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STATEMENT OF ADDITIONAL INFORMATION
[LOGO APPEARS HERE]
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/SM/ (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 May 1, 1999, 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 May 1, 1999.
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THIS STATEMENT OF ADDITIONAL INFORMATION DOES NOT CONSTITUTE AN OFFER TO SELL
SECURITIES.
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TABLE OF CONTENTS
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INVESTMENT POLICIES AND TECHNIQUES................................. 1
Temporary Investments......................................... 1
Sovereign Debt................................................ 1
Brady Bonds................................................... 2
Illiquid and Restricted Securities............................ 2
Short Sales................................................... 3
Warrants...................................................... 4
Debt Obligations.............................................. 4
High Risk Debt Securities..................................... 5
Lending of Portfolio Securities............................... 6
Depositary Receipts........................................... 7
Derivative Instruments........................................ 8
Forward Currency Contracts and Options on Foreign Currencies.. 16
Foreign Currency Transactions................................. 17
When-Issued Securities........................................ 17
Foreign Investment Companies.................................. 18
Repurchase Agreements......................................... 18
Borrowing..................................................... 18
Mortgage Dollar Rolls and Reverse Repurchase Agreements....... 19
ADDITIONAL RISK FACTORS............................................ 19
INVESTMENT RESTRICTIONS............................................ 22
TRUSTEES AND OFFICERS OF THE TRUST................................. 24
PRINCIPAL SHAREHOLDERS............................................. 26
INVESTMENT ADVISER................................................. 27
FUND TRANSACTIONS AND BROKERAGE.................................... 28
CUSTODIAN.......................................................... 31
TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT....................... 31
TAXES.............................................................. 32
DETERMINATION OF NET ASSET VALUE................................... 34
ADDITIONAL SHAREHOLDER INFORMATION................................. 35
ORGANIZATION OF THE TRUST AND THE FUNDS............................ 36
PERFORMANCE INFORMATION............................................ 37
GENERAL INFORMATION................................................ 41
INDEPENDENT ACCOUNTANTS............................................ 41
LEGAL COUNSEL...................................................... 42
FINANCIAL STATEMENTS............................................... 42
Ratings Appendix................................................... A-1
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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.
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INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of each Fund's
investment goals and strategies that are described in detail in the Prospectus.
TEMPORARY INVESTMENTS
Each Fund may make money market investments pending other investment or
settlement for liquidity, or in adverse market conditions. These money market
investments include obligations of the U.S. Government and its agencies and
instrumentalities, obligations of foreign sovereignties, other debt securities,
commercial paper including bank obligations, certificates of deposit (including
Eurodollar certificates of deposit) and repurchase agreements.
For temporary defensive purposes, during periods in which the Adviser
believes changes in economic, financial or political conditions make it
advisable, each Fund may reduce its holdings in equity and other securities and
may invest up to 100% of its assets in certain short-term (less than twelve
months to maturity) and medium-term (not greater than five years to maturity)
debt securities and in cash (U.S. dollars, foreign currencies, or multicurrency
units). These short-term and medium-term debt securities consist of (a)
obligations of governments, agencies or instrumentalities of any member state of
the Organization for Economic Cooperation and Development ("OECD"), (b) bank
deposits and bank obligations (including certificates of deposit, time deposits
and bankers' acceptances) of banks organized under the laws of any member state
of the OECD, denominated in any currency; (c) floating rate securities and other
instruments denominated in any currency issued by international development
agencies; (d) finance company and corporate commercial paper and other short-
term corporate debt obligations of corporations organized under the laws of any
member state of the OECD meeting the Fund's credit quality standards; and (e)
repurchase agreements with banks and broker-dealers covering any of the
foregoing securities. The short-term and medium-term debt securities in which a
Fund may invest for temporary defensive purposes will be those that the Adviser
believes to be of high quality, i.e., subject to relatively low risk of loss of
interest or principal (there is currently no rating system for debt securities
in most emerging countries). If rated, these securities will be rated in one of
the three highest rating categories by rating services such as Moody's Investors
Service, Inc. or Standard & Poor's Corporation (i.e., rated at least A).
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SOVEREIGN DEBT
Each Fund may invest in Sovereign Debt, which may trade at a substantial
discount from face value. The Fund may hold and trade Sovereign Debt of emerging
market countries in appropriate circumstances and to participate in debt
conversion programs. Emerging country Sovereign Debt involves a high degree of
risk, is generally lower-quality debt, and is considered speculative in nature.
The issuer or governmental authorities that control Sovereign Debt repayment
("sovereign debtors") may be unable or unwilling to repay principal or interest
when due in accordance with the terms of the debt. A sovereign debtor's
willingness or ability to repay principal and interest due in a timely manner
may be affected by, among other factors, its cash flow situation, the extent of
its foreign reserves, the availability of sufficient foreign exchange on the
date a payment is due, the relative size of the debt service burden to the
economy as a whole, the sovereign debtor's policy towards the International
Monetary Fund (the "IMF") and the political constraints to which the sovereign
debtor may be subject. Sovereign debtors may also be dependent on expected
disbursements from foreign governments, multilateral agencies and others abroad
to reduce principal and interest arrearage on their debt. The commitment of
these third parties to make such disbursements may be conditioned on
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the sovereign debtor's implementation of economic reforms or economic
performance and the timely service of the debtor's obligations. The sovereign
debtor's failure to meet these conditions may cause these third parties to
cancel their commitments to provide funds to the sovereign debtor, which may
further impair the debtor's ability or willingness to timely service its debts.
In certain instances, a Fund may invest in Sovereign Debt that is in default as
to payments of principal or interest. A Fund holding non-performing Sovereign
Debt may incur additional expenses in connection with any restructuring of the
issuer's obligations or in otherwise enforcing its rights thereunder.
BRADY BONDS
Each Fund may invest in Brady Bonds as part of its investment in Sovereign
Debt of countries that have restructured or are in the process of restructuring
their Sovereign Debt pursuant to the Brady Plan. Brady Bonds are issued under
the framework of the Brady Plan, an initiative announced by former U.S. Treasury
Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to
restructure their outstanding external indebtedness. The Brady Plan
contemplates, among other things, the debtor nation's adoption of certain
economic reforms and the exchange of commercial bank debt for newly issued
bonds. In restructuring its external debt under the Brady Plan framework, a
debtor nation negotiates with its existing bank lenders as well as the World
Bank or IMF. The World Bank or IMF supports the restructuring by providing
funds pursuant to loan agreements or other arrangements that enable the debtor
nation to collateralize the new Brady Bonds or to replenish reserves used to
reduce outstanding bank debt. Under these loan agreements or other arrangements
with the World Bank or IMF, debtor nations have been required to agree to
implement certain domestic monetary and fiscal reforms. The Brady Plan sets
forth only general guiding principles for economic reform and debt reduction,
emphasizing that solutions must be negotiated on a case-by-case basis between
debtor nations and their creditors.
