underlying property owned or the quality of the loans held
by the trust.
- -In the section titled "Portfolio Managers" on pages 20 and 21:
m the heading "Portfolio Managers" is replaced with
"Portfolio Management Team."
m the last sentence discussing Thomas L. Hansberger is
replaced with the following:
He is the lead manager for the All Countries
Fund_ and the Emerging Markets Fund.
m the paragraph discussing Wilkin W. Tai is deleted.
m the paragraphs discussing Ms. Reeves and Messrs. Alzuru,
Tyurenkov and Gulden are replaced with the
following:
Lauretta (Retz) Reeves joined the Adviser in 1996 as a
Managing Director, portfolio manager and research analyst.
Prior to joining the Adviser she was Senior Vice President of
Templeton Worldwide in the research and portfolio management
group with primary responsibility for numerous industries and
countries, including global chemicals and European banks. Ms.
Reeves is the lead manager for the Foreign Small Cap Fund and
a member of the team that manages the International Fund.
Francisco Alzuru joined the Adviser in 1994 as a Managing
Director, portfolio manager and research analyst, specializing
in Latin America. Prior to joining the Adviser, he worked at
Vestcorp Partners as their Latin American analyst. Mr. Alzuru
is a member of the team that manages the Foreign Small Cap
Fund, the All Countries Fund_ and the Emerging Markets Fund.
Victoria Gretzky joined the Adviser in 1995 as a research
analyst. Prior to joining the Adviser, she was a research
analyst for Optimum Consulting, a Russian based firm which
specialized in restructuring Russian Companies during
privatization. Ms. Gretzky is a member of the team that
manages the Emerging Markets Fund.
Charles F. Gulden joined the Adviser in 1996 as a Managing
Director, portfolio manager and research analyst. Prior to
joining the Adviser, he was Vice President and Director of
Templeton Worldwide in the research and portfolio management
group with primary research responsibility for global health
care services and agricultural chemical sectors. Mr. Gulden
is a member of the teams that manage the Foreign Small Cap
Fund and the All Countries Fund_
John Hock joined the Adviser in 1996 as a research analyst.
Prior to joining the adviser, he was a vice president and
senior analyst in the global securities research and economics
group at Merrill Lynch. Mr. Hock is a member of the teams
that manage the International Fund and the All Countries
Fund._
Robert Mazuelos joined the Adviser in 1995 as a research
analyst. Prior to joining the Adviser, he was a performance
analyst at Templeton Investment Counsel, Inc. where he was
responsible for return analysis on separate accounts and
mutual funds. Mr. Mazuelos is a member of the teams that
manage the International Fund, Emerging Markets Fund and the
Foreign Small Cap Fund.
Pattra Piriyapoksombut joined the Adviser in 1996 as a
portfolio manager and research analyst. Prior to joining the
Adviser, she was a senior analyst at Wheelock NatWest
Securities where her research responsibilities included
building materials and property sectors. Ms. Piriyapoksombut
is a member of the team that manages the Emerging Markets
Fund.
Vladimir Tyurenkov joined the Adviser in 1995 as Managing
Director of Eastern Europe and Russia, portfolio manager and
research analyst. Prior to joining the Adviser, he spent
several years working for the Russian Government and worked
extensively on the Pepperdine University Russian Conversion
and Privatization Program. Mr. Tyurenkov is a member of the
teams that manage the Foreign Small Cap Fund, the All
Countries Fund_ and the Emerging Markets Fund.
David Wu joined the Adviser in 1995 as a research analyst.
Prior to joining the Adviser, Mr. Wu was an editor at Business
Asia, an Economist Group publication targeted at senior
management for multinationals operating in Asia. He is a
member of the teams that manage the Emerging Markets Fund and
the Foreign Small Cap Fund.
PLEASE RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE
STATEMENT OF ADDITIONAL INFORMATION
HANSBERGER INSTITUTIONAL SERIES
515 East Las Olas Boulevard
Suite 1300
Fort Lauderdale, Florida 33301
Telephone No. 954-522-5150
Hansberger Institutional Series (the "Trust") is an open-
end management investment company currently consisting of four
series, International Fund, Emerging Markets Fund, Foreign Small
Cap Fund and All Countries Fund_ (each individually referred to
as a "Fund" or collectively referred to as the "Funds"), each of
which is described in this Statement of Additional Information.
The investment adviser of each Fund is Hansberger Global
Investors, Inc. (the "Adviser").
This Statement of Additional Information ("SAI") is not a
prospectus and should be read in conjunction with the prospectus
offering shares of the Trust dated June 30, 1997, as it may be
amended or supplemented from time to time (the "Prospectus"). A
copy of the Prospectus may be obtained without charge by writing
to, or calling, the Trust at the address and telephone number
listed above.
This Statement of Additional Information is dated June 30, 1997.
TABLE OF CONTENTS PAGE
INVESTMENT POLICIES AND TECHNIQUES 3
Illiquid and Restricted Securities 3
Short Sales 3
Warrants 4
Debt Obligations 4
High Risk Debt Securities 5
Lending of Portfolio Securities 6
Depositary Receipts 7
Derivative Instruments 7
Forward Currency Contracts 12
Foreign Currency Transactions 13
When-Issued Securities 13
Foreign Investment Companies 14
Repurchase Agreements 14
Borrowing 15
Mortgage Dollar Rolls and Reverse Repurchase Agreements 15
INVESTMENT RESTRICTIONS 15
TRUSTEES AND OFFICERS OF THE TRUST 17
PRINCIPAL SHAREHOLDERS 19
INVESTMENT ADVISER 19
FUND TRANSACTIONS AND BROKERAGE 20
CUSTODIAN 22
TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT 23
TAXES 23
DETERMINATION OF NET ASSET VALUE 26
ADDITIONAL SHAREHOLDER INFORMATION 26
ORGANIZATION OF THE TRUST AND THE FUNDS 27
PERFORMANCE INFORMATION 27
GENERAL INFORMATION 31
INDEPENDENT ACCOUNTANTS 32
LEGAL COUNSEL 32
FINANCIAL STATEMENTS 32
Appendix of Ratings A-1
No person has been authorized to give any information or to
make any representations other than those contained in this
Statement of Additional Information and the Prospectus and, if
given or made, such information or representations may not be
relied upon as having been authorized by the Trust.
This Statement of Additional Information does not
constitute an offer to sell securities.
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of
each Fund's investment objectives, policies and techniques that
are described in detail in the Prospectus under the caption
"Investment Objectives and Policies". Capitalized terms not
defined herein are defined in the Prospectus.
Illiquid and Restricted Securities
Certain securities exempt, or issued in transactions
exempt, from registration under the 1933 Act, including 144A
Securities, may be considered illiquid. The Board of Trustees
is responsible for determining, to the extent permissible under
the federal securities laws, which securities are illiquid; the
Board has delegated this responsibility to the Adviser, who will
make the day-to-day determinations of the liquidity of
securities. The Board retains oversight and ultimate
responsibility for these determinations. Although no definitive
liquidity criteria are used, the Board of Trustees has directed
the Adviser to examine factors such as (i) the nature of the
market (including the institutional private resale market) for a
security, (ii) the terms of certain instruments permitting
disposition to the issuer thereof or a third party (e.g.,
certain repurchase obligations and demand instruments), (iii)
availability of market quotations (e.g., for securities quoted
in PORTAL system), and (iv) other permissible relevant factors.
Restricted Securities may be sold only in privately
negotiated transactions or in a public offering under an
effective registration statement under the 1933 Act. If
registration becomes necessary, the Fund may have to pay all or
part of the registration costs; in addition, considerable time
may elapse between the Fund's decision to sell and the time it
may be permitted to sell a security under an effective
registration statement. If adverse market conditions developed
during such a period, the Fund might obtain a less favorable
price than prevailed when it decided to sell. Restricted
Securities will be priced at fair value, determined in good
faith by the Board of Trustees.
If, through appreciation of Restricted Securities or
depreciation of other securities, a Fund finds that more than
15% of its net assets are invested in illiquid securities,
including illiquid Restricted Securities, it will take such
steps, if any, as the Trustees deem advisable to protect
liquidity.
Each Fund may sell OTC options and may need to segregate
assets or cover its obligations as writer of such options.
Assets used as cover for OTC options written by a Fund will be
considered illiquid unless such options are sold to qualified
dealers who agree that the Fund may repurchase any OTC option it
writes at a maximum price to be calculated by a formula set
forth in the option agreement. The cover for an OTC option
written subject to this procedure will be considered illiquid
only to the extent that the maximum repurchase price under the
formula exceeds the intrinsic value of the OTC option.
Short Sales
When a Fund sells short, it borrows the securities that it
needs to deliver to the buyer. The Fund must arrange through a
broker to borrow these securities and will become obligated to
replace the borrowed securities at whatever their market price
may be at the time of replacement. The Fund may have to pay a
premium to borrow the securities and must pay any dividends or
interest payable on the securities until they are replaced.
A Fund's obligation to replace the securities borrowed in
connection with a short sale will be secured. The proceeds a
Fund receives from the short sale will be held on behalf of the
broker until the Fund replaces the borrowed securities, and the
Fund will deposit collateral with the broker; this collateral
will consist of
cash or liquid, high grade debt obligations. In addition, the
Fund will deposit collateral in a segregated account with the
Custodian; this collateral will consist of cash or liquid, high
grade debt obligations equal to any difference between the market
value of (1) the securities sold at the time they were sold short
and (2) any collateral deposited with the broker in connection
with the short sale (not including the proceeds of the short
sale).
Each Fund may sell securities short against the box to hedge
unrealized gains on portfolio securities. If a Fund sells
securities short against the box, it may protect unrealized
gains, but will lose the opportunity to profit on such securities
if the price rises.
Warrants
Each Fund may buy warrants, which give the holder the right,
but not the obligation, to buy stock of an issuer ("underlying
stock") at a given price (usually higher than the price of the
underlying stock when the warrant is issued) prior to a specified
expiration date or perpetually. Warrants may trade separately or
in connection with the acquisition of securities. A Fund will
not purchase warrants, valued at the lower of cost
or market value, in excess of 5% of the Fund's net assets; this
limit includes warrants that are not listed on
any stock exchange, and such warrants are limited to 2% of the
Fund's net assets. Warrants acquired by a Fund in units or
attached to securities are not subject to these limits. Warrants
do not carry dividend or
voting rights on the underlying stock, and do not represent any
rights in the assets of the issuer. As a result, warrants may be
considered more speculative than certain other investments. A
warrant's value does not necessarily change with the value of the
underlying stock. A warrant ceases to have value if it expires
unexercised.
Debt Obligations: General
Each Fund may invest in debt obligations. Issuers of debt
obligations are contractually obliged to pay interest at a
specified rate on specified dates and to repay principal on a
specified maturity date. Certain debt obligations (usually
intermediate- and long-term bonds) allow the issuer to redeem or
"call" a bond before its maturity. Issuers are most likely to
call debt when interest rates are falling.
Price Volatility. The market value of debt generally
varies inversely to changes in interest rates; when interest
rates decline, a debt obligation's price usually rises, and when
interest rates rise, a debt obligation's price usually declines.
Maturity. In general, the longer the maturity of a debt
obligation, the higher its yield and the more sensitive it is to
changes in interest rates. Conversely, the shorter the
maturity, the lower the yield but the greater the price
stability. "Commercial paper" is generally considered the
shortest form of debt, and "bond" generally refers to securities
with maturities over two years. Bonds with maturities of three
years or less are considered short-term, bonds with maturities
between three and seven years are considered intermediate-term,
and bonds with maturities greater than seven years are
considered long-term.
Credit Quality. The value of debt may also be affected by
changes in the issuer's credit rating or financial condition.
Lower quality ratings indicate a higher degree of risk as to
payment of interest and return of principal. To compensate
investors for taking on increased risk, issuers considered less
creditworthy generally must offer investors higher interest
rates than issuers with better credit ratings.
In conducting its credit research and analysis, the Adviser
considers both qualitative and quantitative factors to evaluate
creditworthiness of individual issuers. The Adviser also
relies, in part, on credit ratings compiled by a number of
rating organizations. See the Ratings Appendix.
High Risk Debt Securities ("Junk Bonds")
Each Fund may invest up to 20% of its net assets in non-
investment grade debt securities. Debt securities rated below
Baa by Moody's or BBB by S&P, or of comparable quality, are
considered below investment grade. Non-investment grade debt
securities ("high risk debt securities") may include (i) debt
not in default but rated as low as C by Moody's, S&P, or Fitch
Investors Service, Inc. ("Fitch"), CC by Thomson BankWatch
("TBW") or ICBA, or CCC by Duff & Phelps, Inc. ("D&P"); (ii)
commercial paper rated as low as C (or D if in default) by S&P,
Not Prime by Moody's, F-S (or D if in default) by Fitch, Duff 4
(or Duff 5 if in default) by Duff, TBW-4 by TBW, or D by ICBA;
and (iii) unrated debt securities of comparable quality. Each
Fund may also buy debt in default (rated D by S&P or TBW or
Fitch, C by ICBA, DD by Duff, or of comparable quality) and
commercial paper in default (rated D by S&P or Fitch, Not Prime
by Moody's, Duff 5 by Duff, TBW-4 by TBW, D by ICBA, or of
comparable quality). Such securities, while generally offering
higher yields than investment grade securities with similar
maturities, involve greater risks, including the possibility of
(or actual) default or bankruptcy. They are regarded as
predominantly speculative with respect to the issuer's capacity
to pay interest and repay principal. See the Ratings Appendix
for a description of ratings.
The market for high risk debt securities is relatively new
and its growth has paralleled a long economic expansion. It is
not clear how this market would withstand a prolonged recession
or economic downturn, which could severely disrupt this market
and adversely affect the value of such securities.
Market values of high risk debt securities tend to reflect
individual corporate developments to a greater extent, and tend
to be more sensitive to economic conditions, than do higher
rated securities. As a result, high risk debt securities
generally involve more credit risks than higher rated debt.
During an economic downturn or a sustained period of rising
interest rates, highly leveraged issuers of high risk debt may
experience financial stress and may not have sufficient revenues
to meet their payment obligations. An issuer's ability to
service its debt obligations may also be adversely affected by
specific corporate developments, its own inability to meet
specific projected business forecasts, or unavailability of
additional financing. The risk of loss due to default by an
issuer is significantly greater for high risk debt than for
higher rated debt because the high risk debt is generally
unsecured and often subordinated.
If the issuer of high risk debt defaulted, the Fund might
incur additional expenses in seeking recovery. Periods of
economic uncertainty and changes would also generally result in
increased volatility in the market prices of these securities
and thus in a Fund's net asset value.
If a Fund invested in high risk debt experiences unexpected
net redemptions in a rising interest rate market, it may be
forced to liquidate a portion of its portfolio without regard to
their investment merits. Due to the limited liquidity of high
risk debt securities, the Fund may be forced to liquidate these
securities at a substantial discount. Any such liquidation
would reduce the Fund's asset base over which expenses could be
allocated and could result in a reduced rate of return for the
Fund.
Payment Expectations. During periods of falling interest
rates, issuers of high risk debt securities that contain
redemption, call or prepayment provisions are likely to redeem
or repay the securities and refinance with other debt at a lower
interest rate. If a Fund holds debt securities that are
refinanced or otherwise redeemed, it may have to replace the
securities with a lower yielding security, which would result in
a lower return.
Credit Ratings. Credit ratings evaluate safety of
principal and interest payments, but do not evaluate the market
value risk of high risk securities and, therefore, may not fully
reflect the true risks of an investment. In addition, rating
agencies may not make timely changes in a rating to reflect
changes in the economy or in the condition of the issuer that
affect the market value of the security. Consequently, credit
ratings are used only as a preliminary indicator of investment
quality. Investments in high risk securities will depend more
heavily on the Adviser's credit analysis than investment-grade
debt securities. The Adviser will monitor each Fund's
investments and evaluate whether to dispose of or retain high
risk securities whose credit quality may have changed.