Brady Bonds are recent issues and do not have a long payment history.
Agreements implemented under the Brady Plan are designed to achieve debt and
debt-service reduction through specific options negotiated by a debtor nation
with its creditors. As a result, each country offers different financial
packages. Options have included the exchange of outstanding commercial bank debt
for bonds issued at 100% of face value of such debt, bonds issued at a discount
of face value of such debt, and bonds bearing an interest rate that increases
over time and the advancement of the new money for bonds. The principal of
certain Brady Bonds has been collateralized by U.S. Treasury zero coupon bonds
with a maturity equal to the final maturity of the Brady Bonds. Collateral
purchases are financed by the IMF, World Bank and the debtor nations' reserves.
Interest payments may also be collateralized in part in various ways.
Brady Bonds are often viewed as having three or four valuation components:
(i) the collateralized repayment of principal at final maturity; (ii) the
collateralized interest payments; (iii) the uncollateralized interest payments;
and (iv) any uncollateralized and of principal at maturity (these
uncollateralized amounts constitute the "residual risk"). In light of the
residual risk of Brady Bonds and, among other factors, the history of defaults
with respect to commercial bank loans by public and private entities of
countries issuing Brady Bonds, investments in Brady Bonds can be viewed as
speculative.
ILLIQUID AND RESTRICTED SECURITIES
Each Fund may invest in securities that are neither listed on a stock
exchange nor traded over the counter, including privately placed securities.
These securities may present a higher degree of business and financial risk,
which can result in substantial losses. In the absence of a public trading
market for these
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securities, they may be less liquid than publicly traded securities. Although
these securities may be resold in privately negotiated transactions, the prices
realized from these sales could be less than those originally paid by the Fund
or less than what the Fund may consider the fair value of such securities.
Further, companies whose securities are not publicly traded may not be subject
to disclosure and other investor protection requirements that might apply if
their securities were publicly traded. If such securities are required to be
registered under the securities laws of one or more jurisdictions before being
resold, the Fund may be required to bear the costs of registration. As a general
matter, each Fund may not invest more than 15% of its net assets in illiquid
securities, including securities for which there is no readily available
secondary market, nor more than 10% of its total assets in securities that are
restricted from sale to the public without registration ("Restricted
Securities") under the Securities Act of 1933, as amended (the "1933 Act").
Subject to these limits, however, a Fund may invest up to 25% of its total
assets in Restricted Securities that can be offered and sold to qualified
institutional buyers under Rule 144A under the 1933 Act ("144A Securities"). The
Board of Trustees has adopted guidelines and delegated to the Adviser, subject
to the Board's supervision, the daily function of determining and monitoring the
liquidity of 144A Securities. Rule 144A Securities may become illiquid if
qualified institutional buyers are not interested in acquiring them. Investors
should note that investments of 5% of a Fund's total assets may be considered a
speculative activity and may involve greater risk and expense to the Fund.
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
Each Fund may from time to time sell securities short without limitation,
although initially it has no intention to sell securities short. In a short
sale, a Fund sells securities it does not own (but has borrowed) in anticipation
of a decline in the securities' market price. 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
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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 also sell short "against the box," that is, sell a security
that the Fund owns or has the right to acquire, for delivery at a specified date
in the future. This allows a Fund 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.
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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 "Appendix of Ratings" set forth in the
back of this SAI.
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 Investors Service
("Moody's") or BBB by Standard & Poor's Corporation ("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
"Appendix of Ratings" set forth in the back of this SAI 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.
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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 is authorized to lend up to 33 1/3% of the total market
value of its portfolio securities to brokers, dealers, domestic and foreign
banks or other financial institutions for the purpose of increasing its net
investment income; however, currently, no Fund intends to engage in such
lending. Any such loan must be fully secured; however, there may be risks of
delay in recovery of the securities or even loss of rights in the collateral
should the borrower of the securities fail financially.
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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
Each Fund may invest in sponsored or unsponsored depositary receipts and
other similar instruments, including American Depositary Receipts ("ADRs"),
European Depositary Receipts ("EDRs"), Global Depositary Receipts ("GDRs")
(collectively, "Depositary Receipts"). Depositary Receipts are typically issued
by a financial institution ("depository") and evidence ownership interests in a
security or a pool of securities ("underlying securities") that have been
deposited with the depository. In ADRs, the depository is typically a U.S.
financial institution and the underlying securities are issued by a foreign
issuer. In other Depositary Receipts, the depository may be a foreign or a U.S.
entity, and the underlying securities may have a foreign or a U.S. issuer.
Depositary Receipts will not necessarily be denominated in the same currency as
their underlying securities. 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, such as GDRs and EDRs, may be issued in
bearer form and denominated in other currencies, and are generally designed for
use in securities markets outside the U.S. While the two types of Depositary
Receipt facilities ("unsponsored" or "sponsored") are similar, there are
differences regarding a 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 Depositary Receipts
generally bear all the costs of the facility. The depositary usually charges
fees upon the deposit and withdrawal of the underlying securities, the
conversion of dividends into U.S. dollars or other currency, 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 Depositary Receipt holders with respect to the
underlying securities.
Sponsored Depositary Receipt facilities are created in generally the same
manner as unsponsored facilities, except that sponsored Depositary Receipts are
established jointly by a depositary and the underlying issuer through a deposit
agreement. The deposit agreement sets out the rights and responsibilities o the
underlying issuer, the depositary and the Depositary Receipt holders. With
sponsored facilities, the underlying issuer typically bears some of the costs of
the Depositary Receipts (such as dividend payment fees of the depositary),
although most sponsored Depositary Receipts holders may bear costs such as
deposit and withdrawal fees. Depositories of most sponsored Depositary Receipts
agree to distribute notices of
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shareholder meetings, voting instructions, and other shareholder communications
and information to the Depositary Receipt holders at the underlying issuer's
request.
For purposes of a Fund's investment policies, investments in Depositary
Receipts will be deemed to be investments in the underlying securities. Thus, a
Depositary Receipt representing ownership of common stock will be treated as
common stock.
DERIVATIVE INSTRUMENTS
GENERAL DESCRIPTION. Each Fund may invest in a variety of derivative
instruments, including structured notes, swaps, 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 Securities and
Exchange Commission ("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 the 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
than the increase in the price of the hedged security, the Fund could suffer a
loss.
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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 purchased 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 a
segregated 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.
STRUCTURED NOTES. Structured notes are Derivatives on which the amount of
principal repayment and or interest payments is based upon the movement of one
or more factors. These factors include, but are not limited to, currency
exchange rates, interest rates (such as the prime lending rate and LIBOR) and
stock indices such as the S&P 500 Index. In some cases, the impact of the
movements of these factors may increase or decrease through the use of
multipliers or deflators. The use of structured notes allows a Fund to tailor
its investments to the specific risks and returns the Adviser wishes to accept
while avoiding or reducing certain other risks.
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SWAPS, CAPS, COLLARS, AND FLOORS. Each Fund may enter into various types
of privately negotiated or over-the-counter derivatives transactions, including
swap transactions ("Swaps"), caps ("Caps"), Floors ("Floors"), Collars
("Collars"), similar transactions and related options. A Swap is a privately-
negotiated derivatives contract in which two parties agree, on specified payment
dates, to make or exchange payments calculated by reference to a specified rate,
index or asset and an agreed "notional amount". Some common examples of
underlying rates, indices and assets include: the market value of a single
equity or debt security, a group or "basket" of securities or a stock or fixed-
income index; fixed and floating interest rates; foreign currency exchange
rates; and various commodity prices or indices. For example, a Fund may enter
into an equity Swap on the value of a single common stock. The Swap is a
separate contract that does not require ownership of the underlying stock. In
the Swap, the Fund will agree with a swap dealer to make payments based upon
changes in the value of the stock. For example, on a specified payment date, if
the value of the stock has increased, one party (such as the Fund) will receive
a payment equal to the amount of that increase for the time period involved and
the notional number of shares, as well as receiving equivalent payments after
any distribution of a dividend on the security and perhaps making certain
interest-like payments on specified dates. If the value of the stock has
decreased, then rather than receiving a payment, the first party (such as the
Fund, in this example) would be obligated to make a payment to the other party
to the Swap. The Fund can take either position in the Swap; that is, the Fund
may be the party that receives a payment following an increase in value and pays
following a decrease or vice versa. In some cases, the Fund may also make or
receive additional payments on the effective date and/or termination date of the
Swap. Swaps are very flexible financing tools whose terms can be negotiated
between the parties.
The Funds may enter into various Swaps that may be based upon the value of
various single debt and equity securities, baskets or indices. One example of a
situation is which a Fund may use an equity swap is to mimic some of the
benefits of ownership of "local shares" in a country in which the Fund, as a
foreigner, is prohibited from owning local shares. The terms of the Swaps
actually entered by the Fund may vary from the the typical example described
here. In addition, the Funds may also enter into interest-rate and currency
Swaps. Both interest rate and currency Swaps involve exchanges of payment
streams. In the case of interest rate Swaps, the notional amount is used to
calculate the size of the payments, but generally is not exchanged; in certain
currency Swaps, payment of the entire notional amount in the two applicable
currencies may be exchanged by the parties on the effective date of the Swap and
in some cases a reverse exchange may be made on the termination date.
In addition to Swaps, the Funds may enter into Caps, Floors, Collars
relating to securities, interest rates or currencies. In a Cap or Floor, the
buyer pays a premium (which is generally, but not always a single up-front
amount) for the right to receive payments from the other party if, on specified
payment dates, the applicable rate, index or asset is greater than (in the case
of a Cap) or less than (in the case of a Floor) an agreed level, for the period
involved and the applicable notional amount. A Collar is a combination
instrument in which the same party buys a Cap and sells a Floor. Depending upon
the terms of the Cap and Floor comprising the Collar, the premiums will
partially or entirely offset each other. The notional amount of a Cap, Collar
or Floor is used to calculate payments, but is not itself exchanged. The Funds
may be both buyers and sellers of these instruments. In addition, the Funds may
engage in combinations of put and call options on securities (also commonly
known as "collars"), which may involve physical delivery of securities. Puts,
calls, and securities collars are described in more detail under "Options"
below. Like Swaps, Caps, Floor and Collars are very flexible products. The
terms of the transactions entered by the Funds may vary from the typical
examples described here.
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The Funds may enter into these over-the-counter derivative transactions
with a number of dealers, generally using standard forms of master agreement
documentation customized to suit the needs and circumstances of the Funds and
the dealers. These instruments are not traded on an organized exchange or,
generally speaking, through a clearinghouse. Because they are privately
negotiated bilateral contracts, in each case, the Fund and the dealer are each
exposed to the credit risk that the other party will not meet its obligations.
This risk will be greater with some derivative transactions than others,
depending upon the nature, size and terms of the transaction, as well as the
creditworthiness of the dealer. The size of a Fund's potential loss upon
default by the dealer or by the Fund itself is primarily related to the market
value of the transactions at the time of the default; since markets move both up
and down, it is also possible that the Fund could realize a gain. Consistent
with market practices, the Funds will generally make and receive payments on a
net basis and will, to the extent feasible, document Swaps, Caps, Floors and
Collars with a single dealer under a single master agreement to obtain the risk-
reduction and other benefits, where permitted by applicable law, of netting upon
default or other early termination. Events of default, other termination
events, damage calculations and remedies are among the legal terms specified in
the documentation.
A Fund's obligations will be accrued daily (offset against any amounts
owing to the Fund) and any accrued but unpaid net amounts owed to a Swap
Counterparty will be covered by the maintenance of a segregated account
consisting of cash or liquid securities to avoid any potential leveraging of the
Fund. To the extent that these Swaps, Caps, Floors, and Collars are entered into
for hedging purposes, the Adviser believes such obligations do not constitute
"senior securities" under the 1940 Act and, accordingly, will not treat them as
being subject to a Fund's borrowing restrictions.
The over-the-counter derivatives markets have grown substantially in recent
years with a large number of banks and investment banking firms acting both as
principals and as agents utilizing standardized documentation. As a result,
these markets have become increasingly liquid. Different product and geographic
segments of these markets have developed at different rates and are subject to
different risks. As a result, both the liquidity and the risks associated with
individual derivative transactions will vary greatly.
The use of over-the-counter derivatives is a highly specialized activity
which involves investment techniques and risks different from those associated
with ordinary Fund securities transactions. If the Adviser is incorrect in its
forecasts of market values, interest rates, and currency exchange rates, the
investment performance of the Funds would be less favorable than it would have
been if this investment technique were not used.
OPTIONS. Each Fund may also write (i.e., sell) covered put options. The
writer of a put incurs an obligation to buy the security underlying the option
from the put's purchaser at the exercise price at any time on or before the
termination date, at the purchaser's election (certain options a Fund writes
will be exercisable by the purchaser only on a specific date). Generally, a put
is "covered" if the Fund maintains cash, U.S. government securities or other
liquid high grade debt obligations equal to the exercise price of the option or
if the Fund holds a put on the same underlying security with a similar or higher
exercise price.
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.