Liquidity and Valuation. A Fund may have difficulty
disposing of certain high risk securities with a thin trading
market. Not all dealers maintain markets in all these
securities, and for many such securities there is no established
retail secondary market. The Adviser anticipates that such
securities may be sold only to a limited number of dealers or
institutional investors. To the extent a secondary trading
market does exist, it is generally not as liquid as that for
higher-rated securities; a lack of a liquid secondary market may
adversely affect the market price of a security, which may in
turn affect a Fund's net asset value and ability to dispose of
particular securities in order to meet liquidity needs or to
respond to a specific economic event, or may make it difficult
for the Fund to obtain accurate market quotations for valuation
purposes. Market quotations on many high risk securities may be
available only from a limited number of dealers and may not
necessarily represent firm bids or prices for actual sales.
During periods of thin trading, the spread between bid and asked
prices is likely to increase significantly, and adverse
publicity and investor perceptions (whether or not based on
fundamental analysis) may decrease the value and liquidity of a
high risk security.
Legislation. Legislation has from time to time been or may
be proposed that is designed to limit the use of certain high
risk debt. It is not possible to predict the effect of such
legislation on the market for high risk debt. However, any
legislation that may be proposed or enacted could have a
material adverse effect on the value of these securities, the
existence of a secondary trading market for the securities and,
as a result, a Fund's net asset values.
Lending of Portfolio Securities
Each Fund may lend portfolio securities to qualified
borrowers. In determining whether to lend securities to a
particular investor, the Adviser will consider, and during the
period of the loan will monitor, all relevant facts and
circumstances, including the borrower's creditworthiness. The
borrower must maintain collateral with the Custodian, either in
cash, money market instruments, or a letter of credit, in an
amount at least equal to the market value of the securities
loaned, plus accrued interest and dividends or other income,
determined on a daily basis and adjusted accordingly.
Each Fund will retain authority to terminate any loan of
its portfolio securities at any time. A Fund may pay reasonable
administrative and custodial fees in connection with a loan and
may pay the borrower or placing broker a negotiated portion of
the interest earned on cash or money market instruments held as
collateral. On any loan, a Fund will receive reasonable
interest or a flat fee from the borrower and amounts equivalent
to any dividends, interest or other distributions on the
securities loaned. The Fund will retain record ownership of
loaned securities to exercise beneficial rights, such as voting
and subscription rights and rights to dividends, interest or
other distributions, when retaining such rights is considered to
be in the Fund's interest.
Depositary Receipts
Generally, ADRs are issued in registered form, denominated
in U.S. dollars, and designed for use in the U.S. securities
markets. Other Depositary Receipts may be issued in bearer form
and denominated in other currencies, and are generally designed
for use in securities markets outside the U.S. ADR facilities
include American Depositary Shares and New York Shares, and may
be established as either "unsponsored" or "sponsored." While
the two types of ADR facilities are similar, there are
differences regarding ADR holders' rights and obligations and
the practices of market participants. A depositary may
establish an unsponsored facility without participation by (or
acquiescence of) the underlying issuer; typically, however, the
depositary requests a letter of non-objection from the
underlying issuer prior to establishing the facility. Holders
of unsponsored ADRs generally bear all the costs of the ADR
facility. The depositary usually charges fees upon the deposit
and withdrawal of the underlying securities, the conversion of
dividends into U.S. dollars, the disposition of non-cash
distribution, and the performance of other services. The
depositary of an unsponsored facility frequently is under no
obligation to distribute shareholder communications received
from the underlying issuer or to pass through voting rights to
ADR holders in respect of the underlying securities.
Sponsored ADR facilities are created in generally the same
manner as unsponsored facilities, except that sponsored ADRs are
established jointly by a depositary and the underlying issuer
through a deposit agreement. The deposit agreement sets out the
rights and responsibilities of the underlying issuer, the
depositary and the ADR holders. With sponsored facilities, the
underlying issuer typically bears some of the costs of the ADR
(such as dividend payment fees of the depositary), although ADR
holders may bear costs such as deposit and withdrawal fees.
Depositories of most sponsored ADRs agree to distribute notices
of shareholder meetings, voting instructions, and other
shareholder communications and information to the ADR holders at
the underlying issuer's request.
Derivative Instruments
General Description. Each Fund may invest in a variety of
derivative instruments, including options, futures contracts
(sometimes referred to as "futures"), options on futures
contacts, and forward contracts to hedge its other investments,
or for risk management.
The use of these instruments is subject to regulation by
the SEC, options and futures exchanges upon which the
instruments may be traded, the Commodity Futures Trading
Commission ("CFTC") and state regulatory authorities. In
addition, the Fund's ability to use these instruments will be
limited by tax considerations.
In addition to the investments and techniques described
below and in the Prospectus, the Adviser may use additional
instruments and other hedging techniques as they become
available, to the extent that they are consistent with a Fund's
investment limitations and applicable regulation.
Special Risks of These Instruments. Derivative instruments
present special considerations and risks. Risks pertaining to
particular individual instruments are described in following
sections.
First, successful use of these instruments depends on the
Adviser's ability to predict movements in the overall securities
and currency markets, which requires different skills than
predicting changes in the prices of individual securities.
There can be no assurance that any particular strategy adopted
will succeed.
Second, correlation between the price movements of a
hedging instrument and the price movements of the investment
being hedged may be imperfect or even non-existent. For
example, if the value of an instrument used in a short hedge
(such as writing a call option, buying a put option, or selling
a futures contract) increased by less than the decline in value
of the hedged investment, the hedge would not be fully
successful. Imperfect correlation could be due to factors
unrelated to the value of the investments being hedged, such as
speculative or other pressures on the markets in which these
instruments are traded. The effectiveness of any hedge using
instruments on indices will depend on the degree of correlation
between price movements in the index and price movements in the
hedged investments.
Third, while successful hedging strategies can reduce the
risk of loss, they can also reduce opportunity for gain by
offsetting the positive effect of favorable price movements in
the hedged investments. For example, if a Fund entered into a
short hedge because the Adviser projected a decline in the price
of a portfolio security, but the price of that security
increased, the Fund's gain from that increase could be offset by
a decline in the price of the hedging instrument. Moreover, if
the price of the hedging instrument declined by more then the
increase in the price of the hedged security, the Fund could
suffer a loss.
Fourth, if a Fund is unable to close out its positions in
derivative instruments, assets maintained as "cover" might be
required to continue to be maintained until the hedge position
expired or matured. The requirements might impair the Fund's
ability to sell a portfolio security at an advantageous time. A
Fund's ability to close out a position in an instrument prior to
expiration or maturity depends on the existence of a liquid
secondary market or, in the absence of such a market, the
ability and willingness of the counterparty to the transaction
to close out the position. There is no assurance that any
hedging position can be closed out at a time and price favorable
to the Fund.
General Limitation on Certain Derivative Transactions. The
Trust has filed a notice of eligibility for exclusion from the
definition of the term "commodity pool operator" with the CFTC
and the National Futures Association, which regulate trading in
the futures markets. Pursuant to Rule 4.5 of the regulations
under the Commodity Exchange Act (the "CEA"), the notice of
eligibility includes representations that a Fund will use
futures contracts and related options solely for bona fide
hedging purposes within the meaning of CFTC regulation, provided
that a Fund may hold other positions in futures contracts and
related options that do not qualify as a bona fide hedging
position if the aggregate initial margin deposits and premiums
required to establish these positions, less the amount by which
any such options positions are "in the money," do not exceed 5%
of the Fund's net assets. Adoption of these guidelines does not
limit the percentage of the Fund's assets at-risk to 5%.
In addition, (i) the aggregate value of securities
underlying call options on securities written by a Fund or
obligations underlying put options on securities written by a
Fund determined as of the date of the options are written will
not exceed 25% of the Fund's net assets, (ii) the aggregate
premiums paid on all options purchase by a Fund and which are
being held will not exceed 20% of the Fund's net assets; (iii) a
Fund will not purchase put or call options, other than hedging
positions, if, as a result thereof, more than 5% of its total
assets would be so invested; and (iv) the aggregate margin
deposit required on all futures and options on futures
transactions being held will not exceed 5% of a Fund's total
assets.
Transactions using options (other than purchased options)
expose a Fund to counterparty risk. To the extent required by
SEC guidelines, each Fund will not enter into any such
transactions unless it owns either (1) an offsetting ("covered")
position in securities, other options, or futures or (2) cash
and liquid high grade debt obligations with value sufficient at
all times to cover its potential obligations to the extent not
covered as provided in (1) above. Each Fund will also set aside
cash and/or appropriate liquid assets in segregate custodial
account if required to do so by the SEC and CFTC regulations.
Assets used as cover or held in a segregated account cannot be
sold while the position in the corresponding option or futures
contract is open, unless they are replaced with similar assets.
As a result, the commitment of a large portion of a Fund's
assets to segregated accounts as a cover could impede portfolio
management or the Fund's ability to meet redemption requests or
other current obligations.
Options. As described in the Prospectus, each Fund may
write covered call options and covered put options. As a matter
of operating policy, the value of the underlying securities on
which a Fund will write options will not, at any one time,
exceed 5% of the Fund's total assets.
For writing a call, a Fund will receive a premium, which
increases the Fund's return on the underlying security in the
event the option expires unexercised or is closed out at a
profit; however, by writing the call, the Fund also limits its
opportunity to profit from an increase in the market value of
the underlying security above the exercise price of the option
for as long as the Fund's obligation as writer of the option
continues. Thus, the Fund's total return when it is writing
covered calls may be more or less than the total return would
have been from its underlying securities had it not written the
calls.
Each Fund may sell puts to receive the premiums paid by
purchasers and to close out long put positions. In addition,
when the Adviser wishes to purchase a security at a price lower
than its current market price, the Fund may write a covered put
at an exercise price reflecting the lower purchase price sought.
Each Fund may purchase calls to close out covered call
positions or to protect against an increase in the price of a
security it anticipates purchasing. Each Fund may purchase puts
on securities that it holds only to protect itself against a
decline in the value of those securities. If a Fund were to
purchase a put on a security it holds, and the value of that
underlying security were to fall below the exercise price of the
put, in an amount greater than the premium paid for the option,
the Fund would incur no additional loss. Each Fund may also
purchase puts to close out written put positions in a manner
similar to call option closing purchase transactions. There are
no other limits on each Fund's ability to purchase call and put
options.
Each Fund may purchase or write put and call options on
securities, indices and foreign currency, and enter into closing
transactions with respect to such options to terminate an
existing position. The purchase of call options serves as a
long hedge, and the purchase of put options serves as a short
hedge. Writing put or call options can enable the Fund to
enhance income by reason of the premiums paid by the purchaser
of such options. Writing call options serves as a limited short
hedge because declines in the value of the hedged investment
would be offset to the extent of the premium received for
writing the option. However, if the security appreciates to a
price higher than the exercise price of the call option, it can
be expected that the option will be exercised and the Fund will
be obligated to sell the security at less than its market value
or will be obligated to purchase the security at a price greater
than that at which the security must be sold under the option.
All or a portion of any assets used as cover for OTC options
written by the Fund would be considered illiquid to the extent
described above under "Illiquid and Restricted Securities."
Writing put options serves as a limited long hedge because
increases in the value of the hedged investment would be offset
to the extent of the premium received for writing the option.
However, if the security depreciates to a price lower than the
exercise price of the put option, it can be expected that the
put option will be exercised and the Fund will be obligated to
purchase the security at more than its market value.
The value of an option position will reflect, among other
things, the historical price volatility of the underlying
investment, the current market value of the underlying
investment, the time remaining until expiration, the
relationship of the exercise price to the market price of the
underlying investment, and general market conditions. Options
that expire unexercised have no value. Options used by the Fund
may include European-style options, which are exercisable only
at expiration. American-style options are exercisable at any
time prior to the expiration date.
A Fund may effectively terminate its right or obligation
under an option by entering into a closing transaction. For
example, a Fund may terminate its obligation under a call or put
option that it had written by purchasing an identical call or
put option; this is known as a closing purchase transaction.
Conversely, a Fund may terminate a position in a put or call
option it had purchased by writing an identical put or call
option; this is known as a closing sale transaction. Closing
transactions permit the Fund to realize the profit or limit the
loss on an option position prior to its exercise or expiration.
Each Fund may purchase or write both exchange-traded and
OTC options. Exchange-traded options are issued by a clearing
organization affiliated with the exchange on which the option is
listed that, in effect, guarantees completion of every exchange-
traded option transaction. OTC options are contracts between
the Fund and the counterparty to the transaction (usually a
securities dealer or a bank) with no clearing organization
guarantee. Thus, when a Fund purchases or writes an OTC option,
it relies on the counterparty to make or take delivery of the
underlying investment upon exercise of the option. Failure by
the counterparty to do so would result in the loss of any
premium paid by the Fund as well as the loss of any expected
benefit of the transaction.
A Fund's ability to establish and close out positions in
exchange-listed options depends on the existence of a liquid
market. Each Fund intends to purchase or write only those
exchange-traded options for which there appears to be a liquid
secondary market. However, there can be no assurance that such
a market will exist at any particular time. Closing
transactions can be made for OTC options only by negotiating
directly with the counterparty, or by a transaction in the
secondary market if any such market exists. Although a Fund
will enter into OTC options only with counterparties that are
expected to be capable of entering into closing transactions
with the Fund, there is no assurance that the Fund will in fact
be able to close out an OTC option at a favorable price prior to
expiration. In the event of insolvency of the counterparty, the
Fund might be unable to close out an OTC option position at any
time prior to its expiration.
If a Fund were unable to effect a closing transaction for
an option it had purchased, it would have to exercise the option
to realize any profit. The inability to enter into a closing
purchase transaction for a covered call option written by a Fund
could cause material losses because the Fund would be unable to
sell the investment used as a cover for the written option until
the option expires or is exercised.
Each Fund may engage in options transactions on indices in
much the same manner as the options on securities discussed
above, except that index options may serve as a hedge against
overall fluctuations in the securities markets in general.
The writing and purchasing of options is a highly
specialized activity that involves investment techniques and
risks different from those associated with ordinary portfolio
securities transactions. Imperfect correlation between the
options and securities markets may detract the effectiveness of
attempted hedging.
Futures Contracts. Each Fund may enter into futures
contracts, including interest rate, index, and currency futures.
Each Fund may also purchase put and call options, and write
covered put and call options, on futures in which it is allowed
to invest. The purchase of futures or call options thereon can
serve as a long hedge, and the sale of futures or the purchase
of put options thereon can serve as a short hedge. Writing
covered call options on futures contracts can serve as a limited
short hedge, and writing covered put options on futures
contracts can serve as a limited long hedge, using a strategy
similar to that used for writing covered options in securities.
A Fund's hedging may include purchases of futures as an offset
against the effect of expected increases in securities prices or
currency exchange rates and sales of futures as an offset
against the effect of expected declines in securities prices or
currency exchange rates. A Fund's futures transactions may be
entered into for hedging purposes or risk management. Each Fund
may also write put options on futures contracts while at the
same time purchasing call options on the same futures contracts
in order to create synthetically a long futures contract
position. Such options would have the same strike prices and
expiration dates. A Fund will engage in this strategy only when
the Adviser believes it is more advantageous to the Fund than is
purchasing the futures contract.
To the extent required by regulatory authorities, each Fund
will only enter into futures contracts that are traded on
national futures exchanges and are standardized as to maturity
date and underlying financial instrument. Futures exchanges and
trading are regulated under the CEA by the CFTC. Although
techniques other than sales and purchases of futures contracts
could be used to reduce a Fund's exposure to market, currency,
or interest rate fluctuations, the Fund may be able to hedge its
exposure more effectively and perhaps at a lower cost through
using futures contracts.
A futures contract provides for the future sale by one
party and purchase by another party of a specified amount of a
specific financial instrument (e.g., debt security) or currency
for a specified price at a designated date, time, and place. An
index futures contract is an agreement pursuant to which the
parties agree to take or make delivery of an amount of cash
equal to the difference between the value of the index at the
close of the last trading day of the contract and the price at
which the index futures contract was originally written.
Transactions costs are incurred when a futures contract is
bought or sold and margin deposits must be maintained. A
futures contract may be satisfied by delivery or purchase, as
the case may be, of the instrument, the currency, or by payment
of the change in the cash value of the index. More commonly,
futures contracts are closed out prior to delivery by entering
into an offsetting transaction in a matching futures contract.
Although the value of an index might be a function of the value
of certain specified securities, no physical delivery of those
securities is made. If the offsetting purchase price is less
than the original sale price, the Fund realizes a gain; if it is
more, the Fund realizes a loss. Conversely, if the offsetting
sale price is more than the original purchase price, the Fund
realizes a gain; if it is less, the Fund realizes a loss. The
transaction costs must also be included in these calculations.
There can be no assurance, however, that a Fund will be able to
enter into an offsetting transaction with respect to a
particular futures contract at a particular time. If a Fund is
not able to enter into an offsetting transaction, it will
continue to be required to maintain the margin deposits on the
futures contract.
No price is paid by a Fund upon entering into a futures
contract. Instead, at the inception of a futures contract, the
Fund is required to deposit in a segregated account with its
custodian, in the name of the futures broker through whom the
transaction was effected, "initial margin" consisting of cash,
U.S. government securities or other liquid, high grade debt
obligations, in an amount generally equal to 10% or less of the
contract value. Margin must also be deposited when writing a
call or put option on a futures contract, in accordance with
applicable exchange rules. Unlike margin in securities
transactions, initial margin on futures contracts does not
represent a borrowing, but rather is in the nature of a
performance bond or good-faith deposit that is returned to the
Fund at the termination of the transaction if all contractual
obligations have been satisfied. Under certain circumstances,
such as periods of high volatility, the Fund may be required by
an exchange to increase the level of its initial margin payment,
and initial margin requirements might be increased generally in
the future by regulatory action.
Subsequent "variation margin" payments are made to and from
the futures broker daily as the value of the futures position
varies, a process known as "marking to market." Variation
margin does not involve borrowing, but rather represents a daily
settlement of the Fund's obligations to or from a futures
broker. When the Fund purchases an option on a future, the
premium paid plus transaction costs is all that is at risk. In
contrast, when a Fund purchases or sells a futures contract or
writes a call or put option thereon, it is subject to daily
variation margin calls that could be substantial in the event of
adverse price movements. If the Fund does not have sufficient
cash to meet daily variation margin requirements, it might need
to sell securities at a time when such sales are
disadvantageous. Purchasers and sellers of futures positions
and options on futures can enter into offsetting closing
transactions by selling or purchasing, respectively, an
instrument identical to the instrument held or written.
Positions in futures and options on futures may be closed only
on an exchange or board of trade that provides a secondary
market. Each Fund intends to enter into futures transactions
only on exchanges or boards of trade where there appears to be a
liquid secondary market. However, there can be no assurance
that such a market will exist for a particular contract at a
particular time.
Under certain circumstances, futures exchanges may
establish daily limits on the amount that the price of a future
or option on a futures contract can vary from the previous day's
settlement price; once that limit is reached, no trades may be
made that day at a price beyond the limit. Daily price limits
do not limit potential losses because prices could move to the
daily limit for several consecutive days with little or no
trading, thereby preventing liquidation of unfavorable
positions.
If a Fund were unable to liquidate a futures or option on a
futures contract position due to the absence of a liquid
secondary market or the imposition of price limits, it could
incur substantial losses. The Fund would continue to be subject
to market risk with respect to the position. In addition,
except in the case of purchased options, the Fund would continue
to be required to make daily variation margin payments and might
be required to maintain the position being hedged by the future
or option or to maintain cash or securities in a segregated
account.
Certain characteristics of the futures market might
increase the risk that movements in the prices of futures
contracts or options on futures contracts might not correlate
perfectly with movements in the prices of the investments being
hedged. For example, all participants in the futures and
options on futures contracts markets are subject to daily
variation margin calls and might be compelled to liquidate
futures or options on futures contracts positions whose prices
are moving unfavorably to avoid being subject to further calls.
These liquidations could increase price volatility of the
instruments and distort the normal price relationship between
the futures or options and the investments being hedged. Also,
because initial margin deposit requirements in the futures
markets are less onerous than margin requirements in the
securities markets, there might be increased participation by
speculators in the future markets. This participation also
might cause temporary price distortions. In addition,
activities of large traders in both the futures and securities
markets involving arbitrage, "program trading" and other
investment strategies might result in temporary price
distortions.
Forward Currency Contracts
Each Fund may enter into forward currency contracts; such
transactions may serve as long hedges (for example, if the Fund
seeks to buy a security denominated in a foreign currency, it
may purchase a forward currency contract to lock in the $US
price of the security) or as short hedges (the Fund anticipates
selling a security denominated in a foreign currency may sell a
forward currency contract to lock in the $US equivalent of the
anticipated sale proceeds).
A Fund may seek to hedge against changes in the value of a
particular currency by using forward contracts on another
foreign currency or a basket of currencies, the value of which
the Adviser believes will have a positive correlation to the
values of the currency being hedged. In addition, a Fund may
use forward currency contracts to shift exposure to foreign
currency fluctuations from one country to another. For example,
if a Fund owns securities denominated in a foreign currency and
the Adviser believes that currency will decline relative to
another currency, it might enter into a forward contract to sell
an appropriate amount of the first foreign currency, with
payment to be made in the second currency. Transactions that
use two foreign currencies are sometimes referred to as "cross
hedges." Use of different foreign currency magnifies the risk
that movements in the price of the instrument will not correlate
or will correlate unfavorably with the foreign currency being
hedged.
The cost to a Fund of engaging in forward currency
contracts varies with factors such as the currency involved, the
length of the contract period and the market conditions then
prevailing. Because forward currency contracts are usually
entered into on a principal basis, no fees or commissions are
involved. When a Fund enters into a forward currency contract,
it relies on the counterparty to make or to take delivery of the
underlying currency at the maturity of the contract. Failure by
the counterparty to do so would result in the loss of any
expected benefit of the transaction.
As is the case with future contracts, holders and writers
of forward currency contracts can enter into offsetting closing
transactions, similar to closing transactions on futures, by
selling or purchasing, respectively, an instrument identical to
the instrument held or written. Secondary markets generally do
not exist for forward currency contracts, with the result that
closing transactions generally can be made for forward currency
contracts only by negotiating directly with the counterparty.
Thus, there can be no assurance that a Fund will in fact be able
to close out a forward currency contract at a favorable price
prior to maturity. In addition, in the event of insolvency of
the counterparty, the Fund might be unable to close out a
forward currency contract at any time prior to maturity. In
either event, the Fund would continue to be subject to market
risk with respect to the position, and would continue to be
required to maintain a position in securities denominated in the
foreign currency or to maintain cash or securities in a
segregated account.
The precise matching of forward currency contract amounts
and the value of the securities involved generally will not be
possible because the value of such securities, measured in the
foreign currency, will change after the foreign currency
contract has been established. Thus, a Fund might need to
purchase or sell foreign currencies in the spot (cash) market to
the extent such foreign currencies are not covered by forward
contracts. The projection of short-term currency market
movements is extremely difficult, and the successful execution
of a short-term hedging strategy is highly uncertain.
Foreign Currency Transactions
Although each Fund values its assets daily in U.S. dollars,
the Funds are not required to convert their holdings of foreign
currencies to U.S. dollars on a daily basis. Each Fund's
foreign currencies generally will be held as "foreign currency
call accounts" at foreign branches of foreign or domestic banks.
These accounts bear interest at negotiated rates and are payable
upon relatively short demand periods. If a bank became
insolvent, a Fund could suffer a loss of some or all of the
amounts deposited. Each Fund may convert foreign currency to
U.S. dollars from time to time. Although foreign exchange
dealers generally do not charge a stated commission or fee for
conversion, the prices posted generally include a "spread,"
which is the difference between the prices at which the dealers
are buying and selling foreign currencies.
When-Issued Securities
Normally, the settlement date on when-issued securities
occurs within one month of purchase commitment, but may take
longer, albeit not more than 120 days after the trade date.
At the time a Fund commits to purchase a security on a when-
issued basis, it will record the transaction and reflect the
value of that security in determining its net asset value. The
Adviser does not believe that any Fund's net asset value will be
adversely affected by purchases of securities on a when-issued
basis.
While when-issued securities may be sold prior to
settlement, the Adviser intends to purchase such securities with
the purpose of actually acquiring them unless a sale appears
desirable for investment reasons. Each Fund will maintain a
separate account with the Custodian, with a segregated portfolio
of cash and marketable securities at least equal in value to
that Fund's commitments to purchase when-issued securities.
Such segregated securities will mature (or, if necessary, be
sold) on or before the settlement date. When the time comes for
a Fund to pay for when-issued securities, it will meet its
obligations from the then-available cash flow, the sale of the
securities held in this separate account, the sale of other
securities; although it would not normally expect to do so, the
Fund may also meet this obligation from the sale of the when-
issued securities themselves, which may have increased or
decreased in market value.
When a Fund commits to purchase when-issued securities, it
increases its exposure to fluctuations in, e.g., market interest
rates. Each Fund's current policy is to limit its aggregate
when-issued commitments to 15% of the market value of its total
assets less liabilities, other than the obligations created by
these commitments.
Foreign Investment Companies
Some of the countries in which the Funds may invest may not
permit, or may place economic restrictions on, direct investment
by outside investors. Investments in such countries may only be
permitted through foreign government-approved or -authorized
investment vehicles, which may include other investment
companies. The Funds may also invest in registered or
unregistered closed-end investment companies that invest in
foreign securities. Investing through such vehicles may involve
frequent or layered fees or expenses and may also be subject to
limitation under the 1940 Act. Under the 1940 Act, a Fund may
invest up to 10% of its assets in shares of investment companies
and up to 5% of its assets in any one investment company as long
as the investment does not represent more than 3% of the voting
stock of the acquired investment company.
Repurchase Agreements
In a repurchase agreement, a Fund buys a security from a
counterparty that has agreed to repurchase it at a mutually
agreed upon date and repurchase price, reflecting the interest
rate effective for the term of the repurchase agreement. The
term of a repurchase agreement is usually from overnight to one
week and never exceeds one year; repurchase agreements with a
maturity in excess of seven days are considered illiquid. The
counterparty's obligation to repurchase is secured by the value
of the underlying security; when the Fund enters into a
repurchase agreement, it always receives, as collateral,
underlying securities with a market value at least equal to the
purchase price (including accrued interest), and the Adviser
will monitor, on an ongoing basis, the value of the underlying
securities to ensure that such value always equals or exceeds
the repurchase price plus accrued interest.
A Fund may, under certain circumstances, deem repurchase
agreements collateralized by U.S. government securities to be
investments in U.S. government securities.
Borrowing
Borrowing by a Fund will create the opportunity for
increased net income but, at the same time, will involve special
risk considerations. Each Fund will secure all borrowings;
either the Custodian will segregate the Fund's assets securing
the borrowing for the benefit of the lenders or similar
arrangements will be made with a suitable sub-custodian. If
assets used to secure the borrowing decrease in value, the Fund
may be required to pledge additional collateral to the lender in
the form of cash or securities to avoid liquidation of those
assets. Proceeds of borrowing may be used for investment
purposes or to pay dividends.
Each Fund may also engage in dollar roll transactions and
reverse repurchase agreements, which may be considered a form of
borrowing. In addition, each Fund may borrow up to an
additional one-third of its total assets from banks for
temporary or emergency purposes. A Fund will not purchase
securities when bank borrowings exceed one-third of its total
assets.
Mortgage Dollar Rolls and Reverse Repurchase Agreements
Each Fund may engage in reverse repurchase agreements to
facilitate portfolio liquidity, a practice common in the mutual
fund industry, or for arbitrage transactions discussed below.
In a reverse repurchase agreement, the Fund would sell a
security and enter into an agreement to repurchase the security
at a specified future date and price. The Fund generally
retains the right to interest and principal payments on the
security. Since the Fund receives cash upon entering into a
reverse repurchase agreement, it may be considered a borrowing.
(See "Borrowing" above.) When required by guidelines of the
SEC, the Fund will set aside permissible liquid assets in a
segregated account to secure its obligations to repurchase the
security.
Each Fund may also enter into mortgage dollar rolls, in
which the Fund would sell mortgage-backed securities for
delivery in the current month and simultaneously contract to
purchase substantially similar securities on a specified future
date. While the Fund would forego principal and interest paid
on the mortgage-backed securities during the roll period, it
would be compensated by the difference between the current sales
price and the lower price for the future purchase as well as by
any equivalent to a lower forward price. At the time the Fund
would enter into a mortgage dollar roll, it would set aside
permissible liquid assets in a segregated account to secure its
obligation for the forward commitment to buy mortgage-backed
securities. Mortgage dollar roll transactions may be considered
a borrowing by the funds. (See "Borrowing" above.)
The mortgage dollar rolls and reverse repurchase agreements
entered into by the Funds may be used as arbitrage transactions
in which a Fund will maintain an offsetting position in
investment grade debt obligations or repurchase agreements that
mature on or before the settlement date on the related mortgage
dollar roll or reverse repurchase agreements. Since the Fund
will receive interest on the securities or repurchase agreements
in which it invests the transaction proceeds, such transactions
may involve leverage. However, since such securities or
repurchase agreements will be high quality and will mature on or
before the settlement date of the mortgage dollar roll or
reverse repurchase agreement, the Adviser believes that such
arbitrage transactions do not present the risks to the Fund that
are associated with other types of leverage.
INVESTMENT RESTRICTIONS
The following are fundamental investment limitations of
each Fund. These fundamental limitations may not be changed
without shareholder approval.
In accordance with these limitations, each Fund will not:
1. Invest in real estate or mortgages on real estate (although
a Fund may invest in marketable securities secured by real
estate or interests therein or issued by companies or
investment trusts which invest in real estate or interests
therein); invest in other open-end investment companies
(except in connection with a merger, consolidation,
acquisition or reorganization); invest in interests (other
than debentures or equity stock interests) in oil, gas or
other mineral exploration or development programs; or
purchase or sell commodity contracts (except futures
contracts, as described in the Prospectus).
2. Purchase any security (other than obligations of the U.S.
Government, its agencies or instrumentalities) if, as a
result, as to 75% of the Fund's total assets (i) more than
5% of the Fund's total assets would then be invested in
securities of any single issuer, or (ii) the Fund would
then own more than 10% of the voting securities of any
single issuer.
3. Act as an underwriter; issue senior securities except as
set forth in investment restrictions 5 and 6 below; or
purchase on margin, except that a Fund may make margin
payments in connection with futures, options and currency
transactions.
4. Loan money, except that a Fund may (i) purchase a portion
of an issue of publicly distributed bonds, debentures,
notes and other evidences of indebtedness, (ii) enter into
repurchase agreements and (iii) lend its portfolio
securities.
5. Borrow money, except that a Fund may engage in dollar roll
transactions and reverse repurchase agreements, and may
borrow money from banks in an amount not exceeding one-
third of the value of its total assets (including the
amount borrowed).