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Each Fund may also purchase put or call options on individual securities or
baskets of securities. When a Fund purchases a call, it acquires the right to
buy the underlying security at the exercise price on or before the termination
date, and when a Fund purchases a put, it acquires the right to sell the
underlying security at the exercise price on or before the termination date.
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
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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. The primary risks associated with
the use of options on securities are (i) imperfect correlation between the
change in market value of the securities the Fund holds and the prices of
options relating to the securities purchased or sold by the Fund; and (ii)
possible lack of a liquid secondary market for an option. Options not traded on
an exchange (OTC options) are often considered illiquid and may be difficult to
value. The Adviser believes that each Fund will minimize its risk of being
unable to close out an options contract by transacting in options only if there
appears to be a liquid secondary market for those options.
FUTURES CONTRACTS. Each Fund may buy and sell financial futures contracts,
stock and bond index futures contracts, foreign currency futures contracts and
options on any of the foregoing for hedging purposes only. A financial futures
contract is an agreement between two parties to buy or sell a specified debt
security at a set price on a future date. An index futures contract is an
agreement to take or make delivery of an amount of cash based on the difference
between the value of the index at the beginning and at the end of the contract
period. A futures contract on a foreign currency is an agreement to buy or sell
a specified amount of a currency for a set price on a future date.
When a Fund enters into a futures contract, it must make an initial
deposit, known as "initial margin," as a partial guarantee of its performance
under the contract. As the value of the security, index or currency fluctuates,
either party to the contract is required to make additional margin payments,
known as "variation margin," to cover any additional obligation it may have
under the contract. In addition, when the Fund enters into a futures contract,
it will segregate assets or "cover" its position in accordance with the 1940
Act.
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
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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.
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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 futures
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.
The risk of loss in trading on futures contracts and related options in
some strategies can be substantial, due both to the low margin deposits required
and the extremely high degree of leverage involved in futures pricing. Gains
and losses on futures and related options depend on the Adviser's ability to
predict correctly the direction of stock prices, interest rates, and other
economic factors. In the opinion of the Trustees, the risk that Fund will be
unable to close out a futures position or related options contract will be
minimized by only entering into futures contracts or related options
transactions for which there appears to be a liquid secondary market.
FORWARD CURRENCY CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES
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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.
Each Fund may purchase put and call options and write covered put and call
options on foreign currencies for the purpose of protecting against declines in
the U.S. dollar value of foreign currency denominated portfolio securities and
against increases in the U.S. dollar cost of such securities to be acquired. As
in the case of other kinds of options, however, the writing of an option on a
foreign currency constitutes only a partial hedge, up to the amount of the
premium received, and the Fund could be required
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to purchase or sell foreign currencies at disadvantageous exchange rates,
thereby incurring losses. The purchase of an option on a foreign currency may
constitute an effective hedge against fluctuations in exchange rates although,
in the event of rate movements adverse to the Fund's position, it may forfeit
the entire amount of the premium plus related transaction costs. Options on
foreign currencies to be written or purchased by the Funds are traded on U.S.
and foreign exchanges or over-the-counter.
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
Each Fund may purchase securities on a when-issued or delayed delivery
basis. The price of debt obligations purchased on a when-issued basis is fixed
at the time the Fund commits to purchase, but delivery and payment for the
securities ("settlement") takes place at a later date. The price of these
securities may be expressed in yield terms; the Funds will enter into these
transactions in order to lock in the yield (price) available at the time of
commitment. 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.
Between purchase and settlement, the Fund assumes the ownership risk of the
when-issued securities, including the risk of fluctuations in the securities'
market value due to, among other factors, a change in the general level of
interest rates. However, no interest accrues to the Fund during this period.
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.
17
<PAGE>
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, generally 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. If a Fund invests in investment companies, shareholders will bear not
only their proportionate share of the Fund's expenses (including operating
expenses and the fees of the Adviser), but also, indirectly, the similar
expenses of the underlying investment companies.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with brokers, dealers or
banks ("counterparties") that the Adviser has determined meet the credit
guidelines established by the Board of Trustees. Repurchase agreements will be
fully collateralized, and may be viewed for purposes of the 1940 Act as a loan
of money by the Fund to the counterparty. 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. The Fund may incur a loss if the counterparty defaults and
the collateral value declines, or if bankruptcy proceedings are commenced
regarding the counterparty and the Fund's realization upon the collateral is
delayed or limited.
A Fund may, under certain circumstances, deem repurchase agreements
collateralized by U.S. government securities to be investments in U.S.
government securities.
BORROWING
Each Fund may borrow money from U.S.-regulated banks. The 1940 Act and
each Fund's fundamental investment policies restrict such borrowing to
33 1\3% of the Fund's total assets (including the amount borrowed) less all
liabilities and indebtedness other than the borrowing. Borrowing creates
leverage, which is a speculative characteristic; leverage from borrowing will
magnify declines as well as increases in a Fund's net asset value per share and
net yield. A Fund will borrow only on a secured basis, and only when the
Adviser believes that borrowing will benefit the Fund after taking into account
considerations such as the costs of borrowing and the likely investment returns
on securities purchased with borrowed monies.
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
18
<PAGE>
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, to meet redemptions or to pay dividends.
Each Fund may also engage in mortgage 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.
ADDITIONAL RISK FACTORS
FOREIGN INVESTMENT
Investment in securities of foreign issuers and in foreign branches of
domestic banks, involves some risks different from, or in addition to, those
affecting investments in securities of U.S. issuers:
INFORMATION. Publicly available information about foreign issuers and
economies may be limited. Foreign issuers are not generally subject to uniform
accounting, auditing and financial and other reporting standards and
requirements comparable to those applicable to U.S. companies. Statistical
information about
19
<PAGE>
the economy in an emerging market country may be unavailable, or if available
may be unreliable or not directly comparable to information regarding the
economy of the U.S. or other more developed countries.
REGULATION. There may be less government supervision and regulation of
foreign securities exchanges, brokers and listed companies than in the U.S.
LIQUIDITY AND CONCENTRATION. Many foreign securities markets have
substantially less volume than U.S. national securities exchanges. Available
investments in emerging countries may be highly concentrated in a small number
of issuers, or the issuers may be unseasoned and/or have significantly smaller
market capitalization than in the U.S. or more developed countries.
Consequently, securities of foreign issuers may be less liquid and more volatile
than those of comparable domestic issuers.
BROKERAGE. Brokerage commissions and other transaction costs on foreign
securities exchanges are generally higher than in the U.S.
TAXES. Dividends and interest paid by foreign issuers may be subject to
withholding and other foreign taxes, which may decrease the net return on
foreign investments as compared to dividends and interest paid to the Fund by
U.S. companies. It is expected that the Funds' shareholders will be able to
claim a credit for U.S. tax purposes for any such foreign taxes, although there
can be no assurance that they will be able to do so. See "TAXES."
POLITICAL/ECONOMY. Political and economic developments may present risks.
A foreign jurisdiction might impose or change withholding taxes on income
payable in connection with foreign securities. There are risks of seizure,
nationalization or expropriation of a foreign issuer or foreign deposits, and
adoption of foreign governmental restrictions such as exchange controls. Many
emerging or developing countries have less stable political and economic
environments than some more developed countries, and may face external stresses
(including war) as well as internal ones (including hyperinflation, currency
depreciation, limited resource self-sufficiency, and balance of payments issues
and associated social unrest). It may be more difficult to obtain a judgment in
a court outside the U.S.
CURRENCY EXCHANGE. Securities of foreign issuers are frequently
denominated in foreign currencies, and a Fund may temporarily hold uninvested
reserves in bank deposits in foreign currencies. The exchange rates between the
U.S. dollar and the currencies of emerging markets countries may be volatile,
and changes in currency rates and exchange control regulations may affect
(favorably or unfavorably) the value of a Fund's assets in U.S. dollars. A Fund
may incur costs in converting between currencies.
REPATRIATION RESTRICTIONS. Foreign governments may delay or restrict
repatriation of a Fund's investment income or other assets. If, for any reason,
a Fund were unable, through borrowing or otherwise, to distribute an amount
equal to substantially all of its investment company taxable income (as defined
for U.S. tax purposes) within required time periods, the Fund would cease to
qualify for the favorable tax treatment afforded regulated investment companies
under the U.S. Internal Revenue Code of 1986, as amended (the "Code").
INVESTING IN SMALLER CAPITALIZATION STOCKS
The Adviser believes that the issuers of smaller capitalization stocks
often have sales and earnings growth rates which exceed those of larger
companies, and that such growth rates may in turn be reflected in more rapid
share price appreciation. However, investing in smaller capitalization stocks
can involve
20
<PAGE>
greater risk than is customarily associated with investing in stocks of larger,
more established companies. For example, smaller capitalization companies often
have limited product lines, markets, or financial resources, may be dependent
for management on one or a few key persons, and can be more susceptible to
losses. Also, their securities may be thinly traded (and therefore have to be
sold at a discount from current prices or sold in small lots over an extended
period of time), may be followed by fewer investment research analysts and may
be subject to wider price swings and thus may create a greater chance of loss
than securities of larger capitalization companies. Transaction costs in stocks
of smaller capitalization companies may be higher than those of larger
capitalization companies.
INVESTING IN LOWER RATED DEBT SECURITIES
Each Fund may invest in lower rated or unrated debt securities. Debt
considered below investment grade may be referred to as "junk bonds" or "high
risk" securities. The emerging country debt securities in which the Fund may
invest are subject to significant risk and will not be required to meet any
minimum rating standard or equivalent. Debt securities are subject to the risk
of the issuer's inability to meet principal and interest payments (credit risk)
and may also be subject to price volatility due to such factors as interest rate
sensitivity, market perception of the issuer's creditworthiness and general
market liquidity (market risk). Lower rated or unrated securities are more
likely to react to developments affecting market and credit risk than are more
highly rated securities, which react primarily to movements in general levels of
interest rates. The market values of debt securities tend to vary inversely with
interest rate levels. Yields and market values of lower rated and unrated debt
will fluctuate over time, reflecting not only changing interest rates but also
the market's perception of credit quality and the outlook for economic growth.
When economic conditions appear to be deteriorating, medium to lower rated
securities may decline in value due to heightened concern over credit quality,
regardless of prevailing interest rates. The Adviser will consider credit risk
and market risk in making debt security investment decisions for each Fund.
Investors should carefully consider the relative risks of investing in a Fund
that purchases lower rated and unrated debt securities, and should understand
that such securities are not generally meant for short-term investing.
The U.S. market for lower rated and unrated corporate debt is relatively
new and its recent growth paralleled a long period of economic expansion and an
increase in merger, acquisition and leveraged buyout activity. In addition,
trading markets for debt securities of issuers located in emerging countries may
be limited. Adverse economic developments may disrupt the market for U.S.
corporate lower rated and unrated debt securities and for emerging country debt
securities. Such disruptions may severely affect the ability of issuers,
especially highly leveraged issuers, to service their debt obligations or to
repay their obligations upon maturity. In addition, the secondary market for
lower rated and unrated debt securities, which is concentrated in relatively few
market makers, may not be as liquid as the secondary market for more highly
rated securities. As a result, the Adviser could find it more difficult to sell
these securities or may be able to sell the securities only at prices lower than
if such securities were widely traded. Prices realized upon the sale of such
lower rated or unrated securities, under these circumstances, may be less than
the prices used in calculating a Fund's net asset value.
FOREIGN CUSTODIANS AND SECURITIES DEPOSITORIES
Rules adopted under the 1940 Act, permit the Funds to maintain their
foreign securities and cash in the custody of certain eligible non-U.S. banks
and securities depositories (collectively, "foreign custodians"). Pursuant to
these rules, each Fund's assets invested in foreign countries may be held by
foreign custodians that are approved by the Fund's Board of Trustees. The Board
will consider a number of factors in selecting foreign custodians, including but
not limited to the reliability and financial stability of the institution, the
21
<PAGE>
ability of the institution to capably perform custodial services for the Fund,
the reputation of the institution in its national market, the political and
economic stability of the countries in which the foreign custodian is located,
and risks of potential nationalization or expropriation of Fund assets. In
addition, foreign custodians must, among other things, meet minimum requirements
for shareholder equity, have no lien on Fund assets, and maintain adequate and
accessible records. Certain banks in foreign countries may not be eligible
foreign custodians for the Funds, which may preclude a Fund from purchasing
securities in which it would otherwise invest; banks that are eligible foreign
custodians may be recently organized or otherwise lack extensive operating
experience.
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
herein).
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.
22
<PAGE>
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 Adviser, 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 herein under
the heading "DETERMINATION OF NET ASSET VALUE."
23
<PAGE>
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.
<TABLE>
<CAPTION>
OFFICES WITH PRINCIPAL OCCUPATION
NAME AND ADDRESS THE TRUST DURING THE PAST FIVE YEARS
- ------------------------------------- ------------------------------------------ -------------------------------------------------
<S> <C> <C>
THOMAS L. HANSBERGER* President and Chairman and Chief Executive
(66) Trustee Officer, Hansberger Global Investors, Inc.,
515 East Las Olas Blvd. 1994 to present; Chairman and Chief
Fort Lauderdale, FL Executive Officer, Hansberger Group, Inc., 1999 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 President and Senior Vice President and
ESQ.* (47) Trustee General Counsel, Hansberger Global
515 East Las Olas Blvd. Investors, Inc. 1996 to present;
Fort Lauderdale, FL to present;Vice President,
Associate General Senior Vice President,
General Counsel and Assistant Secretary,
Hansberger Group, Inc., 1999
Counsel and Assistant Secretary,
Van Kampen American Capital, Inc.