6. Mortgage, pledge or hypothecate its assets (except as may
be necessary in connection with permitted borrowings);
provided, however, this does not prohibit escrow,
collateral or margin arrangements in connection with its
use of options, futures contracts and options on future
contracts.
7. Invest 25% or more of its total assets in a single
industry. For purposes of this restriction, a foreign
government is deemed to be an "industry" with respect to
securities issued by it.
If a Fund receives from an issuer of securities held by the
Fund subscription rights to purchase securities of that issuer,
and if the Fund exercises such subscription rights at a time
when the Fund's portfolio holdings of securities of that issuer
would otherwise exceed the limits set forth in Investment
Restrictions 2 or 7 above, it will not constitute a violation
if, prior to receipt of securities upon exercise of such rights,
and after announcement of such rights, the Fund has sold at
least as many securities of the same class and value as it would
receive on exercise of such rights.
Additional Restrictions
Each Fund has adopted the following additional
restrictions which are not fundamental and which may be changed
without Shareholder approval, to the extent permitted by
applicable law, regulation or regulatory policy. Under these
restrictions, each Fund may not:
1. Purchase or retain securities of any company in which
Trustees or officers of the Trust or of the Investment
Manager, individually owning more than 1/2 of 1% of the
securities of such company, in the aggregate own more than
5% of the securities of such company.
2. Invest more than 5% of the value of its total assets in
securities of issuers which have been in continuous
operation less than three years.
3. Invest more than 5% of its net assets in warrants whether
or not listed on the New York or American Stock Exchanges,
and more than 2% of its net assets in warrants that are not
listed on those exchanges. Warrants acquired in units or
attached to securities are not included in this
restriction.
4. Purchase or sell real estate limited partnership interests.
5. Purchase or sell interests in oil, gas and mineral leases
(other than securities of companies that invest in or
sponsor such programs).
6. Invest for the purpose of exercising control over
management of any company.
7. Invest more than 15% of the Fund's net assets in securities
that are not readily marketable (including repurchase
agreements maturing in more than seven days and over-the-
counter options purchased by the Fund). Rule 144A
securities determined by the Board of Trustees to be liquid
are not subject to this limitation.
Whenever any investment policy or investment restriction
states a maximum percentage of a Fund's assets which may be
invested in any security or other property, it is intended that
such maximum percentage limitation be determined immediately
after and as a result of that Fund's acquisition of such
security or property. The value of a Fund's assets is
calculated as described in its Prospectus under the heading
"Valuation of Shares."
TRUSTEES AND OFFICERS OF THE TRUST
The name, age, address, principal occupation during the
past five years and other information about each Trustee and
officer of the Trust is shown below. Each Trustee who is
considered to be an "interested person," as defined in the 1940
Act, of the Trust is indicated by an asterisk.
Offices Principal Occupation
Name and Address with During Past Five Years
the
Trust
THOMAS L. HANSBERGER* (64) President Chairman and Chief
515 East Las Olas Blvd. and Executive officer,
Fort Lauderdale, FL Trustee Hansberger Global
Investors, Inc., 1994 to
present; Chairman and
Chief Executive Officer,
Templeton Worldwide,
1992 to 1993; Director
and Chief Executive
Officer, Templeton,
Galbraith & Hansberger
Ltd., 1985 to 1992.
J. CHRISTOPHER JACKSON, Vice General Counsel,
ESQ.* (45) President Hansberger Global
515 East Las Olas Blvd. and Investors, Inc. 1996 to
Fort Lauderdale, FL Trustee present; Vice President,
Associate General
Counsel and Assistant
Secretary, Van Kampen
American Capital, Inc.
1986 to 1996.
KATHRYN B. MCGRATH, ESQ.* Trustee Partner, Morgan, Lewis &
(52) Bockius LLP, 1990 to
1800 M Street, N.W. present.
Washington, DC
STUART B. ROSS (59) Trustee Executive Vice
100 First Stamford Place President, Xerox
Stamford, CT Corporation, 1990 to
present; Chief Executive
Officer, Xerox Financial
Services, Inc., 1990 to
present.
WILLIAM F. WATERS, ESQ. Trustee Retired; former Senior
(64) Vice President, Merrill
640 Hollow Tree Ridge Road Lynch & Co., 1984 to
Darien, CT 1996.
CHARLES F. GULDEN (35) Vice Managing Director,
515 East Las Olas Blvd. President Hansberger Global
Fort Lauderdale, FL Investors, Inc. 1996 to
present; Vice President
and Director of Research
& Portfolio Management,
Templeton Worldwide,
1989 to 1996.
WESLEY E. FREEMAN (47) Vice Managing Director,
515 East Las Olas Blvd. President Hansberger Global
Fort Lauderdale, FL Investors, Inc. 1996 to
present; Executive Vice
President for
Institutional Business
Development, Templeton
Worldwide, 1989 to 1996.
THOMAS A. CHRISTENSEN, Jr. Treasurer Vice President and
(26) Controller, Hansberger
515 East Las Olas Blvd. Global Investors, Inc.
Fort Lauderdale, FL 1996 to present;
Accountant, Arthur
Andersen LLP, 1993 to
1996; student,
University of Illinois,
1993 to 1994; student,
University of Florida
School of Accountancy,
1989 to 1993.
KIMBERLEY SCOTT (34) Secretary Senior Vice President,
515 East Las Olas Blvd. Hansberger Global
Fort Lauderdale, FL Investors, Inc. 1994 to
present; Executive
Assistant and Portfolio
Supervisor, Templeton
Worldwide, 1992 to 1994.
KARL O. HARTMANN, ESQ. (41) Assistant Senior Vice President
73 Tremont Street Secretary and General Counsel,
Boston, MA Chase Global Funds
Services Company, 1991
to present.
The Trust pays each Trustee who is not a director, officer,
partner or employee of the Adviser, any affiliated company, or
legal counsel to the Adviser ("Disinterested Trustee"), an
annual fee of $3500, plus $500 per Board meeting. In addition,
the Trust reimburses each Disinterested Trustee for travel and
other expenses incurred in connection with attendance at such
meetings. Other officers and Trustees receive no compensation
or expense reimbursement from the Trust. For the fiscal year
ending December 31, 1996, the Trust paid the following amounts
to Trustees and Officers of the Trust:
Total
Pension or Compensatio
Aggregate Retirement n from
Compensati Benefits Registrant
on From Accrued as Estimated and Fund
Name of Registrant Part of Annual Complex
Person, for Fiscal Fund Benefits Paid to
Position Year Ended Expenses Upon Directors
1996 Retirement for Fiscal
Year Ended
1996
Stuart B, $1,375 N/A N/A $1,375 for
Ross, service on
Trustee one board
William F. $1,375 N/A N/A $1,375 for
Waters, service on
Trustee one board
As of April 4, 1997, the officers and Trustees of the
Trust, in the aggregate, beneficially owned 77,117.537 shares (
2.51% of the outstanding shares) of International Fund.
PRINCIPAL SHAREHOLDERS
The following table sets forth the information concerning
beneficial ownership, as of April 4, 1997, of the Funds' shares
by each person who beneficially owned more than 5% of the voting
securities of any Fund.
Shares Percentage
Name and Address Benefici of
of Shareholder Fund ally Outstandin
Owned g Shares
Owned
MAC & CO Internationa 1,139,12 37%
Mutual Funds Operations l Fund 4.174
P.O. Box 3198
Pittsburgh, PA 15230-3198
BOVA & COMPANY Internationa 1,092,49 36%
P.O. Box 85539 l Fund 0.952
Richmond, VA 23285-5539
BOST & CO Emerging 299,553. 22.2%
Mutual Funds Operations Markets 482
P.O. Box 3198 Fund
Pittsburgh, PA 15230-3198
General Employees Retirement Emerging 280,636. 20.8%
System of the City of Fort Markets 109
Lauderdale Fund
315 NE Third Avenue Suite
202
Fort Lauderdale, FL 33301
Alberto Cribiore Emerging 98,814.2 7.3%
590 Madison Avenue Suite 18C Markets 29
New York, NY 10022 Fund
Donald J. Gogel Emerging 98,814.2 7.3%
31 Masterton Road Markets 29
Bronxville, NY 10708 Fund
Max C. Chapman Jr. Emerging 98,814.2 7.3%
P.O. Box 194 Markets 29
Scarborough, NY 10510 Fund
Hubbard C. Howe Emerging 95,423.3 7.1%
and Gene S. Howe Markets 19
JTTEN Fund
210 Gentry Way
Reno, NV 89502
INVESTMENT ADVISER
Hansberger Global Investors, Inc. (the "Adviser") is the
investment adviser to each Fund. The Adviser, a Florida
corporation, is owned and controlled by Mr. Thomas L. Hansberger
who founded the Adviser in 1994. In addition to the Funds, the
Adviser is currently the investment manager of the Hansberger
Global Fund plc., an investment company incorporated in Ireland.
A brief description of the investment advisory agreement
("Advisory Agreement") is set forth in the Prospectus under
"MANAGEMENT OF THE FUND -- Investment Adviser."
The Advisory Agreement, dated October 17, 1996, was
approved by the sole shareholder of the International Fund and
the Emerging Markets Fund on October 4, 1996. The Advisory
Agreement will continue in effect for two years following its
effective date, and will continue in effect thereafter only if
such continuance is approved annually by either the Board of
Trustees or by vote of a majority of each Fund's outstanding
voting securities (as defined in the 1940 Act), and in either
case by the vote of a majority of the Trust's trustees who are
neither parties to the Advisory Agreement nor interested persons
of any such party, cast in person at a meeting called for the
purpose of voting on such approval. The Advisory Agreement is
terminable, without penalty, on 60 days' written notice by the
Board of Trustees, by vote of a majority of the Fund's
outstanding voting securities, or by the Adviser, and will
terminate automatically in the event of its assignment.
The Adviser is responsible for investment decisions and
supplies investment research and portfolio management. At its
expense, the Adviser provides office space and all necessary
office facilities, equipment and personnel for servicing the
investments of the Fund. The Adviser places all orders for the
purchase and sale of each Fund's portfolio securities at that
Fund's expense.
Except for expenses assumed by the Adviser as set forth
above, each Fund is responsible for all its other expenses,
including, without limitation, interest charges, taxes,
brokerage commissions, and similar expenses, expenses of issue,
sale, repurchase, or redemption of shares; expenses of
registering or qualifying shares for sale; expenses for printing
and distribution costs of Prospectuses and quarterly financial
statements mailed to existing shareholders; and charges of
custodians, transfer agents (including the printing and mailing
of reports and notices to shareholders); registrars; auditing
and legal services, clerical services related to record keeping
and shareholder relations, and fees for trustees who are not
"interested persons" of the Adviser.
As compensation for its services, each Fund pays to the
Adviser a fee as described in the Prospectus. For the fiscal
year ended December 31, 1996, the Adviser waived all fees
payable to it by the Funds.
The organizational expenses of the International Fund,
Emerging Markets Fund, Foreign Small Cap Fund and All Countries
Fund_ in the amounts of $44,614, $44,614, $19,594 and $19,594,
respectively, were advanced by the Adviser and will be
reimbursed by the Fund over a period of not more than 60 months
from the date that Fund commenced operations.
FUND TRANSACTIONS AND BROKERAGE
The Adviser is responsible for decisions to buy and sell
securities for each Fund and for the placement of a Fund's
investment business and the negotiation of the commissions to be
paid on such transactions. It is the policy of the Adviser to
seek the best execution at the best security price available
with respect to each transaction, in light of the overall
quality of brokerage and research services provided to the
Adviser or the Fund. In over-the-counter transactions, orders
are placed directly with a principal market maker unless it is
believed that better price and execution can be obtained using a
broker. The best price to a Fund means the best net price
without regard to the mix between purchase or sale price and
commissions, if any. In selecting broker-dealers and in
negotiating commissions, the Adviser considers a variety of
factors, including best price and execution, the full range of
brokerage services provided by the broker, as well as its
capital strength and stability, and the quality of the research
and research services provided by the broker. Consistent with
the foregoing primary considerations, the Conduct Rules of the
National Association of Securities Dealers, Inc. and such other
policies as the Trustees may determine, the Adviser may consider
sales of shares of the Funds as a factor in the selection of
broker-dealers to execute the Funds' portfolio transactions.
Section 28(e) of the Securities Exchange Act of 1934
("Section 28(e)") permits an investment adviser, under certain
circumstances, to cause an account to pay a broker or dealer a
commission for effecting a transaction in excess of the amount
of commission another broker or dealer would have charged for
effecting the transaction in recognition of the value of the
brokerage and research services provided by the broker or
dealer. Brokerage and research services include (a) furnishing
advice as to the value of securities, the advisability of
investing in, purchasing or selling securities, and the
availability of securities or purchasers or sellers of
securities; (b) furnishing analyses and reports concerning
issuers, industries, securities, economic factors and trends,
portfolio strategy, and the performance of accounts; and (c)
effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement, and custody).
In carrying out the provisions of the Advisory Agreement,
the Adviser may cause a Fund to pay, to a broker that provides
brokerage and research services to the Adviser, a commission for
effecting a securities transaction in excess of the amount
another broker would have charged for effecting the transaction.
The Adviser believes it is important to its investment decision-
making process to have access to independent research. The
Advisory Agreements provide that such higher commissions will
not be paid by a Fund unless (a) the Adviser determines in good
faith that the amount is reasonable in relation to the services
in terms of the particular transaction or in terms of the
Adviser's overall responsibilities with respect to the accounts
as to which it exercises investment discretion; (b) such payment
is made in compliance with provisions of Section 28(e), other
applicable state and federal laws, and the Advisory Agreement;
and (c) in the opinion of the Adviser, the total commissions
paid by the Fund will be reasonable in relation to the benefits
to the Fund over the long term. The investment advisory fees
paid by each Fund under its Advisory Agreement are not reduced
as a result of the Adviser's receipt of research services.
Generally, research services provided by brokers may
include information on the economy, industries, groups of
securities, individual companies, statistical information,
accounting and tax law interpretations, political developments,
legal developments affecting portfolio securities, technical
market action, pricing and appraisal services, credit analysis,
risk measurement analysis, performance analysis, and analysis of
corporate responsibility issues. Such research services are
primarily in the form of written reports, telephone contacts,
and personal meetings with security analysts. In addition, such
research services may be provided in the form of access to
various computer-generated data, computer hardware and software,
and meetings arranged with corporate and industry spokesperson,
economists, academicians, and government representatives. In
some cases, research services are generated by third parties but
are provided to the Adviser by or through brokers. Such brokers
may pay for all or a portion of computer hardware and software
costs relating to the pricing of securities.
Where the Adviser itself receives both administrative
benefits and research and brokerage services from the services
provided by brokers, it makes a good faith allocation between
the administrative benefits and the research and brokerage
services, and will pay for any administrative benefits with
cash. In making good faith allocations of costs between
administrative benefits and research and brokerage services, a
conflict of interest may exist by reason of the Adviser's
allocation of the costs of such benefits and services between
those that primarily benefit the Adviser and those that
primarily benefit the funds and other advisory clients.
From time to time, the Adviser may purchase securities for
a Fund in a fixed price offering. In these situations, the
seller may be a member of the selling group that will, in
addition to selling the securities to the Funds and other
advisory clients, provide the Adviser with research. The
National Association of Securities Dealers has adopted rules
expressly permitting these types of arrangements under certain
circumstances. Generally, the seller will provide research
"credits" in these situations at a rate that is higher than the
rate available for typical secondary market transactions. These
arrangements may not fall within the safe harbor of Section
28(e).