1986 to 1996.
KATHRYN B. MCGRATH, Trustee Partner, Morgan, Lewis & Bockius
ESQ.*(54) LLP, 1990 to present.
1800 M Street, N.W.
Washington, DC
STUART B. ROSS (62) Trustee Executive Vice President, Xerox
100 First Stamford Place Corporation, 1990 to present; Chief
Stamford, CT Executive Officer, Xerox Financial
Services, Inc., 1990 to present.
WILLIAM F. WATERS, ESQ. Trustee Retired; former Senior Vice President,
(67) Merrill Lynch & Co., 1984 to 1996.
640 Hollow Tree Ridge Road
Darien, CT
</TABLE>
24
<PAGE>
<TABLE>
<S> <C> <C>
CHARLES F. GULDEN (37) Vice President Managing Director, Hansberger Global
515 East Las Olas Blvd. Investors, Inc. 1996 to present; Vice
Fort Lauderdale, FL President and Director of Research &
Portfolio Management, Templeton
Worldwide, 1989 to 1996.
WESLEY E. FREEMAN (49) Vice President Managing Director, Hansberger Global
515 East Las Olas Blvd. Investors, Inc. 1996 to present; Executive
Fort Lauderdale, FL Vice President for Institutional Business
Development, Templeton Worldwide,
1989 to 1996.
THOMAS A. CHRISTENSEN, Treasurer Chief Financial Officer, 1998 to present; Vice President
Jr. (28) and Controller, Hansberger Global Investors, Inc. 1996
515 East Las Olas Blvd. to 1998; Chief Financial Officer, Hansberger Group,
Fort Lauderdale, FL Inc., 1999 to present;Accountant, Arthur Andersen
LLP, 1993 to 1996.
KIMBERLEY SCOTT (36) Secretary Senior Vice President, Hansberger Global
515 East Las Olas Blvd. Investors, Inc. 1994 to present; Senior Vice President
Fort Lauderdale, FL and Secretary, Hansberger Group, Inc., 1999 to
present; Executive Assistant and Portfolio
Supervisor, Templeton Worldwide, 1992 to 1994.
KARL O. HARTMANN, ESQ. Assistant Secretary Senior Vice President and General
(44) Counsel, Chase Global Funds Services
73 Tremont Street Company, 1991 to present.
Boston, MA
</TABLE>
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 $3,500, 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. Messrs.
Hansberger, Ross and Waters are members of the Audit Committee of the Board of
Trustees, but receive no compensation for attendence at
25
<PAGE>
committee meetings. Other officers and Trustees receive no compensation or
expense reimbursement from the Trust. For the fiscal year ending December 31,
1998, the Trust paid the following amounts to Trustees and officers of the
Trust:
<TABLE>
<CAPTION>
==================================================================================================
Pension or Total Compensation
Aggregate Retirement from Registrant
Compensation Benefits Estimated and Fund Complex
From Registrant Accrued as Part Annual Benefit Paid to Directors
Name of Person, for Fiscal Year of Fund Upon for Fiscal Year
Position Ended 1998 Expenses Retirement Ended 1998
==================================================================================================
<S> <C> <C> <C> <C>
Stuart B, Ross, $5,500 N/A N/A $5,500 for service
Trustee on one board
William F. Waters, $5,500 N/A N/A $5,500 for service
Trustee on one board
</TABLE>
As of April 12, 1999, subject to officers and Trustees owning more than 1%
of Fund(s), the officers and Trustees of the Trust, in the aggregate,
beneficially owned less than 1% of the outstanding shares of the Emerging
Markets Fund. As of the same date, the officers and Trustees of the Trust, in
the aggregate, beneficially owned less than 1% of the outstanding shares of the
International Fund.
PRINCIPAL SHAREHOLDERS
The following table sets forth the information concerning beneficial
ownership, as of February 10, 1999, of the Funds' shares by each person who
beneficially owned more than 5% of the voting securities of any Fund.
<TABLE>
<CAPTION>
Shares Percentage of
Name and Address Beneficially Outstanding
of Shareholder Fund Owned Shares Owned
- --------------------------------- --------------------- ------------- --------------
<S> <C> <C> <C>
Northern Trust Company, International Fund 6,775,192.544 22.19%
- --------------------- ------------------ ------------- -----
Trustee
- -------
FBO Noram
- ---------
P.O. BOX 92956
- --------------
Chicago, IL 60675
- -----------------
Citibank N.A. Trustee International Fund 5,034,843.873 16.49%
- --------------------- ------------------ ------------- -----
FBO Albemarle Corporation
- -------------------------
Attn: Cathy Blackshear
- ---------------------
111 Wall St. 14th Fl.
- ---------------------
New York, NY 10043
- ------------------
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Shares Percentage of
Name and Address Beneficially Outstanding
of Shareholder Fund Owned Shares Owned
- --------------------------------- --------------------- ------------- --------------
<S> <C> <C> <C>
Mercantile Safe Deposit & Trust International Fund 2,746,328.674 9.00%
- ------------------------------- ------------------ ------------- -----
Trustee for NFL Reciprocal
- --------------------------
Trust
-----
766 Old Hammonds Ferry Rd.
- --------------------------
Linthicum, MD 21090
- -------------------
Northern Trust Company, International Fund 2,293,566.41 7.51%
- ----------------------- ------------------ ------------ -----
Trustee
-------
FBO CPC International
- ---------------------
Retirement Plan
---------------
P.O. Box 92956
- --------------
Chicago, IL 60675
- -----------------
The Trustees of Emerging Markets Fund 15,063,536.49 51.41%
- --------------- --------------------- ------------- -----
Princeton University
- --------------------
22 Chambers Street
- ------------------
Suite 200
- ---------
Princeton, NJ 08542
- -------------------
The Reed Institute Emerging Markets Fund 2,940,270.96 10.04%
- ------------------ --------------------- ------------- -----
DBA Reed College
- ----------------
3203 S.E. Woodstock Blvd.
- -------------------------
Portland, OR 97202
- ------------------
Massachusetts Institute of Emerging Markets Fund 2,521,297.888 8.61%
- -------------------------- --------------------- ------------- -----
Technology
- ----------
238 Main Street
- ---------------
Suite 200
- ---------
Cambridge, MA 02142-1012
- ------------------------
Tobias White & Co. Emerging Markets Fund 1,661,947.419 5.67%
- ----------------- --------------------- ------------- -----
Genesee Tower
- -------------
Suite 1802
- ----------
120 E. 1st Street
- -----------------
Flint, MI 48502-1940
- --------------------
</TABLE>
INVESTMENT ADVISER
Hansberger Global Investors, Inc. (the "Adviser") is the investment adviser
to each Fund. The Adviser, a Delaware corporation, is a wholley owned
subsidiary of Hansberger Group, Inc. and is controlled by Mr. Thomas L.
Hansberger who founded the Adviser in 1994. A brief description of the
investment advisory agreement ("Advisory Agreement") is set forth in the
Prospectus under "The Investment Adviser."
27
<PAGE>
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 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, 1998, the
Trust paid advisory fees of $1,527,034 and $469,117, respectively, for the
International Fund and the Emerging Markets Fund. For the fiscal year ended
December 31, 1997, the Trust paid advisory fees of $523,870 and $98,153,
respectively, for the International Fund and the Emerging Markets Fund. Because
each Fund was newly organized, neither Fund paid advisory fees during the fiscal
year ended December 31, 1996. The Foreign Small Cap Fund and the All Countries
Fund/SM/ have not commenced operations, therefore, advisory fees were not paid
as of December 31, 1998.
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. In determining the abilities of a broker or dealer to obtain
best execution, the Adviser considers relevant factors including: the ability
and willingness of the broker or dealer to facilitate the Fund's portfolio
transaction by participating therein for its own account; speed, efficiency and
confidentiality; familiarity with the market for a particular security; and the
reputation and perceived soundness of the 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
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the foregoing primary considerations, the Conduct Rules of the National
Association of Securities Dealers, Inc. (the "NASD") 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. However, since shares of the Funds are not marketed
through intermediary brokers or dealers, it is not the Fund's practice to
allocate brokerage or principal business on the basis of sales of shares which
may be made through such firms.
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 the Adviser determines in
good faith that such amount of commission is reasonable in relation to the value
of the brokerage or research services provided by such broker or dealer, viewed
in terms of either that particular transaction or the Adviser's overall
responsibilities with respect to the accounts as to which it exercises
investment discretion. 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.
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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 NASD 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).
Twice a year, the Adviser, through a committee of its securities analysts,
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
attempt 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.
If purchase or sale of securities consistent with the investment policies
of the Fund and one or more of these other clients served by the Adviser is
considered at or about the same time, transactions in such securities will be
allocated among the Fund and such other clients pursuant to guidelines deemed
fair and reasonable by the Adviser. Generally, under those guidelines, the
Funds and other participating clients will be allocated at least $25,000 of the
relevant security, with any remaining shares allocated on a pro rata basis. In
the event that there are not enough securities available to allocate each
participating client $25,000 worth of the security, the Adviser will use a
random allocation procedure, randomly selecting one participating client to
commence allocation.
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For the fiscal year ended December 31, 1998, the International Fund and
Emerging Markets Fund paid brokerage commissions of approximately $945,933 and
$746,560, respectively. For the fiscal year ended December 31, 1997, the
International Fund and Emerging Markets Fund paid brokerage commissions of
approximately $664,634 and $216,314, respectively. Because each Fund was newly
organized, the Funds paid no brokerage commissions during the fiscal year ended
December 31, 1996. Because an affiliate of J.M. Sassoon owns approximately 7.09%
of the Adviser and affiliates of Salomon Smith Barney own approximately 6.94% of
the Adviser, J.M. Sassoon and Salomon Smith Barney, are considered affiliates of
the Adviser, which in turn is an affiliate of the Trust. For the fiscal year
ended December 31, 1998: (1) the Trust paid brokerage commissions of
approximately $6,287 and $41,442 to J.M. Sassoon and Salomon Smith Barney,
respectively; (2) commissions paid to J.M. Sassoon and Salomon Smith Barney,
represented approximately .37% and 2.45.%, respectively, of the total brokerage
commissions paid; and (3) the dollar amount of such transactions in which
commissions paid to J.M. Sassoon and Salomon Smith Barney, represented
approximately .20% and 3.99%, respectively, of the aggregate dollar amount of
transactions for which commissions were paid by the Trust. For the fiscal year
ended December 31, 1997: (1) the Trust paid brokerage commissions of
approximately $5,591, $5,031, and $4,991 to J.M. Sassoon, Salomon Brothers, and
Smith Barney, respectively; (2) commissions paid to J.M. Sassoon, Salomon
Brothers, and Smith Barney, represented approximately .63%, .57%, and .57%,
respectively, of the total brokerage commissions paid; and (3) the dollar amount
of such transactions in which commissions paid to J.M. Sassoon, Salomon
Brothers, and Smith Barney, represented approximately .32%, .96%, and .37%,
respectively, of the aggregate dollar amount of transactions for which
commissions were paid by the Trust.
It is anticipated that the annual portfolio turnover rate of each Fund will
not exceed 100% under normal circumstances. For the fiscal year ended December
31, 1998, the portfolio turnover rates were approximately 32% and 44% for the
International Fund and the Emerging Markets Fund, respectively.
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.
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TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT
Chase Global Funds Services Company, a subsidiary of The Chase Manhattan
Bank, 73 Tremont Street, Boston MA 02108-3913, (the "Administrator" or
"Transfer Agent") provides administrative services to the Fund pursuant to an
Administration Agreement (the "Administration Agreement"). Services provided
under the Administration Agreement are subject to supervision by officers of the
Trust and the Board of Trustees, and include day-to-day administration of
matters related to the existence of the Fund, maintenance of its records,
preparation of reports, supervision of the Fund's arrangements with its
custodian, and assistance in preparing the Fund's registration statements under
federal and state laws. Also under the Administration Agreement, the
Administrator (through its agents) provides dividend disbursing and transfer
agent services to the Fund. For its services under the Administration
Agreement, the Trust pays the Administrator a monthly fee in proportion to the
Funds combined average daily net assets at the following annual rate: 0.12% of
the first $500 million in average daily net assets, 0.08% for the next $500
million, and 0.06 for average net assets over $1 billion.