Each year, the Adviser will consider the amount and nature
of research and research services provided by brokers, as well
as the extent to which such services are relied upon, and
attempts to allocate a portion of the brokerage business of the
Fund and other advisory clients on the basis of that
consideration. In addition, brokers may suggest a level of
business they would like to receive in order to continue to
provide such services. The actual brokerage business received
by a broker may be more or less than the suggested allocations,
depending upon the Adviser's evaluation of all applicable
considerations.
The Adviser may direct the purchase of securities on behalf
of each Fund and other advisory clients in secondary market
transactions, in public offerings directly from an underwriter,
or in privately negotiated transactions with an issuer. When
the Adviser believes the circumstances so warrant, securities
purchased in public offerings may be resold shortly after
acquisition in the immediate aftermarket for the security in
order to take advantage of price appreciation from the public
offering price or for other reasons. Short-term trading of
securities acquired in public offerings, or otherwise, may
result in higher portfolio turnover and associated brokerage
expenses.
The Adviser is responsible for selecting brokers in
connection with foreign securities transactions. The fixed
commissions paid in connection with most foreign stock
transactions are usually higher than negotiated commissions on
U.S. stock transactions. Foreign stock exchanges and brokers
are subject to less government supervision and regulation as
compared with the U.S. exchanges and brokers. In addition,
foreign security settlements may in some instances be subject to
delays and related administrative uncertainties.
The Adviser places portfolio transactions for other
advisory accounts, including other mutual funds managed by the
Adviser. Research services furnished by firms through which
each Fund effects its securities transactions may be used by the
Adviser in servicing all of its accounts; not all of such
services may be used by the Adviser in connection with each
Fund. In the opinion of the Adviser, it is not possible to
measure separately the benefits from research services to each
of the accounts (including the Funds) managed by the Adviser.
Because the volume and nature of the trading activities of the
accounts are not uniform, the amount of commissions in excess of
those charged by another broker paid by each account for
brokerage and research services will vary. However, in the
opinion of the Adviser, such costs to each Fund will not be
disproportionate to the benefits received by it on a continuing
basis.
The Adviser seeks to allocate portfolio transactions
equitably whenever concurrent decisions are made to purchase or
sell securities by a Fund and another advisory account. In some
cases, this procedure could have an adverse effect on the price
or the amount of securities available to the Fund. In making
such allocations between a Fund and other advisory accounts, the
main factors considered by the Adviser are the respective
investment objectives, the relative size of portfolio holdings
of the same or comparable securities, the availability of cash
for investment, the size of investment commitments generally
held, and the opinions of the persons responsible for
recommending the investment.
Because each Fund was newly-organized, it paid no brokerage
commissions during the past fiscal year.
It is anticipated that the annual portfolio turnover rate
of each Fund will not exceed 100% under normal circumstances.
For the fiscal period ended December 31, 1996, the portfolio
turnover rate was 0%.
CUSTODIAN
The Chase Manhattan Bank, 4 Chase Metro Tech Center, 18th
Floor, Brooklyn, New York 11245, serves as custodian of the
assets of the Trust and has custody of all of its securities and
cash. The Custodian delivers and receives payment for
securities sold, receives and pays for securities purchased,
collects income from investments, and performs other duties, all
as directed by the officers of the Trust. In addition, the
Trust, with the approval of the Board of Trustees and subject to
the rules of the SEC, may have sub-custodians in those foreign
countries in which it invests its assets. The Custodian and sub-
custodians are in no way responsible for any of the investment
policies or decisions of a Fund.
TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT
Chase Global Funds Services Company, the Trust's
Administrator, acts as transfer agent and dividend-disbursing
agent for the Funds. The Administrator is compensated under the
Administration Agreement discussed in the Prospectus.
From time to time, the Funds, directly or indirectly
through arrangements with the Adviser or Administrator, may pay
amounts to third parties that provide transfer agent and other
administrative services relating to a Fund to persons who
beneficially own interests in the Fund, such as participants in
401(k) plans. These services may include, among other things,
sub-accounting services, answering inquiries relating to the
Fund, transmitting, on behalf of the Fund, proxy statements,
annual reports, updated Prospectuses, other communications
regarding the Fund, and related services as the Fund or
beneficial owners may reasonably request. In such cases, the
Fund will not pay fees at a rate that is greater than the rate
the Fund is currently paying the Administrator for providing
these services to Fund shareholders.
TAXES
General
As indicated under "Taxes" in the Prospectus, each Fund
intends to continue to qualify annually for treatment as a
regulated investment company ("RIC") under the Code. This
qualification does not involve government supervision of a
Fund's management practices or policies.
In order to qualify for treatment as a RIC under the Code,
each Fund must distribute to its shareholders for each taxable
year at least 90% of its investment company taxable income
(consisting generally of net investment income, net short-term
capital gain, and net gains from certain foreign currency
transactions ("Distribution Requirement") and must meet several
additional requirements. These requirements include the
following: (1) the Fund must derive at least 90% of its gross
income each taxable year from dividends, interest, payments with
respect to securities loans, and gains from the sale or other
disposition of securities or foreign currencies or other income
(including gains from options, futures, or forward contracts)
derived with respect to its business of investing in securities
of those currencies ("Income Requirement"); (2) the Fund must
derive less than 30% of its gross income each taxable year from
the sale or other disposition of securities, or any of the
following that were held for less than three months - options or
futures (other than those on foreign currencies), or foreign
currencies (or options and futures with respect to securities)
("30% Limitation"); (3) at the close of each quarter of the
Fund's taxable year, at least 50% of the value of its total
assets must be represented by cash and cash items, U.S.
government securities, securities of other RICs, and other
securities, with these other securities limited, in respect of
any one issuer, to an amount that does not exceed 5% of the
value of the Fund's total assets and that does not represent
more than 10% of the issuer's outstanding voting securities; and
(4) at the close of each quarter of the Fund's taxable year, not
more than 25% of the value of its total assets may be invested
in securities (other than U.S. government securities or the
securities of other RICs) of any one issuer or two or more
issuers engaged in same or similar businesses if the Fund owns
at least 20% of the voting power of such issuers..
If shares are sold at a loss after being held for six
months or less, the loss will be treated as long-term, instead
of short-term, capital loss to the extent of any capital gain
distributions received on those shares.
Each Fund will be subject to a nondeductible 4% excise tax
("Excise Tax") to the extent it fails to distribute by the end
of any calendar year substantially all of its ordinary income
for that year and capital gain net income for the one-year
period ending on October 31 of that year, plus certain other
amounts.
Foreign Transactions
Dividends and interest received by a Fund may be subject to
income, withholding, or other taxes imposed by foreign countries
and U.S. possessions that would reduce the yield on its
securities. Tax conventions between certain countries and the
United States may reduce or eliminate these foreign taxes,
however, and many foreign countries do not impose taxes on
capital gains in respect of investments by foreign investors.
If more than 50% of the value of a Fund's total assets at the
close of its taxable year consists of securities of foreign
corporations, the Fund will be eligible to, and may, file an
election with the Internal Revenue Service that would enable its
shareholders, in effect, to receive the benefit of the foreign
tax credit with respect to any foreign and U.S. possessions
income taxes paid by the Fund. Pursuant to the elections, the
Funds would treat those taxes as dividends paid to its
shareholders and each shareholder would be required to (1)
include in gross income, and treat as paid by him, his
proportionate share of those taxes, (2) treat his share of those
taxes and any dividend paid by the Fund that represents income
from foreign or U.S. possessions sources as his own income from
those sources, and (3) either deduct the taxes deemed paid by
him in computing his taxable income, or, alternatively, use the
foregoing information in calculating the foreign tax credit
against his federal income tax. Each Fund will report to its
shareholders shortly after each taxable year their respective
shares of its income from sources within, and taxes paid to,
foreign countries and U.S. possessions if it makes this
election.
Each Fund maintains its accounts and calculates its income
in U.S. dollars. In general, gain or loss (1) from the
disposition of foreign currencies and forward currency
contracts, (2) from the disposition of foreign-currency-
denominated debt securities that are attributable to
fluctuations in exchange rates between the date the securities
are acquired and their disposition date, and (3) attributable to
fluctuations in exchange rates between the time the Fund accrues
interest or other receivables or expenses or other liabilities
denominated in a foreign currency and the time the Fund actually
collects those receivables or pays those liabilities, will be
treated as ordinary income or loss. A foreign-currency-
denominated debt security acquired by a Fund may bear interest
at a high normal rate that takes into account expected decreases
in the value of the principal amount of the security due to
anticipated currency devaluations; in that case, the Fund would
be required to include the interest in income as it accrues but
generally would realize a currency loss with respect to the
principal only when the principal was received (through
disposition or upon maturity).
Each Fund may invest in the stock of "passive foreign
investment companies" ("PFICs"). A PFIC is a foreign
corporation that, in general, meets either of the following
tests: (1) at least 75% of its gross income is passive or (2)
an average of at least 50% of its assets produce, or are held
for the production of, passive income. Under certain
circumstances, a Fund will be subject to federal income tax on a
portion of any "excess distribution" received on the stock or of
any gain on disposition of the stock (collectively, "PFIC
income"), plus interest thereon, even if the Fund distributes
the PFIC income as a taxable dividend to its shareholders. The
balance of the PFIC income will be included in the Fund's
investment company taxable income and, accordingly, will not be
taxable to it to the extent that income is distributed to its
shareholders. If a Fund invests in a PFIC and elects to treat
the PFIC as a "qualified electing fund," then in lieu of the
foregoing tax and interest obligation, the Fund will be required
to include in income each year its pro rata share of the
qualified electing fund's annual ordinary earnings and net
capital gain (the excess of net long-term capital gain over net
short-term capital loss) - which probably would have to be
distributed to its shareholders to satisfy the Distribution
Requirement and avoid imposition of the Excise Tax - even if
those earnings and gain were not received by the Fund. In most
instances it will be very difficult, if not impossible, to make
this election because of certain of its requirements.
Pursuant to proposed regulations, open-end RICs such as the
Funds would be entitled to elect to "mark-to-market" their stock
in certain PFICs. "Marking-to-market," in this context, means
recognizing as gain for each taxable year the excess, as of the
end of that year, of the fair market value of each such PFIC's
stock over the adjusted basis in that stock (including mark-to-
market gain for each prior year for which an election was in
effect).
Derivative Instruments
The use of derivatives strategies, such as purchasing and
selling (writing) options and futures and entering into forward
currency contracts, involves complex rules that will determine
for income tax purposes the character and timing of recognition
of the gains and losses the Fund realizes in connection
therewith. Gains from the disposition of foreign currencies
(except certain gains therefrom that may be excluded by future
regulations), and income from transaction in options, futures,
and forward currency contracts derived by a Fund with respect to
its business of investing in securities or foreign currencies,
will qualify as permissible income under the Income Requirement.
However, income from the disposition of options and futures
(other than those on foreign currencies) will be subject to the
30% Limitation if they are held for less than three months.
Income from the disposition of foreign currencies, and options,
futures, and forward contracts on foreign currencies, that are
not directly related to a Fund's principal business of investing
in securities (or options and futures with respect to
securities) also will be subject to the 30% Limitation if they
are held for less than three months.
If a Fund satisfies certain requirements, any increase in
value of a position that is part of a "designated hedge" will be
offset by any decrease in value (whether realized or not) of the
offsetting hedging position during the period of the hedge for
purposes of determining whether the Fund satisfies the 30%
Limitation. Thus, only the net gain (if any) from the
designated hedge will be included in gross income for purposes
of that limitation. Each Fund intends that, when it engages in
hedging strategies, the hedging transactions will qualify for
this treatment, but at the present time it is not clear whether
this treatment will be available for all of the Fund's hedging
transactions. To the extent this treatment is not available or
is not elected, a Fund may be forced to defer the closing out of
certain options, futures, or forward currency contracts beyond
the time when it otherwise would be advantageous to do so, in
order for the Fund to continue to qualify as a RIC.
For federal income tax purposes, each Fund is required to
recognize as income for each taxable year its net unrealized
gains and losses on options, futures, or forward currency
contracts that are subject to section 1256 of the Code ("Section
1256 Contracts") and are held by the Fund as of the end of the
year, as well as gains and losses on Section 1256 Contracts
actually realized during the year. Except for Section 1256
Contracts that are part of a "mixed straddle" and with respect
to which a Fund makes a certain election, any gain or loss
recognized with respect to Section 1256 Contracts is considered
to be 60% long-term capital gain or loss and 40% short-term
capital gain or loss, without regard to the holding period of
the Section 1256 Contract. Unrealized gains on Section 1256
Contracts that have been held by a Fund for less than three
months as of the end of its taxable year, and that are
recognized for federal income tax purposes as described above,
will not be considered gains on investments held for less than
three months for purposes of the 30% Limitation.
DETERMINATION OF NET ASSET VALUE
As set forth in the Prospectus under the caption "Valuation
of Shares" the net asset value of each Fund will be determined
as of the regular close of trading (currently 4:00pm, Eastern
time) on each day the New York Stock Exchange (the "NYSE") is
open for trading. The NYSE is open for trading Monday through
Friday except on New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day. Additionally, if any of the holidays falls on a
Sunday, the NYSE will not be open for trading on the succeeding
Monday, unless unusual business conditions exist, such as the
ending of a monthly or yearly accounting period.
Debt securities are valued by a pricing service that
utilizes electronic data processing techniques to determine
values for normal institutional-sized trading units of debt
securities without regard to sale or bid prices when such values
are believed to more accurately reflect the fair market value
for such securities. Otherwise, sale or bid prices are used
when such values are believed to more accurately reflect the
fair market value for such securities. Any securities or other
assets for which market quotations are not readily available are
valued at fair value as determined in good faith by the Board of
Trustees. Debt securities having remaining maturities of 60
days or less when purchased are valued by the amortized cost
method when the Board of Trustees has determined that the fair
value of such securities is their amortized cost. Under this
method of valuation, a security is initially valued at its
acquisition cost, and thereafter, accretion of any discount or
amortization of any premium is assumed each day, regardless of
the impact of the fluctuating rates on the market value of the
instrument.
The calculation of net asset value does not usually take
place contemporaneously with the determination of the prices of
the portfolio securities used in such calculation. Trading in
securities on foreign securities exchanges and over-the-counter
markets is normally completed well before the regular close of
trading on the NYSE on each business day on which the NYSE is
open for trading. In addition, foreign securities trading in a
particular country or countries may not take place on all
business days the NYSE is open. Furthermore, trading takes
place in various foreign markets on days which are not business
days on which the NYSE is open and on which the Funds' net asset
values are not calculated. As a result, events affecting the
values of portfolio securities that occur between the time their
prices are determined and the close of the NYSE will not be
reflected in a Fund's calculation of net asset values unless the
Adviser determines that the particular event may materially
affect net asset value, in which case an adjustment will be
made.
ADDITIONAL SHAREHOLDER INFORMATION
Telephone Exchange and Redemption Privileges
Shares of a Fund and any other mutual funds sponsored by
the Adviser may be exchanged for each other without charge at
relative net asset values once per six month period. Exchanges
will be effected by redemption of shares of the Fund held and
purchase of shares of the fund for which Fund shares are being
exchanged (the "New Fund"). For federal income tax purposes,
any such exchange constitutes a sale upon which a capital gain
or loss will be realized, depending upon whether the value of
the shares being exchanged is more or less than the
shareholder's adjusted cost basis. If you are interested in
exercising any of these exchange privileges, you should obtain
Prospectuses of other sponsored funds from the Adviser. Upon a
telephone exchange, the transfer agent establishes a new account
in the New Fund with the same registration and dividend and
capital gains options as the redeemed account, unless otherwise
specified, and confirms the purchase to you.