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 Subchapter M of the Internal Revenue Code of 1986, as amended ("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 annually to its Shareholders at least the sum of 90% of its net
investment income excludable from gross income plus 90% of its investment
company taxable income (generally, net investment income plus net short-term
capital gain) (the "Distribution Requirement") and also must meet several
additional requirements. Among these requirements are the following: (a) at
least 90% of a Fund's gross income each taxable year must be derived from
dividends, interest, payments with respect to securities loans, and gains from
the sale or other disposition of stock or securities, or certain other income
(the "Income Requirement"); and (b) diversify its holdings so that; (i) at the
close of each quarter of a 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 such other
securities limited, in respect to any one issuer, to an amount that does not
exceed 5% of the value of a Fund's assets and that does not represent more than
10% of the outstanding voting securities of such issuer; and (ii) at the close
of each quarter of a Fund's taxable year, not more than 25% of the value of its
assets may be invested in securities (other than U.S. Government securities or
the
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securities of other RICs) of any one issuer or of two or more issuers which
are engaged in the same, similar or related trades or businesses if the Fund
owns at least 20% of the voting power of such issuers. Notwithstanding the
Distribution Requirement described above, which only requires a Fund to
distribute at least 90% of its annual investment company taxable income and
does not require any minimum distribution of net capital gain (the excess of net
long-term capital gain over net short-term capital loss), a Fund will be subject
to a nondeductible 4% excise tax to the extent it fails to distribute by the
end of any calendar year 98% of its ordinary income for that year and 98% of
its capital gain net income for the one-year period ending on October 31 of that
year, plus certain other amounts. Each Fund intends to make sufficient
distributions to avoid liability for the 4% federal excise tax. Any gain or
loss recognized on a sale or redemption of shares of a Fund by a Shareholder who
is not a dealer in securities will generally be treated as long-term capital
gain or loss if the shares have been held for more than one year and short-term
if for a year or less. If shares on which a net capital gain distribution has
been received are subsequently sold or redeemed, and such shares have been held
for six months or less, any loss recognized by a shareholder will be treated as
long-term capital loss to the extent of the long-term capital gain
distributions.
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 currently intends to,
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).
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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 recent legislation, the Funds would be entitled to elect to
"mark-to-market" their stock in a PFIC. "Marking-to- market," in this context,
generally means recognizing as taxable 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
transactions 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.
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.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of a Fund is determined by dividing the total
market value of the Fund's investments and other assets, less any liabilities,
by the total number of the Fund's outstanding shares. Net asset value per share
is determined as of the regular close of trading (currently 4:00 pm, Eastern
time) of the New York Stock Exchange ("NYSE") on each day that the NYSE is open
for business. The NYSE is
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open for trading Monday through Friday except on the following holidays: New
Year's Day, Martin Luther King, Jr. 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.
Price information on listed securities is taken from the exchange where the
security is primarily traded. Securities listed on a U.S. securities exchange
for which market quotations are available are valued at the last quoted sale
price on the day the valuation is made. Securities listed on a foreign exchange
are valued at their closing price. Unlisted securities and listed securities
not traded on the valuation date for which market quotations are not readily
available are valued at a price within a range not exceeding the current asked
price nor less than the current bid price. The current bid and asked prices are
determined based on the average bid and asked prices quoted on such valuation
date by reputable brokers.
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 value of other assets and securities for which no quotations are
readily available (including restricted and unlisted foreign securities) and
those securities for which it is inappropriate to determine the prices in
accordance with the above-stated procedures are determined in good faith using
methods determined by the Board of Trustees. For purposes of calculating net
asset value per share, all assets and liabilities initially expressed in foreign
currencies will be translated into U.S. dollars at the mean of the bid price and
asked price for such currencies against the U.S. dollar last quoted by any major
bank.
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.
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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. See "Purchasing, selling and exchanging Fund shares"
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. See "Purchasing, selling
and exchanging Fund shares" in the Prospectus.
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 Trust was organized as a Massachusetts business trust under a
Declaration of Trust dated July 25, 1996. The Declaration of Trust permits the
Trust to issue an indefinite number of units of beneficial interest ("shares"),
with or without par value.
The Trust may issue shares in any number of "series"; each series of the
Trust is a separate portfolio and functions as a separate mutual fund, although
the Funds would share a common board of trustees, and may share an adviser,
administrator, transfer agent, or custodian. All consideration received by the
Trust
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for shares of any series, and all assets of that series, belong only to that
series and are subject to that series' liabilities. The Funds are currently the
only series of the Trust. Each Fund currently offers only one class of shares.
The trustees may, however, create and issue additional series of shares and may
create and issue shares of additional classes of one or more series.
Except as described below, the shares of each Fund, when issued, will be
fully paid, non-assessable, fully transferable and redeemable at the option of
the holder. The shares have no preference as to conversion, exchange,
dividends, retirement or other features and have no preemptive rights. Each
share entitles the shareholder of record to one vote. All shareholders of a
Fund may vote as a single class on each matter presented to shareholders for
action except with respect to any matter that affects one or more series or
class solely or in a manner different from others, in which case the shares of
the affected series or class are entitled to vote separately. The shares of the
Trust have non-cumulative rights, which means that the holders of more than 50%
of the shares voting for the election of Trustees can elect 100% of the Trustees
if they choose to do so. Persons or organizations owning 25% or more of the
outstanding shares of a Fund may be presumed to "control" (as defined in the
1940 Act) the Fund.
The Trust is not required to hold annual shareholder meetings; shareholder
meetings will be held from time to time for the election of Trustees under
certain circumstances, or to seek approval for changes to the operations of the
Trust or a Fund. A Trustee may be removed from office by the remaining
Trustees, or by the shareholders at a special meeting called on the written
request of shareholders owning at least 10% of the Trust's outstanding shares.
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
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.
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<PAGE>
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, 1999 were -2.57% and
- - 17.99% respectively. The average annual total return of the International
Fund and the Emerging Markets Fund for the fiscal year ended December 31, 1998
were -6.96% and -30.20%, 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
38
<PAGE>
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
depository 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 depository 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
39
<PAGE>
Index; Russell Mid Cap Value Index; Value Line Index; Morgan Stanley Capital
International EAFE(R) 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 FUNDS 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.
40
<PAGE>
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 = the square root of x\i\ - x\m\
----------------
n-1
where = "the sum of,"
x\i\ = each individual return during the time period,
x\m\ = 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.
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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 acts as legal counsel for the Trust.
FINANCIAL STATEMENTS
Each Fund's fiscal year ends on December 31st of each year. Each Fund will
send annual and semi-annual reports to its shareholders; the financial
statements appearing in annual reports are audited by the Trust's independent
accountants. 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, Financial Highlights, Notes to
Financial Statements and the Report of Independent Public Accountants, all of
which are included in the 1998 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.
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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.
A-1
<PAGE>
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.
A-2
<PAGE>
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
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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.
A-3
<PAGE>
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.
A-4
<PAGE>
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.
A-5
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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".
A-6
<PAGE>
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.
A-7
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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.
A-8
<PAGE>
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-9
<PAGE>
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.
A-10
<PAGE>
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.
A-11
<PAGE>
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:
A-12
<PAGE>
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.
<PAGE>
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
- --------------------------------
A-14
<PAGE>
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.
A-15
<PAGE>
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
would be forthcoming, if necessary.
4 A bank for which support is likely but not certain.
A-16
<PAGE>
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.
A-17