The Telephone Exchange and Redemption Privileges are
available only in states where shares of the New Fund may be
sold, and may be modified or discontinued at any time.
Additional information regarding the Telephone Exchange and
Redemption Privileges is contained in the Prospectus.
Signature Guarantees
The signature(s) of redeeming shareholders must generally
be guaranteed by an "eligible guarantor," including: (1)
national or state banks, savings associations, savings and loan
associations, trust companies, savings banks, industrial loan
companies and credit unions; (2) national securities exchanges,
registered securities associations and clearing agencies; (3)
securities broker-dealers which are members of a national
securities exchange or clearing agency or which have minimum net
capital of $100,000, or (4) institutions that participate in the
Securities Transfer Agent Medallion Program ("STAMP") or other
recognized signature medallion program. A notarized signature
will not be sufficient. If share are registered in more than
one name, the signature of each of the redeeming Shareholders
must be guaranteed.
Redemptions in Kind
If the Board of Trustees determines that it would be
detrimental to the best interests of the remaining shareholders
of the Fund to make payment wholly or partly in cash, the Fund
may pay the redemption proceeds in whole or in part by a
distribution in-kind of portfolio securities, in conformity with
applicable rules of the SEC. Distributions-in-kind will be made
in readily marketable securities. Investors may incur brokerage
charges on the sale of portfolio securities received in
distributions in kind.
ORGANIZATION OF THE TRUST AND THE FUNDS
The Funds are separate series of an open-end investment
company organized as a trust under the laws of the Commonwealth
of Massachusetts, of a type commonly known as a Massachusetts
business trust. The Board of Trustees may allocate assets,
liabilities, income and expenses to the Trust's separate series
(and classes, if any), and may divide or redivide any unissued
shares of the Trust into one or more additional series.
Fractional shares have the same rights proportionately as do
full shares. Shares have no subscription or preemptive rights
and only such conversion or exchange rights as the Board of
Trustees may grant in its discretion.
When issued for payment as described in the Prospectus and
this SAI, each Fund's shares will be fully paid and non-
assessable, subject only to the possibility of shareholder
liability described in the Prospectus. All consideration
received by the Trust for shares of any Fund and all assets in
which such consideration is invested belong to that Fund and
would be subject to the liabilities related thereto.
Limitation of Trustees' Liability
The Declaration of Trust provides that a Trustee shall be
liable only for his or her own willful defaults and, if
reasonable care has been exercised in the selection of officers,
agents, employees or investment advisers, shall not be liable
for any neglect or wrongdoing of any such person. The
Declaration of Trust also provides that the Trust will indemnify
its Trustees and officers against liabilities and expenses
incurred in connection with actual or threatened litigation in
which they may be involved because of their offices with the
Trust unless it is determined in the manner provided in the
Declaration of Trust that they have not acted in good faith in
the reasonable belief that their actions were in the best
interests of the Trust. However, nothing in the Declaration of
Trust shall protect or indemnify a Trustee against any liability
for his or her willful misfeasance, bad faith, gross negligence
or reckless disregard of his or her duties.
PERFORMANCE INFORMATION
As described under "Performance Information" in the
Prospectus, each Fund's historical performance or return may be
shown in the form of "average annual total return," "total
return," and "cumulative total return." From time to time, the
Adviser may voluntarily waive all or a portion of its management
fee and/or absorb certain expenses for a Fund. Without waivers
and absorption of expenses, performance results will be lower.
No historical performance represents the future performance of a
Fund.
Average Annual Total Return
The average annual total return of a Fund is computed by
finding the average annual compounded rates of return over
designated time periods that would equate the initial amount
invested to the ending redeemable value, according to the
following formula:
P(1+T)n=ERV
P = a hypothetical initial payment of $10,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical
$10,000 payment made at the beginning of the
stated periods at the end of the stated periods.
The average annual total return of the International Fund and
the Emerging Markets Fund for the period from inception to March
31, 1997 were 2.47% and 3.56%, respectively.
Total Return
Calculation of a Fund's total return is not subject to a
standardized formula. Total return performance for a specific
period is calculated by first taking an investment (assumed
below to be $10,000) ("initial investment") in the Fund's shares
on the first day of the period and computing the "ending value"
of that investment at the end of the period. The total return
percentage is then determined by subtracting the initial
investment from the ending value and dividing the remainder by
the initial investment and expressing the result as a
percentage. The calculation assumes that all income and capital
gains dividends paid by the Fund have been reinvested at net
asset value on the reinvestment dates during the period. Total
return may also be shown as the increased dollar value of the
hypothetical investment over the period.
Cumulative Total Return
Cumulative total return represents the simple change in
value of an investment over a stated period and may be quoted as
a percentage or as a dollar amount. Total returns and
cumulative total returns may be broken down into their
components of income and capital (including capital gains and
changes in share price) in order to illustrate the relationship
between these factors and their contributions to total return.
The Funds' performance figures will be based upon
historical results and will not represent future performance.
Each Fund's shares are sold at net asset value per share. Each
Fund's returns and net asset value will fluctuate and shares are
redeemable at the then current net asset value, which may be
more or less than original cost. Factors affecting a Fund's
performance include general market conditions, operating
expenses, and investment management. Any additional fees
charged by a dealer or other financial services firm will reduce
the returns described in this section.
Comparisons
U.S. Treasury Bills, Notes, or Bonds. Investors may want
to compare the performance of a Fund to that of U.S. Treasury
bills, notes or bonds, which are issued by the U.S. government.
Treasury obligations are issued in selected denominations.
Rates of Treasury obligations are fixed at the time of issuance
and payment of principal and interest is backed by the full
faith and credit of the United States Treasury. The market
value of such instruments will generally fluctuate inversely
with interest rates prior to maturity and will equal par value
at maturity. Generally, the values of obligations with shorter
maturities will fluctuate less than those with longer
maturities.
Certificates of Deposit. Investors may want to compare a
Fund's performance to that of certificates of deposit offered by
banks and other depositary institutions. Certificates of
deposit may offer fixed or variable interest rates and principal
is guaranteed and may be insured. Withdrawal of the deposits
prior to maturity normally will be subject to a penalty. Rates
offered by banks and other depositary institutions are subject
to change at any time specified by the issuing institution.
Money Market Fund. Investors may want to compare
performance of a Fund to that of money market funds. Money
market fund yields will fluctuate and shares are not insured,
but share values usually remain stable.
Lipper Analytical Services, Inc. ("Lipper") and Other
Independent Ranking Organizations.
From time to time, in marketing and other fund literature, a
Fund's performance may be compared to the performance of other
mutual funds in general or to the performance of particular
types of mutual funds, with similar investment goals, as tracked
by independent organizations. Among these organizations,
Lipper, a widely used independent research firm which ranks
mutual funds by overall performance, investment objectives, and
assets, may be cited. Lipper performance figures are based on
changes in net asset value, with all income and capital gain
dividends reinvested. Such calculations do not include the
effect of any sales charges imposed by other funds. Each Fund
will be compared to Lipper's appropriate funding category, that
is, by fund objective and portfolio holdings. Each Fund's
performance may also be compared to the average performance of
its Lipper category.
Morningstar, Inc. Each Fund's performance may also be
compared to the performance of other mutual funds by
Morningstar, Inc., which ranks funds on the basis of historical
risk and total return. Morningstar's rankings range from five
stars (highest) to one star (lowest) and represent Morningstar's
assessment of the historical risk level and total return of a
fund as a weighted average for 3, 5, and 10 year periods.
Rankings are not absolute and do not represent future results.
Independent Sources. Evaluations of Fund performance made
by independent sources may also be used in advertisements
concerning a Fund, including reprints of, or selections from,
editorials or articles about the Fund, especially those with
similar objectives. Sources for Fund performance information
and articles about the Funds may include publications such as
Money, Forbes, Kiplinger's, Smart Money, Morningstar, Inc.;
Financial World; Business Week; U.S. News and World Report, The
Wall Street Journal, Barron's and a variety of investment
newsletters.
Indices. A Fund may compare its performance to a wide
variety of indices including the Consumer Price Index; Dow Jones
Average of 30 Industrials; NASDAQ Over-the-Counter Composite
Index; Standard & Poor's 500 Stock Index; Standard & Poor's 400
Mid-Cap Stock Index; Standard & Poor's 600 Small-Cap Index;
Wilshire 4500 Index; Wilshire 5000 Index; Wilshire Small Cap
Index; Wilshire Small Cap Growth Index; Wilshire Small Cap Value
Index; Wilshire Midcap 750 Index; Wilshire Midcap Growth Index;
Wilshire Midcap Value Index; Wilshire Large Cap Growth Index;
Russell 1000 Index; Russell 1000 Growth Index; Russell 2000
Index; Russell 2000 Small Stock Index; Russell 2000 Growth
Index; Russell 2000 Value Index; Russell 2500 Index; Russell
3000 Stock Index; Russell Mid Cap Index; Russell Mid Cap Growth
Index; Russell Mid Cap Value Index; Value Line Index; Morgan
Stanley Capital International EAFEr Index; Morgan Stanley
Capital International World Index; Morgan Stanley Capital
International All Country World Index; and Salomon Brothers
World Index.
In addition, a Fund may compare its performance to certain
other indices that measure stock market performance in
geographic areas in which the Fund may invest. The market
prices and yields of the stocks in these indexes will fluctuate.
A Fund may also compare its portfolio weighting to the EAFE
Index weighting, which represents the relative capitalization of
the major overseas markets on a dollar-adjusted basis.
There are differences and similarities between the
investments that the Fund may purchase for its portfolio and the
investments measured by these indices.
Historical Information. Because each Fund's investments
are denominated primarily in foreign currencies, the strength or
weakness of the U.S. dollar as against these currencies may
account for part of the Fund's investment performance.
Historical information regarding the value of the dollar versus
foreign currencies may be used from time to time in
advertisements concerning a Fund. Such historical information
is not indicative of future fluctuations in the value of the
U.S. dollar against these currencies. Marketing materials may
cite country and economic statistics and historical stock market
performance for any of the countries in which the Fund invests,
including the following: population growth, gross domestic
product, inflation rate, average stock market price earnings
ratios and the total value of stock markets. Sources for such
statistics may include official publications of various foreign
governments, exchanges, or investment research firms. In
addition, marketing materials may cite the Adviser's views or
interpretations of such statistical data or historical
performance.
Historical Asset Class Returns. From time to time,
marketing materials may portray the historical returns of
various asset classes. Such presentations will typically
compare the average annual rates of return of inflation, U.S.
Treasury bills, bonds, common stocks, and small stocks. There
are important differences between each of these investments that
should be considered in viewing any such comparison. The market
value of stocks will fluctuate with market conditions, and small-
stock prices generally will fluctuate more than large-stock
prices. Bond prices generally will fluctuate inversely with
interest rates and other market conditions, and the prices of
bonds with longer maturities generally will fluctuate more than
those of shorter-maturity bonds. Interest rates for bonds may
be fixed at the time of issuance, and the payment of principal
and interest may be guaranteed by the issuer and, in the case of
U.S. Treasury obligations, backed by the full faith and credit
of the U.S. Treasury.
Other Fund Advised by Hansberger. Hansberger Global
Investors, Inc. advises a number of mutual funds investing in a
variety of markets. The Fund may be compared, from time to
time, to other mutual funds advised by Hansberger Global
Investors, Inc. based on a risk/reward profile. In general, the
degree of risk associated with any investment product varies
directly with that product's potential level of reward. This
correlation or any Fund's individual profile may be described or
discussed in marketing materials; this discussion will not be
used to compare the risk and reward potential of the Fund with
that of any mutual fund or investment product other than those
advised by Hansberger Global Investors, Inc. Marketing
materials may also discuss the relationship between risk and
reward as it relates to an individual investor's portfolio.
Additional Fund Information
Portfolio Characteristics. In order to present a more
complete picture of a Fund's portfolio, marketing materials may
include various actual or estimated portfolio characteristics,
including but not limited to median market capitalizations,
earnings per share, alphas, betas, price/earnings ratios,
returns on equity, dividend yields, capitalization ranges,
growth rates, price/book ratios, top holdings, sector
breakdowns, asset allocations, quality breakdowns, and
breakdowns by geographic region.
Measures of Volatility and Relative Performance.
Occasionally statistics may be used to specify Fund volatility
or risk. The general premise is that greater volatility
connotes greater risk undertaken in achieving performance.
Measure of volatility or risk are generally used to compare the
Fund's net asset value or performance relative to a market
index. One measure of volatility is beta. Beta is the
volatility of a fund relative to the total market as represented
by the Standard & Poor's 500 Stock Index. A beta of more than
1.00 indicated volatility greater than the market, and a beta of
less than 1.00 indicates volatility less than the market.
Another measures of volatility or risk is standard deviation.
Standard deviation is a statistical tool that measures the
degree to which a fund's performance has varied from its average
performance during a particular time period.
Standard deviation is calculated using the following formula:
Standard deviation = the square root of S(xi-xm)2
n-1
where S = "the sum of,"
xi = each individual return during the time period,
xm = the average return over the time period, and
n = the number of individual returns during the time
period.
Statistics may also be used to discuss a Fund's relative
performance. One such measure is alpha. Alpha measures the
actual return of a fund compared to the expected return of a
fund given its risk (as measured by beta). The expected return
is based on how the market as a whole performed, and how the
particular fund has historically performed against the market.
Specifically, alpha is the actual return less the expected
return. The expected return is computed by multiplying the
advance or decline in a market representation by the fund's
beta. A positive alpha quantifies the value that the fund
manager has added, and a negative alpha quantifies the value
that the fund manager has lost.
Other measures of volatility and relative performance may
be used as appropriate. However, all such measures will
fluctuate and do not represent future results.
GENERAL INFORMATION
Business Philosophy
The Adviser is an independent investment adviser, owned by
professionals active in its management. Recognizing that the
investors are the focus of its business, the Adviser strives for
excellence both in investment management and in the service
provided to investors. This commitment affects many aspects of
the business, including professional staffing, product
development, investment management, and service delivery.
The increasing complexity of the capital markets requires
specialized skills and processes for each asset class and style.
Therefore, the Adviser believes that active management should
produce greater returns than a passively managed index. The
Adviser has brought together a group of top-flight investment
professionals with diverse product expertise, and each
concentrates on their investment specialty. The Adviser
believes that people are the firm's most important asset. For
this reason, continuity of professionals is critical to the
firm's long-term success.
Investment Environment
Discussions of economic, social and political conditions
and their impact on the Funds may be used in advertisements and
sales materials. Such factors that may affect a Fund include
changes in interest rates, political developments, the
competitive environment, consumer behavior, industry trends,
technological advances, macroeconomic trends, and the supply and
demand of various financial instruments. In addition, marketing
materials may cite the Adviser's views or interpretations of
such factors.
INDEPENDENT ACCOUNTANTS
Arthur Andersen LLP, 225 Franklin Street, Boston, MA 02110,
are the independent accountants for the Trust, providing audit
services and assistance and consultation with respect to the
preparation of filings with the SEC.
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP, 1800 M Street, N.W.,
Washington, D.C. 20036, acts as legal counsel for the Trust.
FINANCIAL STATEMENTS
The Trust's financial statements for the Funds, including
the Portfolios of Investments, Statements of Assets and
Liabilities, Statements of Operations, Statements of Changes in
Net Assets, Notes to Financial Statements and the Report of
Independent Accountants, all of which are included in the 1996
Annual Report to Shareholders, are hereby incorporated by
reference into this Statement of Additional Information. A copy
of the Annual Report to Shareholders must accompany this
Statement of Additional Information. The unaudited financial
statements for the period ended March 31, 1997 are attached
hereto.
RATINGS APPENDIX
STANDARD & POOR'S
A Standard & Poor's corporate or municipal debt rating is a
current assessment of the creditworthiness of an obligor with
respect to a specific obligation. This assessment may take into
consideration obligors such as guarantors, insurers, or lessees.
The debt rating is not a recommendation to purchase, sell,
or hold a security, as it does not comment on market price or
suitability for a particular investor.
The ratings are based, in varying degrees, on the following
considerations:
(1) Likelihood of default. The rating assesses the
obligor's capacity and willingness as to timely payment of
interest and repayment of principal in accordance with the terms
of the obligation.
(2) The obligation's nature and provisions.
(3) Protection afforded to, and relative position of, the
obligation in the event of bankruptcy, reorganization, or other
arrangement under bankruptcy laws and other laws affecting
creditors' rights.
Likelihood of default is indicated by an issuer's senior
debt rating. If senior debt is not rated, an implied senior debt
rating is determined. Subordinated debt usually is rated lower
than senior debt to better reflect relative position of the
obligation in bankruptcy. Unsecured debt, where significant
secured debt exists, is treated similarly to subordinated debt.
LONG-TERM RATINGS DEFINITIONS: The ratings from "AA" to "CCC"
may be modified by the addition of a plus (+) or minus (-) sign
to show relative standing within the major rating categories.
Investment Grade
AAA Highest rating assigned by S&P. Capacity to pay interest
and repay principal is extremely strong.
AA Very strong capacity to pay interest and repay principal and
differs from the highest rated debt only in small degree.
A Strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to adverse effects
of changes in circumstances and economic conditions than
debt in higher-rated categories.
BBB Adequate capacity to pay interest and repay principal.
Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest
and repay principal for debt in this category than in higher
rated categories.
Speculative Grade
BB Less near-term vulnerability to default than other
speculative grade debt. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or
economic conditions that could lead to inadequate capacity
to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied "BBB-" rating.
B Greater vulnerability to default but presently has the
capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions would
likely impair capacity or willingness to pay interest and
repay principal. The "B" rating category also is used for
debt subordinated to senior debt that is assigned an actual
or implied "BB" or "BB-" rating.
CCC Current identifiable vulnerability to default, and is
dependent on 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. The "CCC"
rating category also is used for debt subordinated to senior
debt that is assigned an actual or implied "B" or "B-"
rating.
CC Typically applied to debt subordinated to senior debt which
is assigned an actual or implied "CCC" rating.
C 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 Reserved for income bonds on which no interest is being
paid.
D Issue is in payment default, or the obligor has filed for
bankruptcy. The "D" rating is used when interest 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.
Debt obligations of issuers outside the United States and its
territories are rated on the same basis as domestic corporate and
municipal issues. The ratings measure the creditworthiness of
the obligor but do not take into account currency exchange and
related uncertainties.
NOTES: An S&P note rating reflects the liquidity factors and
market access risks unique to notes. Notes due in three years or
less will likely receive a note rating. Notes maturing beyond
three years will most likely receive a long-term debt rating.
The following criteria will be used in making that assessment:
Amortization schedule - the larger the final maturity relative to
other maturities, the more likely it will be treated as a note;
Source of payment - the more dependent the issue is on the market
for its refinancing, the more likely it will be treated as a
note.
SP-1 Strong capacity to pay principal and interest. An issue
determined to possess a very strong capacity to pay debt
service is given a plus(+) designation.
SP-1 Satisfactory capacity to pay principal and interest, with
some vulnerability to adverse financial and economic changes
over the term of the notes.
SP-3 Speculative capacity to pay principal and interest.
COMMERCIAL PAPER/SHORT TERM RATING DEFINITIONS: A Standard &
Poor's short term rating is a current assessment of the
likelihood of timely payment of debt with an original maturity of
no more than 365 days, such as commercial paper. It is also
assigned to remarketed long term debt with a provision that
allows the holder to put the debt back to the company in less
than one year, in addition to the usual long term rating.
(Medium term note programs are assigned long term ratings.)
A-1 Highest category; degree of safety regarding timely payment
is strong. Debt determined to possess extremely strong
safety characteristics is denoted with a plus sign (+)
designation.
A-2 Capacity for timely payment is satisfactory. However, the
relative degree of safety is not as high as for issues
designated "A-1".
A-3 Adequate capacity for timely payment. It is, however, more
vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher
designations.
B Regarded as having only speculative capacity for timely
payment.
C Assigned to short-term debt obligations with a doubtful
capacity for payment.
D Obligation is in payment default.
MOODY'S
Moody's bond ratings, where specified, are applied to senior bank
obligations and insurance company senior policyholder and claims
obligations with an original maturity in excess of one year.
Obligations relying upon support mechanisms such as letters-of-
credit and bonds of indemnity are excluded unless explicitly
rated.
Obligations of a branch of a bank are considered to be domiciled
in the country in which the branch is located. Unless noted as
an exception, Moody's rating on a bank's ability to repay senior
obligations extends only to branches located in countries which
carry a Moody's sovereign rating. Such branch obligations are
rated at the lower of the bank's rating or Moody's sovereign
rating for the bank deposits for the country in which the branch
is located.
When the currency in which an obligation is denominated is not
the same as the currency of the country in which the obligation
is domiciled, Moody's ratings do not incorporate an opinion as to
whether payment of the obligation will be affected by the actions
of the government controlling the currency of denomination. In
addition, risk associated with bilateral conflicts between an
investor's home country and either the issuer's home country or
the country where an issuer branch is located are not
incorporated into Moody's ratings.
Moody's makes no representation that rated bank obligations or
insurance company obligations are exempt from registration under
the U.S. Securities Act of 1933 or issued in conformity with any
other applicable law or regulation. Nor does Moody's represent
that any specific bank or insurance company obligation is legally
enforceable or is a valid senior obligation of a rated issuer.
Moody's ratings are opinions, not recommendations to buy or sell,
and their accuracy is not guaranteed. A rating should be weighed
solely as one factor in an investment decision and you should
make your own study and evaluation of any issuer whose securities
or debt obligations you consider buying or selling.
LONG TERM: Moody's applies numerical modifiers 1, 2 and 3 in
each generic rating classification from Aa through B. 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.
Aaa Judged to be of the best quality. They carry the smallest
degree of investment risk and are generally referred to as
"gilt edged". Interest payments are protected by a large or
by an exceptionally stable margin and principal is secure.
While the various protective elements are likely to change,
such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa Judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present
which make the long-term risk appear somewhat larger than
the Aaa securities.
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 some time in the future.
Baa 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 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 Generally lack characteristics of the 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 Of poor standing. Such issues may be in default or there
may be present elements of danger with respect to principal
or interest.
Ca Speculative in a high degree. Such issues are often in
default or have other marked shortcomings.
C Lowest rated class of bonds, and issues so rated can be
regarded as having extremely poor prospects of ever
attaining any real investment standing.
SHORT-TERM:
Moody's short-term debt ratings are opinions of the ability of
issuers to repay punctually senior debt obligations which have an
original maturity not exceeding one year. Obligations relying
upon support mechanisms such as letters-of-credit and bonds of
indemnity are excluded unless explicitly rated.
Moody's employs the following three designations, all judged to
be investment grade, to indicate the relative repayment ability
of rated issuers:
PRIME-1 Issuers rated Prime-1 (or supporting institutions)
have a superior ability for repayment of senior
short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the
following characteristics: Leading market
positions in well-established industries; high
rates of return on funds employed; conservative
capitalization structure with moderate reliance on
debt and ample asset protection; broad margins in
earnings coverage of fixed financial charges and
high internal cash generation; and well-
established access to a range of financial markets
and assured sources of alternate liquidity.
PRIME-2 Issuers rated Prime-2 (or supporting institutions)
have a strong ability for repayment of senior
short-term debt obligations. This will normally
be evidenced by many of the characteristics cited
above but to a lesser degree. Earnings trends and
coverage ratios, while sound, may be more subject
to variation. Capitalization characteristics,
while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is
maintained.
PRIME-3 Issuers rated Prime-3 (or supporting institutions)
have an acceptable ability for repayment of senior
short-term obligations. The effect of industry
characteristics and market compositions may be
more pronounced. Variability in earnings and
profitability may result in changes in the level
of debt protection measurements and may require
relatively high financial leverage. Adequate
alternate liquidity is maintained.
NOT PRIME Issuers rated Not Prime do not fall within any of
the Prime rating categories.
Obligations of a branch of a bank are considered to be domiciled
in the country in which the branch is located. Unless noted as
an exception, Moody's rating on a bank's ability to repay senior
obligations extends only to branches located in countries which
carry a Moody's sovereign rating. Such branch obligations are
rated at the lower of the bank's rating or Moody's sovereign
rating for bank deposits for the country in which the branch is
located.
When the currency in which an obligation is denominated is not
the same as the currency of the country in which the obligation
is domiciled, Moody's ratings do not incorporate an opinion as to
whether payment of the obligation will be affected by actions of
the government controlling the currency of denomination. In
addition, risks associated with bilateral conflicts between an
investor's home country and either the issuer's home country or
the country where an issuer's branch is located are not
incorporated into Moody's short-term debt ratings.
Moody's makes no representation that rated bank or insurance
company obligations are exempt from registration under the U.S.
Securities Act of 1933 or issued in conformity with any other
applicable law or regulation. Nor does Moody's represent that
any specific bank or insurance company obligation is legally
enforceable or a valid senior obligation of a rated issuer.
When an issuer represents to Moody's that its short-term debt
obligations are supported by the credit of another entity or
entities, then the names of such supporting entities are listed
with the name of the issuer, or indicated with a footnote
reference, in Moody's publications. In assigning ratings to such
issuer's, Moody's evaluates the financial strength of the
affiliated corporations, commercial banks, insurance companies,
foreign governments or other entities, but only as one factor in
the total rating assessment. Moody's makes no representation and
gives no opinion on the legal validity or enforceability of any
support arrangements.
Moody's ratings are opinions, not recommendations to buy or sell,
and their accuracy is not guaranteed. A rating should be weighed
solely as one factor in an investment decision and you should
make your own study and evaluation of any issuer whose securities
or debt obligations you consider buying or selling.
THOMSON BANKWATCH
Thomson BankWatch ("TBW") ratings are based upon a
qualitative and quantitative analysis of all segments of the
organization, including holding company and operating
subsidiaries.
SHORT-TERM RATINGS: TBW's short-term ratings do not consider any
collateral or security as the basis for the rating, although some
securities may in fact have collateral. Further, these ratings
do not incorporate consideration of the possible sovereign risk
associated with a foreign deposit (defined as a deposit taken in
a branch outside the country in which the rated entity is
headquartered) of the rated entity. TBW's short-term ratings are
intended to assess the likelihood of an untimely or incomplete
payment of principal or interest.
TBW-1 Highest category; very high likelihood that
principal and interest will be paid on a timely basis.
TBW-2 Second-highest category; while the degree of
safety regarding timely repayment of principal and interest
is strong, the relative degree of safety is not as high as
for issues rated "TBW-1".
TBW-3 Lowest investment-grade category; while the
obligation is more susceptible to adverse developments (both
internal and external) than those with higher ratings, the
capacity to service principal and interest in a timely
fashion is considered adequate.
TBW-4 Lowest rating category; regarded as non-investment
grade and therefore speculative.
LONG-TERM DEBT RATINGS: TBW's long-term debt ratings apply to
specific issues of long-term debt and preferred stock. They
specifically assess the likelihood of an untimely repayment of
principal or interest over the term to maturity of the rated
instrument. Ratings may include a plus (+) or minus (-)
designation, which indicates where within the respective category
the issue is placed.
Investment Grade
AAA Highest category; ability to repay principal and interest on
a timely basis is very high.
AA Second-highest category; superior ability to repay principal
and interest on a timely basis, with limited incremental
risk compared to issues rated in the highest category.
A Third-highest category; ability to repay principal and
interest is strong. Issues rated "A" could be more
vulnerable to adverse developments (both internal and
external) than obligations with higher ratings.
BBB Lowest investment-grade category; acceptable capacity to
repay principal and interest. Issues rated "BBB" are,
however, more vulnerable to adverse developments (both
internal and external) than obligations with higher ratings.
Non-Investment Grade
BB Suggests that likelihood of default is considerably less
than for lower-rated issues. However, there are significant
uncertainties that could affect the ability to adequately
service debt obligations.
B Higher degree of uncertainty and therefore greater
likelihood of default than higher-rated issues. Adverse
developments could well negatively affect the payment of
interest and principal on a timely basis.
CCC Clearly have a high likelihood of default, with little
capacity to address further adverse changes in financial
circumstances.
CC Applied to issues that are subordinate to other obligations
rated "CCC" and are afforded less protection in the event of
bankruptcy or reorganization.
D Default
IBCA
LONG-TERM RATINGS: "+" or "-" may be appended to a rating to
denote relative status within major rating categories.
AAA Lowest expectation of investment risk. Capacity for timely
repayment of principal and interest is substantial, such
that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk
substantially.
AA Very low expectation of investment risk. Capacity for
timely repayment of principal and interest is substantial.
Adverse changes in business, economic or financial
conditions may increase investment risk, albeit not very
significantly.
A Low expectation of investment risk. Capacity for timely
repayment of principal and interest is strong, although
adverse changes in business, economic or financial
conditions may lead to increased investment risk.
BBB Currently low expectation of investment risk. Capacity for
timely repayment of principal and interest is adequate,
although adverse changes in business, economic or financial
conditions are more likely to lead to increased investment
risk than for obligations in other categories.
BB Possibility of investment risk developing. Capacity for
timely repayment of principal and interest exists, but is
susceptible over time to adverse changes in business,
economic or financial conditions.
B Investment risk exists. Timely repayment of principal and
interest is not sufficiently protected against adverse
changes in business, economic or financial conditions.
CCC Current perceived possibility of default. Timely repayment
of principal and interest is dependent on favorable
business, economic or financial conditions.
CC Highly speculative or have a high risk of default.
C Currently in default.
SHORT-TERM RATINGS:
A1+ Highest capacity for timely repayment.
A1 Strong capacity for timely repayment.
A2 Satisfactory capacity for timely repayment, although such
capacity may be susceptible to adverse changes in business,
economic, or financial conditions.
A3 Adequate capacity for timely repayment. Such capacity is
more susceptible to adverse changes in business, economic,
or financial conditions than for obligations in higher
categories.
B Capacity for timely repayment is susceptible to adverse
changes in business, economic, or financial conditions.
C Inadequate capacity to ensure timely repayment.
D High risk of default or currently in default.
FITCH
INVESTMENT GRADE BOND RATINGS
Fitch investment grade bond ratings provide a guide to
investors in determining the credit risk associated with a
particular security. The ratings represent Fitch's assessment of
the issuer's ability to meet the obligations of a specific debt
issue or class of debt in a timely manner.
The rating takes into consideration special features of the
issue, its relationship to other obligations of the issuer, the
current and prospective financial condition and operating
performance of the issuer and any guarantor, as well as the
economic and political environment that might affect the issuer's
future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may
be provided by insurance policies or financial guaranties unless
otherwise indicated.
Bonds that have the same rating are of similar but not
necessarily identical credit quality since the rating categories
do not fully reflect small differences in the degrees of credit
risk.
Fitch ratings are not recommendations to buy, sell, or hold
any security. Ratings do not comment on the adequacy of market
price, the suitability of any security for a particular investor,
or the tax-exempt nature or taxability of payments made in
respect of any security.
Fitch ratings are based on information obtained from
issuers, other obligors, underwriters, their experts, and other
sources Fitch believes to be reliable. Fitch does not audit or
verify the truth or accuracy of such information. Ratings may be
changed, suspended, or withdrawn as a result of changes in, or
the unavailability of, information or for other reasons.
Plus (+) Minus (-) Plus and minus signs are used with a rating
symbol to indicate the relative position of a
credit within the rating category. Plus and minus
signs, however, are not used in the "AAA"
category.
AAA Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong
ability to pay interest and repay principal, which is
unlikely to be affected by reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and
repay principal is very strong, although not quite as strong
as bonds rated "AAA". Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these
issuers is generally rated "F-1+".
A Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and
repay principal is considered to be adequate. Adverse
changes in economic conditions and circumstances, however,
are more likely to have adverse impact on these bonds, and
therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is
higher than for bonds with higher ratings.
SPECULATIVE GRADE BOND RATINGS
Fitch speculative grade bond ratings provide a guide to
investors in determining the credit risk associated with a
particular security. The ratings ("BB" to "C") represent Fitch's
assessment of the likelihood of timely payment of principal and
interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ("DDD" to
"D") is an assessment of the ultimate recovery value through
reorganization or liquidation.
The rating takes into consideration special features of the
issue, its relationship to other obligations of the issuer, the
current and prospective financial condition and operating
performance of the issuer and any guarantor, as well as the
economic and political environment that might affect the issuer's
future financial strength.
Bonds that have the same rating are of similar but not
necessarily identical credit quality since rating categories
cannot fully reflect the differences in degrees of credit risk.
Plus (+) Minus (-) Plus and minus signs are used with a rating
symbol to indicate the relative position of a
credit within the rating category. Plus and minus
signs, however, are not used in the "DDD", "DD",
or "D" categories.
BB Bonds are considered speculative. The obligor's ability to
pay interest and repay principal may be affected over time
by adverse economic changes. However, business and
financial alternatives can be identified which could assist
the obligor in satisfying its debt service requirements.
B Bonds are considered highly speculative. While bonds in
this class are currently meeting debt service requirements,
the probability of continued timely payment of principal and
interest reflects the obligor's limited margin of safety and
the need for reasonable business and economic activity
throughout the life of the issue.
CCC Bonds have certain identifiable characteristics which, if
not remedied, may lead to default. The ability to meet
obligations requires an advantageous business and economic
environment.
CC Bonds are minimally protected. Default in payment of
interest and/or principal seems probable over time.
C Bonds are in imminent default in payment of interest or
principal.
DDD, DD, and D Bonds are in default on interest and/or principal
payments. Such bonds are extremely speculative
and should be valued on the basis of their
ultimate recovery value in liquidation or
reorganization of the obligor. "DDD" represents
the lowest potential for recovery on these bonds,
and "D" represents the lowest potential for
recovery.
SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that
are payable on demand or have original maturities of generally up
to three years, including commercial paper, certificates of
deposit, medium-term notes, and municipal and investment notes.
The short-term rating places greater emphasis than a long-
term rating on the existence of liquidity necessary to meet the
issuer's obligations in a timely manner.
F-1+ Exceptionally Strong Credit Quality. Issues assigned this
rating are regarded as having the strongest degree of
assurance for timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating
reflect an assurance of timely payment only slightly less in
degree than issues rated "F-1+"
F-2 Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as for issues assigned "F-
1+" and "F-1" ratings.
F-3 Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for
timely payment is adequate, however, near-term adverse
changes could cause these securities to be rated below
investment grade.
F-S Weak Credit Quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse
changes in financial and economic conditions.
D Default. Issues assigned this rating are in actual or
imminent payment default.
DUFF & PHELPS
These ratings represent a summary opinion of the issuer's long-
term fundamental quality. Rating determination is based on
qualitative and quantitative factors which may vary according to
the basic economic and financial characteristics of each industry
and each issuer. Important considerations are vulnerability to
economic cycles as well as risks related to such factors as
competition, government action, regulation, technological
obsolescence, demand shifts, cost structure, and management depth
and expertise. The projected viability of the obligor at the
trough of the cycle is a critical determination.
Each rating also takes into account the legal form of the
security, (e.g., first mortgage bonds, subordinated debt,
preferred stock, etc.). The extent of rating dispersion among
the various classes of securities is determined by several
factors including relative weightings of the different security
classes in the capital structure, the overall credit strength of
the issuer, and the nature of covenant protection. Review of
indenture restrictions is important to the analysis of a
company's operating and financial constraints.
The Credit Rating Committee formally reviews all ratings once per
quarter (more frequently, if necessary). Ratings of "BBB" and
higher fall within the definition of investment grade securities,
as defined by bank and insurance supervisory authorities.
LONG-TERM DEBT:
AAA Highest credit quality. The risk factors are negligible,
being only slightly more than for risk-free U.S. Treasury
debt.
AA+, AA or AA- High credit quality. Protection factors are
strong. Risk is modest but may vary slightly from
time to time because of economic conditions.
A+, A or A- Protection factors are average but adequate.
However, risk factors are more variable and
greater in periods of economic stress.
BBB+, BBB or BBB- Below average protection factors but still
considered sufficient for prudent investment.
Considerable variability in risk during economic
cycles.
BB+, BB or BB- Below investment grade but deemed likely to meet
obligations when due. Present or prospective
financial protection factors fluctuate according
to industry conditions or company fortunes.
Overall quality may move up or down frequently
within this category.
B+, B or B- Below investment grade and possessing risk that
obligations will not be met when due. Financial
protection factors will fluctuate widely according
to economic cycles, industry conditions and/or
company fortunes. Potential exists for frequent
changes in the rating within this category or into
a higher or lower rating grade.
CCC Well below investment grade securities.
Considerable uncertainty exists as to timely
payment of principal, interest or preferred
dividends. Protection factors are narrow and risk
can be substantial with unfavorable
economic/industry conditions, and/or with
unfavorable company developments.
DD Defaulted debt obligations. Issuer failed to
meet scheduled principal and/or interest payments.
SHORT-TERM DEBT:
Duff & Phelps' short-term ratings are consistent with the rating
criteria utilized by money market participants. The ratings
apply to all obligations with maturities of under one year,
including commercial paper, the uninsured portion of certificates
of deposit, unsecured bank loans, master notes, bankers
acceptances, irrevocable letters of credit, and current
maturities of long-term debt. Asset-backed commercial paper is
also rated according to this scale.
Emphasis is placed on liquidity which we define as not only cash
from operations, but also access to alternative sources of funds
including trade credit, bank lines, and the capital markets. An
important consideration is the level of an obligor's reliance on
short-term funds on an ongoing basis.
The distinguishing feature of Duff & Phelps' short-term ratings
is the refinement of the traditional "1" category. The majority
of short-term debt issuers carry the highest rating, yet quality
differences exist within that tier. As a consequence, Duff &
Phelps has incorporated gradations of "1+"(one plus) and "1-"
(one minus) to assist investors in recognizing those differences.
Duff & Phelps' ratings are recognized by the SEC for broker-
dealer requirements, specifically capital computation guidelines.
Our ratings meet Department of Labor ERISA guidelines governing
pension and profit sharing investments. State regulators also
recognize Duff & Phelps' ratings for insurance company investment
portfolios.
Duff 1+ Highest certainty of timely payment. Short-term
liquidity, including internal operating factors and/or
access to alternative sources of funds, is outstanding, and
safety is just below risk-free U.S. Treasury short-term
obligations.
Duff 1 Very high certainty of timely payment.
Liquidity factors are excellent and supported by
good fundamental protection factors. Risk factors
are minor.
Duff 1- High certainty of timely payment. Liquidity
factors are strong and supported by good
fundamental protection factors. Risk factors are
very small.
Duff 2 Good certainty of timely payment. Liquidity
factors and company fundamentals are sound.
Although ongoing funding needs may enlarge total
financing requirements, access to capital markets
is good. Risk factors are small.
Duff 3 Satisfactory liquidity and other protection
factors qualify issue as to investment grade.
Risk factors are larger and subject to more
variation. Nevertheless, timely payment is
expected.
Non-Investment Grade
Duff 4 Speculative investment characteristics.
Liquidity is not sufficient to insure against
disruption in debt service. Operating factors and
market access may be subject to a high degree of
variation.
Duff 5 Default. Issuer failed to meet scheduled
principal and/or interest payments.
SPECIALIZED RATINGS
TBW COUNTRY RATINGS
TBW's Country Ratings represent TBW's assessment of the
overall political and economic stability of a country in which a
bank is domiciled.
TBW considers factors other than the financial strength of
the individual company. In particular, the context of the
company--country risk and the complexion of its domestic
financial system--becomes critical. TBW focuses on both
political risk--the willingness to meet external debt obligations-
- -and economic risk--the ability to repay external debts.
I An industrialized country with a long history of political
stability, effective economic management, sustainable
financial conditions, and continuing access to global
capital markets on favorable terms. Short-run risk of
default is nonexistent.
I/II An industrialized country with a long history of political
and economic stability that is currently experiencing some
short-term political and/or economic difficulties. It
enjoys continuing access to global capital markets, though
at somewhat higher margins. Short-run risk of default is
very low.
II An industrialized country with a history of political and
economic stability that is currently experiencing serious
political and/or economic difficulties. It enjoys
continuing access to global capital markets, though at
significantly higher margins. Short-run risk of default is
low.
II/III A newly industrialized country with a generally
healthy economy that currently enjoys wide access to global
capital markets. Short-run risk of default is very low.
III A newly industrialized country with a generally healthy
economy but with some significant political and/or economic
difficulties. It currently enjoys some access to global
capital markets. Short-run risk of default is low.
III/IV A newly industrialized country experiencing
serious political and/or economic difficulties. It enjoys
only very limited access to global capital markets. Short-
run risk of default is low to medium.
IV A non-industrialized country that has limited access to
world capital markets. Short-run risk of default is low.
IV/V A non-industrialized country with a history of external debt
servicing problems that is currently experiencing serious
political and/or economic difficulties. It enjoys only
limited access to world capital markets. Short-run risk of
default is low to medium.
V A non-industrialized country with no access to world capital
markets and which is considered in default on some or all of
its external debt. Short-run risk of default is medium to
high.
TBW INTRA-COUNTRY ISSUER RATINGS
TBW's Intra-Country Issuer Ratings provide a relative
assessment of each bank's financial performance and its ability
to meet its obligations within the context of the local market.
These ratings are not directly comparable from country to
country.
Further, sovereign risk is not factored into the Intra-
Country Ratings. However, the ratings do incorporate systemic
risks which may be prevalent within certain banking systems that
could preclude any bank within the system from achieving the top
rating.
TBW assigns only one Intra-Country Issuer Rating to each
company, factoring consolidated financials into the overall
assessment.
The ratings are assigned using an intermediate time horizon.
Intra-Country Issuer Ratings incorporate an overall assessment of
the company's financial strength, in addition to TBW's opinion of
the vulnerability of the company to adverse developments (which
may affect the market's perception of the company, thereby its
access to funding and the marketability of its securities).
IC-A Company possesses an exceptionally strong balance sheet and
earnings record, translating into an excellent reputation
and very good access to its natural money markets. If
weakness or vulnerability exists in any aspect of the
company's business, it is entirely mitigated by other
consideration.
IC-A/B Company is financially very solid with a favorable
track record and no readily apparent weakness. Its overall
risk profile, while low, is not quite as favorable as for
companies in the highest rating category.
IC-B A strong company with a solid financial record and well
received by its natural money markets. Some minor
weaknesses may exist, but any deviation from the company's
historical performance levels should be both limited and
short-lived. The likelihood of a significant problem
developing is small, yet slightly greater than for a higher-
rated company.
IC-B/C Company is clearly viewed as a good credit. While
some shortcomings are apparent, they are not serious and/or
are quite manageable in the short-term.
IC-C Company is inherently a sound credit with no serious
deficiencies, but financials reveal at least one fundamental
area of concern that prevents a higher rating. Company may
recently have experienced a period of difficulty, but those
pressures should not be long-term in nature. The company's
ability to absorb a surprise, however, is less than that for
organizations with better operating records.
IC-C/D While still considered an acceptable credit, the
company has some meaningful deficiencies. Its ability to
deal with further deterioration is less than that of better-
rated companies.
IC-D Company's financials suggest obvious weaknesses, most likely
created by asset quality considerations and/or a poorly
structured balance sheet. A meaningful level of uncertainty
and vulnerability exists going forward. The ability to
address further unexpected problems must be questioned.
IC-D/E Company has areas of major weakness that may
include funding and/or liquidity difficulties. A high
degree of uncertainty exists about the company's ability to
absorb incremental problems.
IC-E Very serious problems exist for the company, creating doubt
about its continued viability without some form of outside
assistance, regulatory or otherwise.
ICBA
ICBA's bank rating sheets provide both specialist bank
ratings and, in most cases, short-and long-term ratings. The
former were specifically developed for banks and are designed to
assess the current performance of a bank and whether, in ICBA's
opinion, it would receive support if it ran into difficulties.
ICBA assesses these two issues by means of the INDIVIDUAL RATING
and the LEGAL RATING.
LEGAL RATING: Banking differs from other industries in that it
is invariably dependent on depositor confidence. A bank may have
excellent ratios but, if it cannot maintain this confidence, it
will have a liquidity crisis. Because of the role that banks
play in the financial system they are heavily regulated and, as
part and parcel of this regulation, central banks are seen as
potential lenders of last resort. Much interbank lending is done
on the basis of this lender of last resort role, and this
consideration is assessed in ICBA's Legal Rating.
The support provided by central banks or shareholders is
rarely a statutory requirement. Consequently, it is necessary to
visit and study the country concerned in order to gain a full
understanding of the history and traditions of its banking system
and of the precedents which have been established there. It is
also necessary to assess the possible support a bank might
receive as a result of its ownership and/or economic and
international significance.
In all countries covered, IBCA has discussions with the
supervisory authorities. ICBA also analyzes their past behavior
and keep abreast of all relevant banking legislation. On these
bases, ICBA assigns Legal Ratings to particular banks. These
ratings constitute IBCA's opinions alone and are not submitted to
the authorities for their comment or endorsement. A legal rating
of 2, 3 or 4 may be qualified by the suffix "T," which indicates
significant existing or potential transfer risk of economic
and/or political origin that might prevent support for foreign
currency creditors.
1 A bank for which there is a clear legal guarantee on the
part of a state to provide support OR a bank of such
importance both internationally and domestically that, in
our opinion, support from a state would be forthcoming, if
necessary. The state in question must clearly be prepared
and able to support its principal banks.
2 A bank for which, in ICBA's opinion, state support would be
forthcoming, even in the absence of a legal guarantee. This
could be, for example, because of the bank's importance to
the economy or its historic relationship with the
authorities.
3 A bank which has institutional owners of sufficient
reputation and possessing such resources that, in our
opinion, shareholder support wold be forthcoming, if
necessary.
4 A bank for which support is likely but not certain.
5 A bank which cannot rely on outside assistance.
INDIVIDUAL RATING: ICBA's individual performance rating of banks
attempts to answer the question: "If the bank were entirely
independent and could not rely on support from the state
authorities or its owners, how would it be viewed?". Thus, the
Individual bank rating permits an evaluation of banks divorced
entirely from consideration of support. ICBA may use gradations
among these ratings, i.e., A/B, B/C, C/D and D/E.
A A bank of impeccable financial condition, with a consistent
record of above average performance.
B A bank with a sound risks profile and without significant
problems. The bank's performance has generally been in line
with or better than that of its peers.
C A bank which has an adequate risks profile but possesses one
or more troublesome aspects, giving rise to the possibility
of risk developing, or which has generally failed to perform
in line with its peers.
D A bank which is currently under performing in some notable
manner. Its financial condition is likely to be below
average and its profitability poor. The bank has the
capability of recovering using its own resources, but this
is likely to take some time.
E A bank with very serious problems which either requires or
is likely to require external support.
